What is Forex Scalping?

Day traders who specialise in the foreign exchange market employ a strategy known as forex scalping, in which they repeatedly buy and sell currency pairs in the hopes of making small returns. A forex scalper is an investor who seeks to make numerous trades in a day in order to profit from the frequent and minor fluctuations in currency prices.

Scalping targets extremely minor price movements, often between 5 and 20 pips, in the hope of making a substantial profit. Forex scalpers start and close numerous positions throughout the day, holding each one open for only a few minutes at most.

What is Forex Scalping?

Scalpers in the foreign exchange market use leverage to increase their position sizes, turning even a minor price movement into a significant profit.

Scalping in the forex market can be done manually or automatically. Traders using a manual approach sit in front of a computer and interpret buy and sell signals themselves. Programming instructions for when to purchase and sell are sent to trading software in an automated trading system.

Following significant data releases, such as the U.S. employment report and interest rate announcements, scalping is a common practise. These high-impact news releases create substantial price changes in a brief period of time, which is perfect for the scalper who has to enter and exit deals rapidly.

Position sizes may be reduced back to lower risk due to the elevated volatility. In the wake of a significant news event, for instance, a trader may be able to capture 20 pip or more while typically aiming to make 10 pip on a deal.

Forex Scalping Account

Scalpers in the foreign exchange market need a trading account with minimal commissions, tight spreads, and the ability to place orders at any price. ECN Forex accounts are the only ones that normally provide access to all these extras.

With an ECN forex account, a trader can make market-making decisions, such as whether to buy at the bid price or the offer price. For a standard forex trading account, retail traders must purchase at the offer price and sell at the bid price. Scalping is discouraged or forbidden on most Forex accounts.

Forex scalpers have much less of a chance of making money if the spread or commissions are too large, or if the minimum and maximum prices at which they can trade are too restrictive.

Forex Scalping Strategies

Numerous trading approaches exist, however most may be grouped into only a few categories:

• The goal of trend trading is to take advantage of price movement by initiating trades in the direction of the trend.
• Taking a position in the opposite direction of the trend, known as countertrend trading, is more challenging for a scalper. The trader would enter into such a position if they anticipated a reversal or downturn in the trend.
• Traders employing range techniques look for regions of support and resistance and seek to purchase there and sell there. The trader is making money off of price fluctuations.
• Statistical traders examine data in search of deviations from the norm. For instance, if a predetermined chart pattern materialises at a predetermined time of day, one strategy could be to buy/sell and hold the position for five minutes. Forex scalping tactics are often based on statistical analysis of time, price, day of the week, or chart patterns.

Scalping vs. Market-Making

Scalping is related to market creating in certain ways. When a market maker makes a purchase, they are actively looking to balance out their position and pocket the spread.

However, it is crucial to recognise the distinction between a market maker and a scalper. The spread is the profit made by a market maker and the loss incurred by a scalper.

A scalper who buys on the ask and sells on the bid must therefore wait for the market to move in order to recoup the spread they paid. When forming a market in the other direction, the market maker makes an instant profit of a pip or two by selling at the ask and buying at the bid.

While both a market maker and a scalper aim to enter and exit positions frequently and fast, the latter carries significantly more risk than the former. Since scalpers pay the spread, the more trades they make, the more money the market maker makes from the spread, making them a favourite of the market maker.

How to Set up for Scalping

To get started as a scalper, you need dependable access to the market makers and a trading platform that facilitates speedy buying and selling. The site will typically contain dedicated buy and sell buttons for each available currency pair, allowing traders to quickly and easily enter and exit trades with the click of a button. Trading can be completed in a matter of milliseconds in highly liquid marketplaces.

Picking a Broker

To get started as a scalper, you need dependable access to the market makers and a trading platform that facilitates speedy buying and selling. The site will typically contain dedicated buy and sell buttons for each available currency pair, allowing traders to quickly and easily enter and exit trades with the click of a button. Trading can be completed in a matter of milliseconds in highly liquid marketplaces.

Broker’s Platform

You need to learn as much as possible about the trading platform your broker provides. Since platforms offered by brokers can vary, it’s a good idea to register a demo account and familiarise yourself with the one you’ll be using for real. You can’t afford any slipups when using your platform to scalp the markets.

If you accidentally press “Sell” when you meant to press “Buy,” you might get lucky if the market instantly goes south and you make a profit, but if the market doesn’t immediately go south, you’ll have entered a position in the opposite direction of what you planned. Such blunders can rack up significant expenses. Inadvertent platform errors can and will result in financial losses. Get comfortable with the interface before you invest any actual money.

Guaranteed Executions

Scalpers need to know that their deals will be performed precisely where they want. As a result, familiarise yourself with your broker’s trading conditions. There are brokers who will only guarantee trades at slower market periods. It’s possible that some services won’t promise to carry out the contract at all.

When an order is placed at one price and then executed a few basis points (pips) away from that price, the difference between the two prices is known as “slippage.” As a scalper, you need to be sure your order can and will be executed at the order level you desire because you cannot afford slippage in addition to the spread.

Liquidity

The most liquid markets are the ones you should focus on if you’re a scalper. The markets in question typically involve the most liquid currency pairs, like the US dollar and the euro or the Japanese yen and the British pound. Furthermore, the degree of liquidity in a given session may vary widely across different currency pairs. While the foreign exchange markets are open for business around the clock, volume fluctuates during the day.

Choosing a Charting Time Frame

Repeatedly making transactions requires a system that can be followed virtually mechanically. You need a strategy you can employ consistently with some degree of confidence in, as there is no time for in-depth examination during scalping. You’ll want tick charts, one- and two-minute charts, and maybe even a five-minute chart if you’re a scalper.

Redundancy

Having a backup plan, is like having insurance against disaster. In trading parlance, redundancy refers to having many entry and exit points for your deals. Get the fastest possible connection to the internet. Prepare a plan for when the internet is offline. Is there a direct number to a dealing desk, and how long does it take to get through to someone? When you’re in a tight spot and need to make a rapid exit or drastic adjustment, all these considerations take on greater significance.

When to Scalp and When Not to Scalp

Scalping is fast trading and requires lots of liquidity to execute deals quickly. Trade big currencies only when liquidity is strong and volume is high, such as when London and New York are trading. Forex trading allows private investors to compete with hedge funds and banks—just set up the correct account.

Do not scalp if you are distracted. Late nights, illness symptoms, etc. can cause you to lose focus. After a losing streak, stop trading and regroup. Do not seek market revenge. Scalping may be entertaining, demanding, and exhausting. You must be confident in your personality to trade fast. Scalping will teach you a lot, and by slowing down, you may gain enough confidence and practise to become a day or swing trader. Scalping is not for everyone.

Trade logs are essential. Record your deals on screen and print them for your journal. It will teach you a lot about trading and yourself.