A beginners' guide to a forex scalping strategy.
Find out what scalping in forex is and learn about 5 of the best indicators for this trading style.
What is scalping in forex trading Things to consider before you adopt a scalping strategy on the forex market How to scalp in forex as a beginner Top 5 indicators for a forex scalping strategy Scalping in forex summed up.
What is scalping in forex trading?
Scalping in forex trading is a style that involves opening and closing multiple positions on one or more forex pairs over the course of a day, usually in seconds or minutes. Instead of opening one position at the start of a trend and closing it at the end, scalpers will open and close several positions over a trend’s course.
Forex scalpers aim to gain just a few pips at a time, looking for multiple small gains rather than fewer larger ones. A pip is a common unit of measurement of movement in forex trading, denoting a change in price at the fourth decimal place. For example, if the quoted price of a forex pair decreases from 1.3980 to 1.3979, it has fallen by one pip. There are some exceptions, such as the Japanese yen, that are quoted to two decimal places.
Scalpers often use derivatives like CFDs to trade forex pairs that are rising or falling in value. They’ll open a position to ‘buy’ (go long) if they think the price will rise and open a position to ‘sell’ (go short) if they think the price will fall.
Leveraged products like these also enable traders to open a position with a deposit, called a margin. This can amplify profits but can just as easily magnify losses, because your profit or loss are calculated from the full value of the position. That’s why it’s vital to have an appropriate risk management strategy in place no matter which scalping techniques you’re using.
Things to consider before you start scalping forex.
Before adopting a forex scalping strategy, it’s important to understand currency liquidity and volatility, and the pros and cons of this trading style.
Liquidity in forex scalping.
Around $6.6 trillion worth of forex transactions take place every day, which makes it the most liquid market in the world. Liquidity refers to the ability to buy and sell quickly without affecting a market’s price. High liquidity makes forex a good market for scalpers, who need to enter and exit their positions quickly – sometimes within seconds.
The liquidity of a currency isn’t fixed; it’ll change based on a number of factors, including the time of day, the number of traders that are active in the market at any given moment and wider economic conditions like the countries’ inflation rates (GDP). The most liquid forex pairs tend to be those most traded, such as EUR/USD, GBP/USD and USD/JPY.
In highly liquid markets like forex, the bid-offer spread tightens, making the transaction costs affordable despite the large volume of positions scalpers open. Because gains are incremental, smaller spreads allow for greater profits.
In other markets, liquidity often means stability, but forex is highly volatile. This means major short-term price movements can happen at any time, which can cause the value of currencies to spike up and down in seconds. This volatility presents opportunities for greater profits – another reason why scalpers often favour forex. But conversely, this can also lead to an increased exposure to risk.
Volatility in forex scalping.
Volatility is favourable when trading derivatives, as it allows traders to profit from rising and falling market prices. But it’s important to have a risk management strategy to minimise losses, especially when using leverage to open a position. Because scalping is most successful when markets are volatile, the best time to open a position is during the session’s open and close.
Some forex pairs, such as AUD/JPY, GBP/EUR and USD/MXN, are more volatile due to their decreased liquidity, as well as economic factors like trade agreements, exports and natural resources. Plus, with our aptly named Weekend GBP/USD, Weekend EUR/USD and Weekend JPY/USD offerings, you don’t have to wait for markets to open on Monday to take your position if volatility is high on Saturday and Sunday.
When you’re learning how to scalp forex, it’s important to bear in mind the following pros and cons of this trading style:
Forex scalping pros Forex scalping cons Magnify gains with leverage Magnify losses with leverage Open and close positions quickly Potentially wipe out small wins with one large loss Trade on hundreds of forex pairs Risk your money on a highly volatile market Reduce losses by holding positions for a short time Gain profits slowly due to small incremental wins.