What Is Forex Scalping?
In the investment world, scalping is a term used to denote the "skimming" of small profits on a regular basis, by going in and out of positions several times per day.
Scalping in the forex market involves trading currencies based on a set of real-time analyses. The purpose of scalping is to make a profit by buying or selling currencies and holding the position for a very short time and closing it for a small profit. Many trades are placed throughout the trading day using a system that is usually based on a set of signals derived from technical analysis charting tools. The charting is made up of a multitude of signals, that create a buy or sell decision when they point in the same direction.
Scalp trading forex is a way to trade currencies on the shortest timeframe charts. It’s a quick and potentially exciting way to trade, that comes with upsides, but also with risks. Read on for more about scalping forex, how to apply it to a strategy, and managing your risk effectively.
What is scalp trading forex?
Scalp trading forex involves making a large number of quick currency trades in a short timeframe with the intention of accumulating a succession of small profits.
While a position trade may last several months or even a year, and a swing trade several days up to a few weeks, a scalp trade’s duration is mere minutes, or even less. This means that scalp traders must always be fully switched on to the chart and be in a position constantly to react to price movements in a timely manner. If a scalp trader is not focused in this way, they may miss potentially profitable setups.
The below chart gives a hypothetical picture of the frequency of scalping trades, where a stochastic is used to help find entry points on a one-minute chart. Notice how five trades have been made in the space of fewer than three hours, although scalpers will often complete many more than this in the same.
Is forex scalping profitable?
Forex scalping can potentially be profitable, like any timeframe of trading. Typically, a scalper would look to make in the region of five to ten pips per trade. But how does this translate to cash? Assuming the average pip value is about $10, a trader can make $50 for every five pips of profit, and if they make, say, ten trades a day, this would amount to $500. However, traders must naturally also factor in losing trades – of which there will be many as a scalper – to determine profitability.
In order to give themselves the best chance to profit, traders may aim for a high volume of trades per day, with a strict exit strategy and rigorous risk management practices in place. An entry and exit strategy can be assisted by technical indicators giving signals as to overbought or oversold conditions.
How to scalp forex without getting burned
To scalp forex without getting burned, traders should primarily ensure they have a solid strategy in place (see below). Also, due to the fast-paced nature of the short-term forex market, it helps to have a strong focus and to be observant, quick-witted, and stoical under pressure. It is important to go for liquid markets such as EUR/USD to minimize the risk of slippage (not being able to get your trade filled at the price you want).
Forex scalping strategy
As mentioned, a successful forex scalping strategy will involve frequent trades throughout the day, looking for small gains at the most liquid times, and using technical tools where necessary to assist with entry and exit points. But prior to opening a position, it’s essential to identify the market conditions in which a strategy will be played out. This can be done using multiple timeframe analyses to see the bigger picture of price action.
From there, the way to proceed may depend on whether the market is trending, ranging, or about to break out. For this basic example, we’ll look at a trending market.