What is Scalping in Forex? – Learn A Simple Forex Scalping Strategy
Forex scalping trading is a very short term trading method. In this method, a trader usually holds a position only for few minutes. This method is quite different from day trading.
In the case of day trading, traders usually hold the position for hours and close the position on the same day. In the case of scalping method, traders not only close position on the same day but also close the position in few minutes. Those who use this scalping method are known as scalpers. Scalpers take entry several times in a day to make quick small profits.
Personality of a scalper :
Scalpers have some unique qualities and characteristics that other traders do not have. Scalpers love the excitement of fast trading. They usually aim for small profits of 5 to 15 pips. These traders are too impatient for long term trades. As they are determined to pull out small profits from several trades in a day, so they have to be focused in charts for a long term.
If you want to trade with this method then, you should not get stressed or bored to watch the charts carefully for a long period. Another key quality of scalpers is, they analyze and react with the chart very fast without thinking much. In scalping, you have to execute your trading decisions immediately without thinking much. Scalpers often focus major news releases to pull out a quick profit in a few minutes.
Purpose of Scalping in Forex Market:
Surely the purpose of scalping is to make money like any other trading method, but in scalping a trader tends to make quick short profits in a few minutes. A scalper trades several times a day and tries to pull out small profits from each trade.
In this case, the risk is very little, and profit target is also very little compared to other methods. The main theme is to make several profitable trades in a day. For example, if you profit $30 in each trade and make 10 trades a day. Then you make $300 in a day, which is quite a considerable amount of profit.
Some factors to considered in scalping method :
There are some factors a scalper should consider in scalping. These factors are described below.
Choosing a broker:
You should choose a broker with tight and fixed spread broker in case of scalping. Scalpers aim to make quick short profits of 5-10 pips in general. If your broker charges you wide spread then it will be difficult for you to make a quick short profit as you have to pay the spread. Many brokers offer fixed spreads which mean you have to pay the same amount of spread whatever the market situation and volatility are.
If you choose a broker with variable spreads, then you have to pay high spreads sometimes when the market is volatile. So brokers with tight and fixed spread are suitable for scalping.
You should have a wide understanding of your trading platform offered by your broker; otherwise, your execution might become slow. It is better to open a demo account and practice trading in the trading platform before you start trading. In this way, you will become familiar with your platform and will be aware of advantages and disadvantages of your trading platform.
In the case of scalping, you have to decide and execute your trading decisions very fast. If your broker is not capable of executing your trades fast then you might have to suffer a lot. If you do not choose a broker with fast execution speed then you might suffer from slippage. It is called slippage, when your placed order gets executed few pips away as priced, has changed during this slow execution process. There are some brokers guarantee faster execution speeds. Choose one these brokers if you are a scalper.
As a scalper, you should trade in the major pairs only as most of the moves occur in these major pairs. Minor pairs are not suitable for scalping as they require high spread and provide less movement. The busiest sessions are suitable for scalping as most of the moves happen in these sessions. Liquidity is high during the overlapping of two major sessions. Thus, scalpers choose this overlapping of two sessions for trading.
Scalpers choose short term time frames for trading. Usually, 1 minute and 5-minute charts are very effective for this type of trading.
Money management is very useful to minimize the risk. It is necessary for any type of trading method. As you are aiming to make quick short profits several times a day, so you must have a strict money management plan.
Forex Scalping Strategy :
Now we will discuss a scalping trading strategy for both long positions and short positions.
Indicators used:Candlesticks, EMA100, and Williams’ % R.
All major currencies such as EUR/USD, AUD/USD, GBP/USD, USD/CAD, USD/CHF etc.
Trading session: London session or New York session.
Time frame: 5 minutes chart.
For Long Position:
Enter at the open of next candle when,
- Candlesticks are above EMA100
- Williams’ % R crosses above -20 line.
Place a stop loss,
- At the low point of the previous candle.
Take profit target at,
- 15 pips above the entry price.
Red colored vertical lines showing entry signals for a long position in the chart of EUR/USD given below.
For Short Position: Enter at the open of next candle when,
- Candlesticks are below EMA100
- Williams’ % R crosses below -80 line
Place a stop loss,
- At the high point of the previous candle.
Take profit target at,
- 15 pips below the entry price.
Red colored vertical lines showing entry signals for a short position in the chart of EUR/USD given below.