Forex Scalping

Forex scalping is a trading technique that involves trading currencies on charts with very short time frames. It is a high-frequency and potentially profitable trading method, but it also comes with risks.

1. What is scalping in trading?
2. Is forex scalping profitable?
3. Forex scalping risk management
4. Forex scalping strategy
5. Finding the trend
6. Making the trade
7. Forex scalping

What is scalping in trading?

Scalping is a popular strategy that involves making numerous small profits every day. Scalpers open and close multiple positions during each trading session – some trades last only a minute or even seconds as they seek trading opportunities.

Name:
Scalping

Timeframe:
Very short-term

Find trades using:
Technical analysis

Requires:
A lot of time, strong nerves

In scalping, traders aim to achieve small profits from most of their trades, focusing on a higher success rate compared to day or position trading. If the market moves in their favor, the trader will immediately open a position to capture the profit. On the other hand, if the market moves against them, they usually close the trade right away, accepting a small loss.

Scalping is one of the most intense forms of day trading. It requires more time and a disciplined approach to avoid significant losses or missed profits. Since margins are very low, a single large loss can wipe out the profits from a series of successful trades.

While long-term trading might last for months or even years, and swing trading provides profits over days or weeks, scalping trades last only a few minutes or even seconds.

This means scalpers must remain fully focused on the charts and be able to react instantly to price movements. If they lose focus, they might miss out on opportunities that could bring a profit.

The graph below provides a hypothetical view of scalping trade frequency, using the stochastic indicator to identify entry points on a one-minute chart. Notice that in less than three hours, five trades were made, and many scalpers trade even more frequently during the same time frame.

Is forex scalping profitable?

Forex scalping can be potentially profitable, just like any other trading time frame.

Typically, a scalper aims to earn between five to ten pips per trade. But how does this translate into actual cash?

Assume your average pip value is about $10. For every five pips in profit, you can make $50, and if you complete ten trades a day, this would result in $500. However, when determining profitability, you must also factor in losing trades – and as a scalper, there can be many of those.

To maximize your chances of profitability, you can reduce the high volume of trades per day by implementing a strict exit strategy and risk management procedures. Entry and exit strategies can be supported by technical indicators that signal overbought or oversold conditions.

Forex scalping risk management

To minimize risk when forex scalping, you must first ensure that you have a solid strategy in place. Given the fast-paced nature of short-term currency markets, a strong focus, quick reflexes, and a calm approach under pressure are also crucial.

Just like with day trading, it is important to trade in liquid markets, such as EUR/USD, to reduce the risk of slippage (the inability to fill your trade at the price you want due to a lack of liquidity).

Scalpers must also use strong risk management practices. This includes effectively placing stop-loss orders, which means that if the price moves too far in the wrong direction, your trade will be automatically closed.

1% Rule

You can also apply the following 1% rule, meaning that you should never risk more than 1% of your balance on any single trade idea. For example, if you’re trading with an account balance of $20,000, $200 would be the maximum risk for each position.

If you use a risk-to-reward ratio of 1:2, risking 1% means the trader aims to close their trades with a 2% profit. This would mean a profit of $400 on a $20,000 account balance, or a loss of $400 if the position moves against you.

Meanwhile, the 1% rule advises that no more than 5% of the account balance should be at risk across all open trades. You should set percentages within your personal risk tolerance.

Forex scalping strategy

As mentioned earlier, a successful strategy for forex scalping will involve frequent trades throughout the day, aiming for small profits during the most liquid times and using technical analysis where needed to assist with entry and exit points. Before opening a position, it’s essential to identify market conditions in which new setups will arise. This can be done by analyzing multiple time frames to get a clearer view of price action.

From there, the approach can vary depending on whether the market is trending, moving within a range, or preparing to break out. For this basic example, let’s focus on a trending market.

Finding the trend

When the market shows a prolonged movement in one direction, a trend can be identified. A downtrend is marked by a series of lower lows and lower highs, while an uptrend shows higher lows and higher highs. A broader trend can serve as a useful barometer for predicting potential price action on shorter time frames used in scalping.

In the 5-minute chart below, you can see how the price moves above the exponential moving averages (EMA) for 8 and 34 periods. The shorter EMA also crosses above the longer period EMA, which can signal the start of an uptrend.

Making the trade

Now that a potential uptrend has been established, a shorter time frame can be used for opening and closing positions. In the 1-minute chart example below, an oversold stochastic signal is used to identify entry points.

To confirm the trade, moving average crossovers can be utilized. When the 50-period EMA crosses above the 100-period EMA, and shortly after an oversold stochastic signal appears, a long position can be opened. In this scenario, you might set your stop-loss around 10 pips to effectively manage risk, with a potential target of double or triple the risk.

In scalping, many positions of this type would be closed within minutes, or even less, depending on the information and market movements.

While this example uses the stochastic indicator, a wide range of other technical indicators can also be helpful, such as Fibonacci retracements, MACD, and RSI. You can learn more about these tools in the Technical Analysis course.

Scalping strategies can also be applied to markets where prices are mostly moving sideways. If the price is contained within a certain range, scalpers may find higher success than in trending markets, meaning they can take long positions near support levels and sell near resistance. Breakouts, when the price breaks through a defined support or resistance level, can also provide new momentum, which scalpers may be interested in trading.

Forex Scalping

Scalping is risky: Use strong risk management.

• Trade the most liquid currency markets during the most active times to minimize slippage.

• Use multiple time frames to assess broader trends.

• Use technical analysis to help with entries and exits.