On sporting and musical occasions, as ticket sales reach their peak, the demand for gaining admission goes up. This is where ‘ticket scalpers’ come into play. These individuals buy tickets before the events. As they near, due to the increased demand, they can sell the tickets for an inflated profit.
The concept of Forex scalping is similar. Traders look to buy or sell a currency pair for a quick and substantial gain. While tempting, this approach to making money in the markets is challenging.
So, this guide will explore scalping and how to implement it successfully as a beginner (for a day trading guide, check it out here; we also have a comparison between scalping and day trading).
What is scalping in Forex trading?
Scalping is the activity of ultra-frequent execution where traders hold their positions for a few minutes or even seconds. The aim is to capture quick and small profits, which, over time, can compound into larger gains.
This is why the execution is far higher than other techniques. It is not uncommon for scalpers to target as little as 5 pips per trade, trading over 20 times daily. The chart below gives an idea of the frequency of scalping.
It contains the stochastic indicator. This tool generates a buy/sell signal when the two lines dip from the 20 up or from the 80 down. The chart shows the price action of USD/JPY over four hours.
Notice how many signals were present. Of course, depending on the strategy and indicator, this may be conservative.
To make scalping worthwhile, traders often use larger volumes or open multiple positions at once to amplify their gains. This methodology can be incredibly risky (especially with high margin) but rewarding if done with skill and risk management.
The Forex market produces enough volatility that you can gain a lot of money from minor price changes.
This is why scalping is a popular way to trade the markets. However, it is a fast-paced discipline where the individual needs to be a quick thinker and make good decisions on the fly.
Investors execute Forex trading scalping strategies on lower time frames ranging from the 1-minute to 15-minute charts. These present the most opportunities for traders, an essential attribute to scalping.
You can scalp as a discretionary trader or use an automated system like Galileo FX. As a manual scalper, you will primarily rely on technical analysis using archetypal indicators like moving averages, RSI, and Bollinger Bands.
Using these tools allows the trader to exploit short-term movements with precision. Also, scalpers are not concerned about long-term shifts like swing (here’s a guide comparing this with scalping) and position traders.
Still, because scalpers thrive on momentum, many speculators may trade only during specific high-impact releases like interest rate news. These events have historically produced big moves.
So, in scalping Forex trading, the trader will wait for the release results and trade accordingly. In general, scalpers are meticulous and will only operate during specific sessions rather than any random time in the markets.
Popular Forex scalping indicators
Here, we’ll look at the most popular technical tools used by scalpers:
The moving average (MA) is usually the first tool beginners learn about, and for a good reason. It is one of the best Forex scalping indicators. A moving average is a dynamic line that depicts the average price (often the closing price) a market has traded over a certain period.
So, a 10-period MA shows the average closing price of a pair over the past 10 days. The core concept of this indicator is basing the trading direction on where the market is in relation to the MA.
If the price is below the MA, it suggests a downtrend; on the other hand, when the price is above it, it signals an uptrend. Scalpers will generally stick with MA periods that aren’t above 20 days. This is because a shorter period reflects many more trend changes.
While this quality offers greater trading opportunities, it can also provide a ‘choppy’ picture of the price action. Here is an example of a 10-period MA below:
In any Forex scalping trading system, a single moving average is only useful for spotting a trend instead of confirming an entry. This is where using two MAs comes into play, where the scalper uses a higher and a lower-period MA, e.g., a 10-period and a 5-period MA.
Traders look for the classic crossover. When the moving averages intersect, this signals a trend change that can also act as an entry or exit trigger. The chart below shows an example of a 5 and 10-period MA crossover. Note the trend changes at each of the ellipses.
Relative Strength Index
When you use solid Forex trading scalping strategies, the trend is not the only essential thing. A trader needs to gauge the momentum of a Forex pair to determine the force; this is where the Relative Strength Index (RSI) comes in.
The RSI is a momentum indicator consisting of a graph with a line oscillating between 0 and 100. When the RSI is above 70, it suggests an overbought market and the potential for a pullback to the downside (where traders may sell).
On the other hand, if the RSI is below 30, it reflects an oversold market and the possibility of a pullback to the upside (where traders may buy). Aside from confirming momentum, the RSI is used by traders to pick tops and bottoms or reversals.
Below is a chart with this indicator.
Bollinger Bands are a versatile indicator for Forex trading scalping. It incorporates the trend and volatility using two standard deviations away from a moving average (the middle band). Here are common ways scalpers use this tool.
When the bands contract, it suggests a sideways market where the price will hover around the middle band. Expanding bands can signal a volatile market where the price moves forcefully in a particular direction.
Another trick with Bollinger Bands is how scalpers can pick tops/bottoms as they would with the RSI. They simply look at moments when the market moves outside and back inside the outer bands.
Here are examples of this occurring on a chart
Types of forex scalping trading strategies
Although there are countless trading systems out there, a scalper is generally looking to trade with the trend, trade against it, trade a breakout, or trade the news.
This approach is, as Jesse Livermore put it, ‘finding the path of least resistance.’ Moving averages are a staple of trend trading, providing a bias as to whether one must go short or long. Once scalpers have identified the trend, they can use other tools or indicators to refine their entries.
Here, the aim is to exploit periods when a trend has lost steam and retraces. As mentioned before, an oscillator like the RSI is a useful tool for this job by looking at overbought and oversold moments.
In Forex trading scalping, a breakout happens when a Forex market powerfully breaches a defined support or resistance level on the chart. Before this event, traders observe the area with keen anticipation, which is what increases the force.
Analyzing the momentum with an indicator like the RSI can give clues on whether a breakout will turn out false or not.
Breakouts tend to happen after long periods of consolidation or when the price is ranging. Here, you can observe the ‘flattening’ of moving averages or the ‘squeezing’ of Bollinger Bands as methods to identify range.
Support and resistance isn’t the only way to identify this phenomenon. A breakout can also happen in non-linear conditions using chart patterns like wedges, double tops/double bottoms, triangles, flags, and head-and-shoulders.
Trading the news is an easy Forex scalping strategy that can prove quite profitable. Many scalpers specialise in this area and only participate in the markets during high-impact news releases.
This is because the depth of movements is often pronounced, especially when the projected outcome is noticeably different from the final result. Interest rate and Gross Domestic Product decisions can lead to massive short-lived price changes.
The key is to be well prepared before the event and very quick on your feet once the announcement is official. Still, you should be careful since the market doesn’t always react as expected according to the result.
Pros and cons of Forex trading scalping
Here’s look at the main benefits and drawbacks of this trading approach:
|This approach can offer large profits in a much shorter period than other trading styles||Using large volumes can quickly result in a margin or an account blow-up|
|Forex trading scalping strategies only need a few pairs for analysis (instead of studying all popular pairs)||In scalping, you don’t capture more extensive moves since the profit targets are small.|
|The number of opportunities for scalping are frequent.||Scalpers expose themselves to ‘market noise’ on lower time-frames, which can provide false signals.|
Also, while volatility is a good thing, it can work against you.
|Scalpers generally have a higher win rate.||Scalping requires immense concentration and may be demanding physically.|
|You don’t leave positions open for a long time.||The transaction costs can put a dent in trading profits.|
How to scalp Forex successfully
Even if you know all the Forex trading scalping strategies in the world, it doesn’t guarantee any success. Becoming a profitable scalper is a combination of:
- Having the right personality
- Understanding risk management
- Decreasing trading costs
- Trading in optimal times and markets
Before diving into these factors, you should ensure your broker allows their clients to scalp. Fortunately, the vast majority have no problems with it. However, some may express strict restrictions on any form of high-frequency execution.
This is sometimes the case with ‘dealing desk’ brokers that process their traders’ orders internally instead of distributing them to external dealers. Scalping can be a logistical problem due to the magnified execution frequency across many clients.
Adopting the right personality
There are many experienced traders that have never attempted scalping because it needs a certain personality. Long-term traders are naturally quite patient and relaxed individuals who take a ‘less is more’ approach.
On the other hand, a scalper needs to be nimble in processing the often breakneck speeds of market action in the lower time frames. This isn’t to say that an element of patience isn’t involved, but a lot less than other methods.
There is also an argument that scalping needs a risk taker. Although all trading is risky, scalping puts the risk at the highest level because of the high frequency and trading volume. Another component of scalping is how physically demanding it can become.
So, this means that a scalper must possess high levels of energy and concentration hunting for opportunities and executing positions.
Something else that’s necessary is that you should have exceptional internet speeds and a distraction-free environment. These qualities will allow for the quickest execution and the ability to focus properly.
Understanding risk management
A trader can have the best Forex scalping strategy, but it will not yield profits without managing risks. It is typical for scalpers to use wider stop losses or no stop losses at all.
We wouldn’t advise the latter method as the chances of blowing your account rise. A wide stop loss may not always work if one losing trade overwrites a large chunk of your gains.
These are some concepts to understand when it comes to risk management. A rule of thumb is to incorporate a risk-to-reward ratio. The idea is that you at least gain twice the amount at risk (1:2).
If you apply this over time, you should remain profitable even with potential losses in between. A scalper may have a lower risk-to-reward, allowing them to hit their ideal targets often. This concept goes hand-in-hand with your stop loss size.
As the stop loss is wider for each position, it increases the win rate, but decreases the profit amount. Of course, the opposite is true; a tighter stop generally lowers the win rate but increases the gain potential.
Decreasing trading costs
In currencies, a spread applies to every position regardless of how long it has been open. This charge is the most consistent for all traders. In Forex scalping, you must pay careful attention to the spread.
Since scalpers aim for small profits often, the spread can significantly affect your gains in the long run. The average spread for most pairs is around 2-3 pips. If a trader aims for a 5-pip profit, we can see that they would end up pocketing far less.
Compensating for this difference may require the scalper to increase their profit target, which is not always conducive. The other problem is that spreads may widen, particularly in busier periods like certain anticipated news releases and session overlaps.
Fortunately, there are ways to remedy this situation. The first is using a zero spread account instead of a standard one. This account offers the investor lower spreads with a fixed commission per trade, allowing for more predictable trading costs.
The next consideration is to pick optimal markets. Many scalpers prefer major pairs or USD-related markets (instead of the cross or exotic pairs). Because these are the most traded, they naturally have lower commissions or spreads.
Trading in optimal times and markets
By now, it should be clear that timing in scalping trading Forex is everything. One advantage of this method is its use in specific environments and times. While nothing stops someone from scalping at any time, the nature of being a scalper requires particular qualities:
- Volatile and trending markets: A Forex pair needs to be relatively volatile and in a clear trend. Scalpers look for markets that move a great distance within a short period. This is only possible on a consistent basis with particular pairs like EUR/USD, USD/JPY, and GBP/USD.
Still, volatility is only one part. Even when a market is naturally volatile, it may not move much without an established trend. So, the other component is identifying whether the price is in a range or trending.
Still, both components, along with liquidity, never stay the same. They can change based on factors like the day, the number of active traders, and economic conditions.
- Busy sessions: The best times for Forex scalping are during the New York and London sessions. These tend to be when trading activity is at a peak, attracting the attention of the largest market players.
In parts where the time zone clashes with a trader’s sleep time, they may opt for the Tokyo session (although it’s not the most optimal). Another notable period is when sessions overlap or remain open at the same time.
In the summer, the Tokyo and London sessions are active for an hour from 03h00 to 04h00 Eastern Standard (EST). During summer and winter, the London and New York sessions overlap between 08h00 to 12h00 EST during summer and winter.
If you trade the news, you would be awake before a particular release is announced on the economic calendar.
Now that we’ve reached the end, you may wonder, is scalping Forex profitable? As with any trading strategy, it’s often the trader behind it and not the approach that determines success. It can be lucrative when you understand how to reduce losses and maximise gains.
Scalping is not about aiming for ‘home run’ trades. While these moments are impressive, there is more exposure to the markets, and they don’t happen all the time. Having a position open for a long time is not always preferred. A scalper looks for many trades with small gains rather than a few positions with large profits.
If you prefer not to get involved in the frantic nature of Forex trading scalping, you can use Galileo FX to automate your positions, even while you sleep.