What is Scalping?
Scalping is a popular trading strategy in forex trading where currencies are bought or sold over a brief frame of time. This strategy is backed by real-time analysis and leads to significant gains. Traders who embrace this style, known as forex scalpers, skim off small individual profits from a large volume of trades. Small profits on each trade, for instance, 5 to 50 pips, can be magnified by expanding the position size.Forex scalpers open the positions for limited seconds or minutes and repeat it several times a day to make substantial profits. They derive benefits from the minor price fluctuations which are quite often throughout the day. However, one cannot expect to gain more than 10 pips per trade or lose more than 7 pips through this form of trading.
FX markets rank highest in terms of volatility and liquidity, thereby providing numerous opportunities to traders within the same day. There are two different approaches to ‘scalp’ the markets – manual and automated. The manual type requires the scalpers to constantly sit in front of their computers to figure out the market moves, thus opening and closing their positions accordingly. On the other hand, automated systems run on a program with pre-installed parameters and trade as per the set rules.
How to use Scalping in Forex?
Choose your Time Frame
As a forex scalper, you need to catch the high velocity market movements. Therefore, it is crucial to choose an appropriate time frame – which may range from 1 minute to 15 minutes. Both the time frames are widely accepted by scalpers, however, the 15-minute timeframe is less known as it results in taking fewer positions per day.
Volatile currency pairs are the most preferred option when aiming for substantial pips from each trad as volatility directly involves the number of market moves. EUR/USD, GBP/USD, and EUR/JPY are instances of some of the most volatile pairs.
Assess the Spread and Transaction Costs
Though volatility provides numerous opportunities around the same time, it must not be the only factor taken into consideration. Scalpers must trade with currencies that have less spread costs, i.e. the ones which are cheap to trade. The spread and transaction costs are directly related with the formula:
Transaction cost = (spread x position size) x pip value
The spread will account for approximately 10-30% of your income. Without a doubt, this value must be kept as low as possible so that you can invest more in currencies rather than paying a fee to make a trade.
Bear in your mind that it is hard to successfully scalp the forex signals if there is a dealing desk involved. It is suggested to choose a No Dealing Desk (NDD) broker which provides Straight Through Processing (STP) or Electronic Communication Network (ECN) execution. It broadly offers two benefits – one, it allows a quicker approach to the market which is a crucial aspect in volatile markets like the forex market; two, it takes into account the automated systems and thus, reducing the possibilities of human errors.
Pros and Cons of Scalping
An enterprising trader would develop better insights into the advantages and drawbacks of scalp trading before using this strategy.
Some benefits of scalping are –
- Due to the low barriers to entry into the forex trading realm, scalping is more commonly put in use by the retail FX traders. It does not even require huge holding capital – it is inexpensive, and the percentage of successful trading is higher.
- Scalping strategies are easy to comprehend and it doesn’t require any specific knowledge of the market. You can begin with a basic knowledge of the market.
- It is a quick form of trading: Positions open and close for a short time frame, making it a less stressful style of trading than other forms.
- Non-directional strategy: Scalpers can make profits from both up and down markets. You only need to understand how to manage time and opportunity to wait for a trade to close as it may happen within seconds.
You may want to stay away from scalping as –
- It demands a great deal of time and effort. Scalpers must strike a balance between patience and spontaneity to spot the minor changes in the market.
- There is a high transaction cost associated with scalping – there can be added commissions in case of consequential trades.
- To make the most from scalping, one needs to incorporate greater leverage which in turn comes with a higher risk factor. Moreover, one loss can consume multiple successful trades, leading to exhaustion.
Scalping Strategies for Beginners
There are various tools and techniques that help scalpers maximize their profits such as price patterns, technical indicator signals, time-charts and momentum indicators like RSI and the stochastic oscillator, among others. An ideal strategy depends on the current market trends and conditions. Scalpers often utilize a combination of strategies to get the desired results.
Here are three profitable forex scalping strategies for beginners –
Scalping using Stochastic Oscillator: Stochastic indicators draw a comparison between the current price of a security and its range over a recent time interval. They provide a signal to buy or sell a particular currency. It goes without saying that this strategy should be implemented in an uptrend or a downtrend and is not suitable for a ranging market. A trendline tool is thus used in conjunction with stochastic indicators. The condition where the trend is met acts as a potential signal.
Scalping with Exponential Moving Averages: This strategy revolves around the use of exponential moving averages (EMA) indicators which reveal the average price of a currency pair over a period of time rather than its actual price. It is a handy tool that displays the underlying trend behind a Forex pair. If the currency price is above EMA, it is perceived as a point to sell; if the price is below EMA, it can be a signal to buy.
Scalping using the RSI: Relative Strength Index (RSI) helps to locate entry points that move with the trend. RSI value beyond 70 suggests overbought conditions while its value below 30 denotes oversold conditions.
Scalping can be an extremely effective trading style provided that you are equipped with scalping essentials: an efficient broker, appropriate platform, and the right mindset. Since the holding of positions is carried out for a few seconds or minutes at the most, it is the quickest form of trading. Scalpers, therefore, need to possess discipline and patience. Also, scalp trading is time-consuming and one should be prepared to devote long hours sitting in front of their computers.