Forex scalping explained
Forex scalping is a popular method involving the quick opening and liquidation of positions. In general, it means that the trade is done on a timeframe of about 3-5 minutes at most, while some scalpers will maintain their positions for as little as one minute.
Scalping is popular because it is perceived safer as a trading style, when compared with other trading styles. Many traders argue that since scalpers maintain their positions for a brief time period in comparison to regular traders, market exposure of a scalper is much shorter than that of a trend follower, or even a day trader, and consequently, the risk of large losses resulting from strong market moves is smaller. Indeed, for the typical scalper concepts like trend or range are not very significant, he/she cares only about the bid-ask spread.
Who can be successful at scalping foreign exchange markets?
Forex scalping is not a suitable strategy for every type of trader. The returns generated in each position opened by the scalper is usually small. Profits are made by accumulating gains from each closed small position. Scalpers do not like to take large risks, which means that they are willing to forgo great profit opportunities in return for the safety of small, but frequent gains. Consequently, the scalper needs to be a patient, diligent individual who is willing to wait as the fruits of his labors translate to great profits over time.
Scalping also demands a lot more attention from the trader in comparison to other styles such as swing-trading, or trend following. A typical scalper will open and close tens, and in some cases, more than a hundred positions in an ordinary trading day, and since none of the positions can be allowed to suffer great losses (so that we can protect the bottom line), the scalper cannot afford to be careful about some, and negligent about some of his positions. It may appear to be a formidable task at first sight, but scalping can be an involving, even fun trading style once the trader is comfortable with his practices and habits. Still, it is clear that attentiveness and strong concentration skills are necessary for the successful Forex scalper. One does not need to be born equipped with such talents, but practice and commitment to achieve them are indispensable if a trader has any serious intention of becoming a real scalper.
How to make money using scalping
A successful scalper is very methodical about both his decisions and expectations from the market. He aims to combine various unique features of the Forex market to create profitable conditions for trading, and in this sense he aims to exploit the most basic features of the market for his purposes. Scalping is not only about exploiting economic events, price trends, and market events, but also the basic structure, and internal dynamics of the currency market itself, and this is what sets it apart from other strategies such as swing trading or trend following.
Forex scalping key points:
- Trader must think fast and act fast
- Exploit sharp price movements
- Combine scalping with another approach such as trend following or range trading
- Make use of high leverage combined with consistent position sizing according with the defined Money Management
Forex Scalping Tips
Not every time of the day is suitable for scalping: There are 4 major market sessions: London, New York, Sydney and Tokyo session. To trade effectively scalper needs to learn behavior of a chosen currency pair and define most active sessions, even particular hours for this pair to be able to catch good price moves.
Use leverage wisely: Use of high leverage is a contributing factor for making a small account big in a short period of time. However, we suggest to start with reasonable leverage for scalping, for example 20:1 or at most 50:1, then move on as you see scalping skills improve.
Decide on the size of the trading lot and exposed risk in advance: Calculate the worst possible situation, for example consider 10 consecutive losses in a row and then see if your account will survive. Calibrate you scalping system accordingly.
Know the average daily range of the price for chosen currency: The wider the average daily range the better chance to profit from price moves and scalping strategies
Consider the spread for the currency pair: Chose a broker and the currency pairs with the lowest spread. As Forex scalping involves a high number of trades, the cost of trading (spread) can make a big difference to the bottom line.
Scalp trading is very demanding: Trading using scalping systems require a lot of concentration, constant monitoring of the price and very quick decision making. Avoid scalping when you’re concentration levels are low – for example days when you feel sick or emotionally unstable.
Scalping can be demanding, and time-consuming for those who are not full-time traders. Many of us pursue trading merely as an additional income source and would not like to dedicate five six hours every day to the practice. In order to deal with this problem, software indicators that give trade signals and automated trading systems have been developed.
We have compiled here a list of most recent software available on the market that you may want to use for scalping Forex.