What Is Forex Scalping?
Perhaps the easiest way to express the Forex scalping definition is by calling it the process of attempting to make profits by making small gains in a lot of trades. Forex scalpers enter and exit positions multiple times a day in an attempt to "skim" these small profits from the market. The goal of Forex scalpers is to earn 5-15 pips per trade with each trade, and by making multiple trades per session, these small profits can add up to large ones. When combined with leverage, these small price movements can yield noticeable benefits. A pip is a "percentage in point," the slightest shift in the price for a currency pair in the Forex market. Some scalpers operate by making trades with a profit target as small as 1-3 pips.
How Scalping Works
There are different types of scalping and strategies involved. However, typically scalpers find something in the market that suggests to them that a sudden move is about to take place. This could be a news event or a technical signal. They focus on anticipating rapid but usually small changes to get in and out of the market once their profit expectation is met. The temperament required to be a Forex scalper is one that is comfortable with high risk and a fast pace.
Scalping is not a "set it and forget it" strategy by any means.
These small profits are only in the range of between 5 and 15 pips, but added up across four trades, these wins would amount to between 20 and 60 pips. Using high leverage increases this profitability, but also increases the risk.
Spreads in Scalping vs. Normal Trading Strategy
The price at which a broker will buy a pair from a selling trader is known as the bid. The price at which a broker will sell a pair to a buying trader is known as the ask. The difference between these two prices is known as the bid-ask spread. Due to the tight margins that come with opening and closing a lot of trades, scalpers generally look for tight spreads. They also want to profit off changes in the bid-ask spread that increase their profits. However, in normal market conditions, there is an equilibrium between buyers and sellers, and the bid-ask spread stays constant.
Scalping as a Primary Style
Pure scalping demands exceptional execution to ensure that there is no slippage when placing orders. Someone who uses scalping as their primary trading style often uses a broker with direct access to ensure that they can get the absolute best execution.
In terms of Forex, this would be an ECN or possibly an STP broker. Such scalpers often make hundreds of trades per day and utilize 1-minute candlestick or even tick charts to keep track of the market. Scalping can also be used in a high-frequency strategy to make profits as little as 0.5 to 1 pip per trade.
Scalping as a Supplementary Style
Some traders use scalping as a way to supplement the profits they earn through more conventional strategies. Traders can use the "umbrella" concept to add a few more pips to their trades. When a trader opens a trade in a longer time frame, they begin looking at shorter times to identify scalping setups in the direction of the longer time frame trade.
Three Types of Scalping
One type of scalping is known as "market-making." This method is used by brokers who are trying to take advantage of differences in the spread. They do this by buying on the ask price and selling on the bid price.In doing so, they immediately gain the difference in the spread as profit.
Some don't use the term scalping for this type of trade and define ‘scalp’ as strictly the use of the other two.
The second type of scalping is purchasing a large amount of currency and then selling it on a very small price move. Small moves generate a considerable profit because of the significant order size.
The third method is to buy on a buy signal and then sell immediately at the first sign of an exit signal near the break-even point for the trade. The strategies expressed below make good one-minute chart trading strategies or a 10 pips a day Forex strategy.
Top Indicators for a Scalping Trading Strategy
Indicators that work best for scalping are those that alert the trader to short-term opportunities. Scalping is a more successful strategy in trending and ranging markets, not in more volatile markets where you can be easily fooled and whipsawed out of a trade.
A common scalping indicator is the simple moving average (SMA). With this indicator, you can tell when a trend has become significant, and you can quickly enter a trade. Other indicators that help identify points of interest in scalping include Bollinger Bands and the Stochastic indicator.
Moving Average Ribbon Entry Strategy
On a 2-minute chart, you want to set up three simple moving average (SMA) indicators. One is 5 periods, the second is 8 periods, and the third is 13 periods. You might notice that 5, 8, and 13 are Fibonacci numbers (1, 2, 3, 5, 8, 13, etc.). When strong positive trends begin, the 5-period SMA (which we'll call SMA5) crosses above SMA13 and SMA8. Conversely, when SMA5 crosses below into SMA13, it is suggestive of a reversal.
When a new trend is established, the three ribbons spread out, with SMA5 leading the way either up or down. When SMA5 is shooting up, it is a buy signal. When it's pointing down, it's time to sell. This strategy provides entry points that form a solid foundation for a Forex 1 min trader trading system.
Scalping Techniques: Inside Day Breakout
When a new candle forms between the high and low of the previous candle, it is called an inside candle. This signifies a reduction in market volatility as the range is not as wide as the last candle. This concept is the root of many scalping techniques. The breakout strategy based on this concept can be quite lucrative.
Scalping Strategy Purchase (Long) Entry Point
On a one-minute chart, apply two Exponential Moving Average (EMA) indicators, one with 50 periods and the other with 100 periods. Set up the Stochastic indicator with the parameters of 5, 3, and 3.
The buy signal for an entry order is when EMA50 crosses over above EMA100, AND the target price for your buy is near the EMA indicators, AND the Stochastic indicator crosses above 20. Place a stop loss below the last swing low. The take profit should be set around 10-15 pips from the entry point.
Scalping Strategy Sell (Short) Entry Point
The setup for taking a short position is very similar to that for the long position, only upside down. You want to look for EMA50 to cross below EMA100, and for the entry point, you are targeting to be near the EMA indicators. When the Stochastic indicator drops below 80, it is time to enter the short order. Place the stop loss above the most recent swing high and the take profit at the entry point to gain between 10 to 15 pips of profit.
Forex Scalping Techniques: Comparing Time Frames
Longer time frames are always more significant than shorter ones. You have a bigger sample of the buying and selling that is taking place in the market. If you use 1-minute charts for your primary time frame, you can get a better sense of what is going to happen next by looking at a 5-minute chart.
If you see a buy signal on a 5-minute chart, it's a good sign that there will be stretches on the 1-minute chart of solid buying that can be utilized for scalping. This lets you know to be on the lookout for breakouts on the 1-minute chart. All of this also applies to sell signals as well.
Forex Scalping Tools: 1-Click Trading
Knowledge is your most powerful ally when it comes to any kind of trading, but software tools are also very helpful. Both MetaTrader 4 (MT4) and MetaTrader 5 (MT5) offer a 1-click trading tool that allows you to place an order with a single click of the mouse. This is very helpful when scalping because successful scalping requires precise execution, and seconds lost when entering and closing a trade can be quite expensive.
Forex Scalping Techniques: News
News events tend to add volatility to the market. Many traders are poised at these moments to take advantage of a strong move to make quick money. A short time window of about 15 minutes after such an announcement can be a scary place. Based on the various interpretations of the news, the market can rock back and forth violently, and liquidity issues may appear along with higher spreads.
After this period, the market tends to return to where it was before the news event. But if you have a broker with optimum execution and if you get on the right side of a powerful but short move, you can get in and out and generate huge profits in little time. A Forex news strategy can be some of the most potent scalping opportunities available.
The Pros and Cons of the Scalping Strategy
Scalping strategies can generate profits in any kind of market. This means that you will almost always be able to find some kind of trade, as opposed to waiting around for a strong long-term trend to take hold.
Scalping takes advantage of small price moves, and they happen a lot more often than big price moves. Therefore, you can earn consistent profits instead of waiting for that magical moment when the longer time frame indicator says you can trade.
Another argument in favor of scalping is that you are limiting your risk in terms of time. The longer you keep a position open, the greater the risk that that trade can turn against you and become unprofitable. This is especially true in the case of trades kept open overnight or over the weekend. Furthermore, fees are charged for keeping trades open overnight and over the weekend, so keeping your positions open for short amounts of time saves this expense from hurting your bottom line.
Relative Strength/Weakness Exit Strategy
All of the strategies mentioned above give you entry points. Here is one that helps you determine when it's time to get out of your scalping trade. You will need to set up the Stochastics indicator with the parameters 5, 3, 3, and Bollinger Bands with the parameters of 13 periods and 3 standard deviations. In the moving ribbon entry strategy laid out above, the most successful ribbon signals are generated when the Stochastics indicator shows the price falling from the overbought level of 80 or rising from the oversold level of 20. Since the penetration of SMA5 into SMA13 is a reversal signal, you will want to make profit at that point.
Exit signals are generated when the price crosses either Bollinger Band and when there’s a cross on the Stochastic indicator. In other trading strategies, a reversal signal may simply indicate a strong pullback instead of a full-blown trend reversal, but with the emphasis on quick trades, you cannot afford either. A successful scalper is a fast scalper.
Once you get used to this scalping strategy and are familiar with all of its technical aspects, you can add additional Bollinger Bands of 2 and 4 standard deviations. This allows you to trade on these signals as well after you gain a more intuitive understanding of the price action at work. As a scalping trading example from the week of 6 April 2020, using the scalping trading system laid out above, you can see where SMA5 (in red) crosses above SMA13 (in yellow). The first green diamond demarks this area, and this is a buy signal.
As you can see from the chart, the trade would be up 6 pips when the Stochastic at the bottom generals a sell signal. SMA5 had not yet penetrated SMA13, but when the Stochastic comes down from above level 80 to below 80, we sell.
This trade is just one example, but it shows that this system can be a profitable scalping strategy. There is another buy signal generated afterward denoted by the second green diamond. The Stochastic quickly generates a sell signal, and we lose a few pips on this trade, but fewer pips than we gained in the first trade. There are times when this system can perform better than some 10 pips per day scalping strategies.
Is Scalping Suitable for You?
Just because a scalping trading strategy works, in general, it doesn't mean that you should commit to it. You must ascertain whether scalping fits your personality type and trading style, as well as whether it will meet your financial and trading goals. The intense concentration on the market that you need to successfully scalp the Forex market is not something that everyone can handle.
You will need to be able to act quickly and not overanalyze what you're doing. Overanalysis can lead to "paralysis by analysis" and cause you to freeze up when you should be pulling the trigger. It takes a complete lack of fear or a lot of experience in Forex trading to be able to execute quick trades without overthinking.
Having no fear is not a desirable trait for a Forex trader. It will lead to recklessness, while having too much anxiety will cause you not to take any risks. Healthy fear lies somewhere in the middle. The better way of feeling comfortable when executing a lot of these risky trades is to have experience with the Forex market. An intuitive understanding of the market that you build through practice will allow you to trade without overthinking.
The Best Times (To Avoid) for CFD and Forex Scalping
Scalpers do their work quickly and get out. In order for this to be profitable, scalpers require volatility and volume. That means that scalpers usually find the New York and London trading sessions most suitable for scalping.
The Tokyo trading session is good for trading false breakouts, as price tends to range more in the Asian trading session. Since Forex is a global market, holidays around the world affect the volume and volatility of Forex trading.
Even though the Forex market is open on July 4th, the fact that the rest of the financial infrastructure is closed means that volume will be lower. Fridays are also typically a day of low volume, as traders close out their positions before the weekend. So, Fridays and holidays are good days to avoid scalping. You can find the dates of major holidays for foreign countries on most economic calendars.
The Best Brokers for CFD And Forex Scalping
The first criterion for choosing a broker for scalping is to select one that allows it. Brokers who don't allow scalping are usually market makers, who act as the counterparty to all your trades.
True STP/ECN brokers make their money through the commissions or the markup of spreads. For this reason, they can make money from any type of client and do not have any reason to ban scalping. STP/ECN brokers route your orders with liquidity providers or banks on the InterBank system, offering premium execution that scalpers need to make profitable trades.
Among STP/ECN brokers, you will want to judge them based on the speed and quality of their order execution and on the spreads and commissions they offer. Also, always make sure that any broker you trade with is regulated by a major financial authority, such as the Financial Conduct Authority (FCA) in the UK or the CFTC or NFA in the United States. Lastly, it is often difficult to judge how good a broker is just by viewing their website. Just to be sure, you will want to test scalping using a demo account or even practice real scalping using a live account.
The Best Platforms for CFD and Forex Scalping
The best platform is a matter of opinion. Still, MetaTrader 4 and MetaTrader 5 are the most popular trading platforms for Forex, and they have support for other instruments like CFDs and stocks.
MetaTrader offers an easy-to-use chart system with all the technical indicators that you need for trading the most popular scalping strategies. When you consider plugins that can be added to MetaTrader, the number of indicators you can have is virtually endless.
The Best CFD and Forex Scalping Strategies
Considering the extremely short timeframe for traders to get in and out of the market when scalping, the precision of execution is much more significant than with most trading strategies. Five factors must always be analyzed when evaluating the charts for a scalping opportunity. If any of these factors are off, it can dramatically affect the chances for success or failure of a scalping trade. For example, if the spread is too wide, the increased cost can make the trade unprofitable.
These strategies apply to practically all markets, including Forex currency pairs and CFDs (contracts for difference). You could even perform scalping on commodities like gold based on a Gold Forex time chart. The five factors that are vital to analyzing scalping opportunities are:
- Price volatility
Gauge price volatility both at the current time and in the near future. Price volatility is something that must be in place for successful scalping.
Ensure that the spread on the instrument you're scalping is favorable. You want to stick to instruments with tight spreads. If your profit target is 10-15 pips, a spread of 5 pips is quite significant. Starting out 5 pips in the hole means that you will have to gain 15-20 pips from entry just to make 10-15.
Is the market in an upward or downward trend? Or is the market oscillating between support and resistance zones? This will determine which scalping strategies can be effectively employed in the current market. Be aware of the larger trend and examine longer time frames to get a sense of the bigger picture.
- Support and resistance (S&R)
What are the significant support and resistance levels for the current market? Identifying these will give you an idea of which price targets are reasonable and whether the reward is worth the risk. Also, analyze longer time frame charts at these key levels to identify what happens next.
- News events
These can be great for scalping as they increase volatility and volume. But if you are involved in a Forex scalping strategy that relies on technical analysis, the significance of a news event can cause the price of an instrument to blow right past your stop loss without blinking. Always be aware of significant news events that are about to happen. Keep your economic calendar at the forefront of your attention for the potential opportunities it presents as well as the potential risks.
Scalping Forex for a Living
Being able to scalp Forex for a living requires some experience to develop the skills and techniques that successful scalping demands. Once you have established that you have the temperament for scalping and the ability to access the markets continuously for the several hours needed to trade, you should get a demo account and begin to practice these strategies.
The most critical factor in successful scalping is emotional control. The good thing about scalping concerning this is that single trades only generally make 10-15 pips, so we're not talking about a lot of money.
If there were life-changing money involved in every trade, it would be much harder to exercise emotional control. Making enough profits to make a living in Forex requires many trades and thus, it’s a slow and gradual process. But the hectic pace of scalping means that you are always looking for a trade, often finding one and trying to get in and out as fast as possible.
This fast pace can trigger your emotions and lead you to make poor decisions. You must exercise complete emotional control over your trading and have proper risk and money management procedures in place when you trade.
Another key to scalping Forex for a living is to use a broker that gives you tight spreads or commissions. This can vary according to the currency pair in question. Major pairs like EUR/USD often have very tight spreads, near zero for some brokers. With spreads near zero, even gains as small as 2-3 pips can be very profitable over time.
As you gain more experience, you may want to investigate range bars and range bar scalping. Range bars are a special chart that only shows the change in price. There is a range bar indicator for MetaTrader 4 that is easy to use. Scalp Trader Pro is another tool that you may want to get acquainted with. You can obtain it by getting the Scalp Trader Pro free download. Other advanced topics in scalping Forex include trading robots, risk management when scalping, and modification strategy Forex.
Tips for Novice Scalpers
Forex scalping is not something that comes easily for beginners. Profiting from very small gains means that you must enter and exit a lot of trades. It requires constant monitoring of the markets to find these opportunities. Near flawless execution is also needed, as every pip can make a difference when it comes to making a profitable trade or a losing one.
A fast ECN or STP with direct access to the Interbank system is recommended to get the level of execution that you need to avoid slippage. Every scalper starts somewhere, and since we're not born with the skills necessary, we must develop them. The only way to learn how to scalp trade is to try some strategies and learn from your mistakes.
Make sure that the financial instrument you are scalping has good liquidity and some volatility. Instruments without liquidity jump from price to price in a very choppy manner because of the small number of trades that are being transacted. You can't get in and out quickly in a market where it's hard to find a buyer or seller. Trade only major currency pairs that have good liquidity. And scalp only during high-volume New York and London trading sessions.
Always have a stop loss in place. This applies to all Forex strategies. No matter what strategy you are using, there is no reason not to set a stop loss. There is always some point on a chart where you know your trade is wrong. You should commit yourself to get out at that point and avoid the possibility of a pointless margin call.
With scalping and its many trades per session, it is even more important to keep a log of all your trades. That way, you will be able to look back and reflect upon why you made this or that trade and what the stop loss and profit expectations were. You can then sit down later and examine where you went wrong or where you went right. This is an invaluable learning tool for any beginning trader, no matter what style you prefer.
Since scalping requires a lot of trades, a part of you may be tempted not to treat each trade with respect. But it takes a lot of trades to make scalping work as a long-term strategy, and the only way that each trade will work together is if you execute each of them properly and give them the full attention they deserve. Guard against any gambling impulse that you get and stick to calmly executing your plan.
If you like this strategy, you might also be interested in this A Comparison of Day Trading vs Swing Trading | Which is Better
Scalping is a family of trading strategies that are distinguished from "normal" trading strategies. It seeks to gain profits quickly and accumulate small profits from a lot of trades as opposed to larger earnings from just a few. This type of trading requires paying more attention to the market and potential news events.
It also demands quick execution of entry and exit orders, both from the client and broker. Fumbling with making an order on the client’s side and slow execution from a broker will both cost you precious seconds that scalpers simply cannot afford to lose. Scalping can also be used as a secondary strategy to squeeze more pips out of more conventional long-term strategies.
When analyzing charts for scalping opportunities, take note of price volatility, spreads, ranging or trending of the market, support and resistance levels, and news events. Any of these factors can completely shift the chances for the success or failure of any scalping trade.
Only scalp major currency pairs that have good liquidity so that you can get in and out without any issues. Scalp only during the London and New York trading sessions where the volume is high.
Not everyone has the personality for scalping. Make sure this style of trading fits your temperament before getting in too deep. Don't scalp or even trade when you are upset, sick, or when you've incurred a substantial loss.
The key takeaway should be that you can earn a living Forex scalping, but it will take time, learning, and dedication. Practice the strategies mentioned above and never stop evolving.