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?
A scalp in trading is the act of opening and then closing a position very quickly, in the hope of profiting from small price movements.
Traders who practice this tactic are referred to as scalpers and will tend to make many scalps each day.
The theory behind scalping is trading small price movements is easier to predict than large ones.
Profits on scalps tend to be small, but losses can be kept to a minimum if strict rules are followed.
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.
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).
Scalpers also need to employ strong risk management practices. These will involve effective stop placement, meaning if the price goes too far in the wrong direction, the trade will automatically be exited. For long trades, risk will usually be managed underneath a line of support. For shorts, stops are placed above a level of resistance. How close to these lines you place your stop will depend on how aggressive a trader you are.
Trade the currency market
Furthermore, traders should consider the 1% rule, which means never risking more than 1% of their account balance on any one trading idea. So, for those trading a $20,000 account, $200 would be the maximum for any one position. Using a 1:2 risk-reward ratio, risking 1% means a trader would look to close their trades out for a 2% profit. For example, this would mean $400 profit on a $20,000 account balance or a $400 loss if the position went against you.
Meanwhile, the 5% rule advises that no more than 5% of your account balance should be at risk across all open trades. Traders should set the % that is within their risk appetite.
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 before 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.
Finding a trend
When a market sees a protracted move in a given direction, a trend can be ascertained. A downtrend will see a series of lower lows and lower highs, while an uptrend will see higher lows and higher highs. The broader trend can be a useful barometer of potential price action on a shorter scalping timeframe.
In the below 5-minute chart, see how price moves above both the 8-period and 34-period exponential moving average (EMA). Also, the shorter period EMA crosses above the longer period EMA, suggesting a potential uptrend.
Now that a potential uptrend has been established, a shorter timeframe can be used to open and close positions.
In the below one-minute chart example, an oversold stochastics signal is used to identify an entry. This time, the 50-period and 100-period EMAs are used. When the 50-day EMA crosses above the 100-day EMA, and the oversold stochastic signal follows shortly after, a long position is opened. In this scenario, a stop may be placed within around 10 pips to manage risk effectively, with a potential target of two or three times the risk.
In a scalp trade, many positions of this type would be exiting after just a couple of minutes, or even less than a minute, depending on the pips gained in the trade.
While this example uses stochastics, a range of other technical indicators such as Fibonacci retracements, MACD and RSI may also help.
Scalping strategies can also be applied to ranging markets, where the price is mostly going sideways. Where a price holds in a certain range, scalpers can go for a more neutral stance than in trending markets, meaning taking both buy positions near levels of support and selling near resistance. Breakouts, when price breaks through established support or resistance level, can also deliver fresh momentum that scalpers may be interested in trading.
Forex scalping takeaways
- Scalping is risky: Employ strong risk management
- Trade the most liquid FX markets at the most active times to minimize slippage
- Use multi-timeframe analysis to assess broader trends
- Employ technical analysis to assist with entries and exits
- Pay close attention!