In this guide we will deal with the Forex scalping strategy and the time-frames with which to operate. Keep in mind that, in order to do this, you must also analyze the currencies that best adapt to this type of strategy.
To do this, however, some basic scalping requirements must be considered, as well as the operating techniques of Forex scalping.
If you also want to practice your Forex scalping strategy to make money, you can find all the information in this study. Basically it is a technique suitable for all traders in order to obtain a profit quickly.
The Forex scalping strategy looks at short-term investment ranging from a few seconds to a few minutes maximum, in which you have to open and close positions.
You must therefore consider it as a highly dangerous technique that could make you lose your entire capital in a short time, should you have to invest a large amount of money.
The scalper is satisfied with small but repeated profits, which at the end of the day, added together, make a fair profit.
Entering and exiting the market repeatedly means that the exposure to price fluctuations is minimized and consequently the risk is minimized, too.
Difference between scalping and day trading
The scalper could be confused with the day trader.
The difference between the 2 is in fact very subtle; both try to make small profits from many trades during a trading day.
Nonetheless, there are differences between them, particularly:
- The scalper operates on very low time-frames, for example 1 minute.
- The day trader usually prefers slightly higher time-frames like 15 minutes, but also 1 hour.
Usually the scalper tries to take advantage of the publication of:
- economic data;
- market news;
- other news that could have a significant impact on the price of a certain financial tool.
The scalper usually has a frenetic and impulsive personality, which allows him to react promptly to price changes.
If your profile matches that of the scalper, perhaps the chaotic and exciting path of scalping FX is the right one for you.
Having certain characteristics is vital for a scalper, because his trading style is based on small transactions that generate small profits.
The scalper tries to earn between 5 and 10 pips for each operation and this process must be repeated over and over again throughout the day.
For this reason, the use of leverage is essential, which allows you to multiply capital and earnings.
Be careful though, because leverage could make you lose your capital if the transaction is closed with a negative outcome.
Financial leverages: the new rules from ESMA
The European Securities and Markets Authority (ESMA) has introduced a standard that heavily limits CFDs and leverage. In fact, in addition to banning binary options in full, the Authority has drastically reduced the maximum level of leverage for retail traders, that is all traders except professional traders.
This legislation heavily affects scalping by retail traders, while it does not bring any news for those who have the status of professional trader. A broker can decide based on trading time, performance and invested capital to “promote” a trader and turn him into a professional.
For all non-professional traders the new maximum levels of leverage are as follows:
- 30:1 for the main currency pairs, that is the ones which include the American dollar, such as EUR/USD or GBP/USD;
- 20:1 for the secondary currency pairs, that is the ones which do not include the America dollar, such as EUR/JPY; for gold and most influent stock indices in the world;
- 10:1 for all other commodities and secondary stock indices;
- 5:1 for stocks;
- 2:1 for the cryptocurrencies, like Bitcoin or Ethereum.
It is normal that with a maximum leverage of 30:1 it becomes very difficult to be able to obtain concrete results with scalping. Most likely this technique will remain limited to professional traders.
However, this must not demoralize traders: with a lower leverage even the losses will be more contained! If your passion is scalping, continue to do it with the awareness that the gains will be lower than they were before, but they will not disappear!
Pros and cons of the Forex scalping strategy
What are the pros and cons of the Forex scalping strategy? We have summarized them below:
- You can lose only a few pips for each operation (contained risk).
- It’s perfect for impulsive people, who like to risk and act without thinking.
- It is not recommended to other people:
- you must have a strong personality to become a scalper.
- you don’t have to lose time with analyzes;
- you must feel comfortable taking risks.
Since a big mistake could wipe out profits from hundreds of transactions, it is important to analyze the market diligently and appropriately.
If you decide to apply fundamental analysis, you will run into difficulties when the market, due to unexpected events, unexpected statements, or market news, changes its direction and reverses the trend. It is indeed very difficult for a trader to follow all the news, and it is equally difficult to predict how the market will react to it.
How to operate with scalping FX
Some scalpers use a combination of strategies such as trend following or range trading, but they do it on different timeframes.
Even these approaches, when used on extremely low time-frames, such as those required in scalping FX, begin to show cracks and leaks in the system.
Abrupt price movements are not uncommon in the financial markets, and even less in the Forex market.
This is why scalpers attempt to exploit these movements, taking full advantage of the liquidity provided by the market to maximize profits.
They love extremely volatile markets, where sudden price changes are always around the corner and, with them, the huge opportunities that arise.
The use of leverage is a common practice in the currency market. This certainly entails higher profits, but at the same time also greater losses. For example, if you are using 5:1 leverage this means that, with only $ 50, you can invest $ 250.
However, since profits are often kept to a minimum in the Forex scalping strategy, leverage becomes an indispensable tool in order to at least generate satisfactory profits.
But what is the maximum level of leverage that can be accepted?
It really depends on your temperament. However, if you are a beginner, our advice is to start with the minimum leverage level, also because you will not be able to operate with a leverage greater than 30:1. In any case, using a high leverage level (200:1) could mark the end of your capital.
In fact, in the case of an unexpected event or an error of judgment, the outcome could be catastrophic, even for an expert scalper and even if the stop loss was used.
The level of leverage should be inversely proportional to the level of volatility in the market. These two ingredients together can be a real explosive mix.
Risks of the strategies of scalping Forex
Before proceeding further you must consider that the Forex scalping strategy is very dangerous.
For this reason you must always have control over your money. Otherwise you could risk accumulating an excessive number of losses during the day.
There are therefore some differences with other trading techniques.
If we compare the Forex scalping techniques with the position trading strategy, it is possible to note that the second technique is not only less risky but is characterized by indicators relating to the fundamental and technical analysis of the market.
Scalping trading strategies
Unlike the position trading strategy, all those who use the Forex scalping strategy do not deal with analysis, but are based on simple short-term technical analysis or even analysis of the trading system.
Who can use scalping Forex strategies and techniques?
The scalper must therefore have a particular profile. In this case he must also bear stress and have a tolerance of risk and loss management as well as determination and concentration.
Scalping trading operations
All those who want to trade with this technique do it because they aim to achieve many small profits. They carry out operations with the aim of at least covering the costs of the operations.
Forex scalping and countertrend strategies
This operation allows to enter the countertrend market. This means that the most optimal rebound phase must be exploited, which is nothing other than the one that takes place under short-term resistances, or on supports.
In this case, reference operating strategies are put in place; when you buy you are close to the supports, while if you sell you are close to the resistances.
The profit of those who make scalping FX is therefore based solely and only on the identification of these points where the price tends to release PIPs precisely in countertrend.
Similarly, the Bollinger Bands strategy could also be used.
This type of strategy is a speculative technique which allows to operate with rapid price techniques, even if more contained.
Dynamic scalping is currently one of the most used techniques, thanks also to the fact that the trader is offered the possibility of lowering the risk level of the operations, because of a very close stop system.
Forex Scalping: taxes and fees
It is then obvious how the choice of the broker is a fundamental operation for a scalper.
Let’s assume that you have chosen to rely on a broker that offers a spread of 3 pips, and that you have opened 30 positions on the EUR / USD cross over the course of a day.
Let’s say that:
- you have registered a winning percentage of 2/3 of the open positions;
- each open position consists of a 5 pips gain;
- the loss pips for each negatively closed position are 3.
The result is: (5 * 20) – (3 * 10) = 70 pips. Which correspond to your profit.
The problem, however, arises if commission costs are subtracted from the final profit.
In this case, if we apply the 3 pips spread to each operation, the result is even negative: 70 – (3 * 30) = -20 pips.
Let’s assume now that you have chosen a broker that applies a spread of only 1 pip per position. The result would have been distinctly different: 70 – (1 * 30) = 40 pips.
How to choose the right broker for scalping Forex
The secret is therefore to choose brokers that offer the lowest spread for each specific currency pair.
It is also important, before signing the financial contract, to adequately inquire about the terms and conditions of that contract, in order to become aware of what could happen when you close a negative position.
Furthermore, the efficiency of the chosen trading platform should also be considered.
This must provide accurate quotations, be reliable, provide different tools for technical analysis, as well as different time frames.
Since you will spend many hours in front of the computer using the platform, also make sure that it does not have the so-called slippage – the opening of a position delayed over time and at a price level different from the one set – this is certainly one of the most overwhelming problems for a professional scalper.
Underlying assets to use for scalping Forex
You can choose among the major currency pairs, such as:
You can also choose the pairs of the major world economies.
Usually, these have low volatility, so if what you want are small price movements or conservative trading, these are the currencies that are most suitable for you.
If, on the contrary, you are a risk lover, you could opt for the so-called “carry pairs“, such as:
In this case you need to consider that many investors buy Japanese yen in order to invest in risky assets.
In fact, when the stock market suffers shocks, these pairs can suffer from excessive repercussions and it becomes extremely difficult to predict their future movements.
So if you are beginners, stay away from the “carry pairs.”
What do we mean by redundancy in scalping?
The term redundancy refers to all those techniques that you can use to protect yourself from catastrophes.
For example, you should make sure you have a high-speed internet connection, since temporary slowdowns could mean losing money. In addition, since scalpers operate on the seconds, you should also consider any problems with the trading platform you use.
It is important that you can easily contact your broker’s customer service, so that they can solve any problem as quickly as possible and thus avoid losing money.
Scalping: bullish, bearish and lateral markets
Before anything else, a trader must determine the direction of the market, if this is:
To do this, the best way is to set the chart on a daily or weekly time frame, then to trace the trendline or a moving average.
You can set the chart at:
- 1 minute
- 5 minutes
- 15 minutes.
However, it is better to use 5/15 minute charts to understand where the market is heading and thus decide where to open and close the position.
When you have a chart, you must proceed to draw the straight lines of support and resistance. A support line is drawn below the chart and combines the growing minimums of the trend.
A good strategy is to go long when the prices bounce on the line and be very careful when it is pierced.
Scalpers also give a great importance to the moving average, in fact they often wait for it to be drilled before opening a position.
Market news can move the price of currencies and consequently create important earning opportunities for the scalper.
It is important that you understand that you should not act immediately, but you must wait, so as to allow time for the market to react and dispose of the new information.
A good scalper must be able in these situations to take advantage of the opportunity to earn, identifying the right direction of the market.
During the lateral phases, the scalper must try to identify the price levels and the patterns to which the currency pair is subjected. By placing buy / sell orders exactly on those points, we will have generated a series of positive trades.
This “trick” continues several times giving us the idea of timing positions and allowing us to understand when to enter and when to exit the market. We will now try to understand when it is better to do FX scalping trading. Since FX scalping is a very fast type of trading, this requires a significant amount of liquidity to open and close positions.
On which markets is it worthy to operate?
At the same time, it is recommended to trade on the major currency pairs in markets with higher volumes such as New York or London.
If you are a person who cannot concentrate for a long period of time, and you cannot concentrate even for a short period of time, then dynamic scalping is probably not the trading style for you.
Likewise you should avoid FX scalping if you are an analytical person who needs time to make a decision.
If you don’t put up a lot of pressure – since this in Forex scalping is very high – it would be better if you concentrate on other styles, such as:
- swing trading
- day trading.
The best way to learn how to take advantage of the Forex scalping strategy is to open a demo account and start practicing.
Once you have achieved a fair level of confidence, and have collected a good percentage of winnings, you can switch to the real account and start operating with real money.
Do not throw yourself into scalping, you could lose money very quickly and you would end up thinking that this style of trading is not suitable for you.
It is better to have a professional attitude.
So don’t do Forex scalping just to feel the adrenaline in your body or to gamble. In order to become a professional scalper, you need to understand how to calculate risk and thus take advantage of market ups and downs.
If you are a person who manages to control his emotions, you may be able to become an excellent scalper, earn good money and feel very satisfied.
Forex scalping is a technique adopted by traders to make money on very short-lived trades. The goal is to open and close numerous positions and attempt to earn a few pips per trade.
The brokers who offer a very low spread, which allows the trader to open and close trades at a very low cost.
No, there are brokers that do not allow the practice of Forex scalping; before adopting it, ask your broker.