What is Scalping in Forex?
Scalping in Forex is a trading method that is based on performing many operations that remain open for a very short time. In a scalping strategy, positions are kept open for a maximum of 3 to 5 minutes, with the usual duration of operations being only 1 minute.
The popularity of scalping in Forex is due to the fact that it is perceived as a strategy that offers security to the trader.
This is mainly due to the following:
► The positions are exposed to the market for a very short period of time compared to other online trading strategies that work with longer terms such as swing-trading or even day-trading; therefore, the risk of losses due to strong market movements is lower.
► Due to the short space of time of a scalping strategy, the variables that the operator needs to take into account are smaller. In a scalping strategy, the spread or the use of one or two indicators is often more important than the analysis of trends or the ranges of price oscillation of the currency pair being operated.
In summary, the general characteristics of a scalping strategy are:
► Many trades with short market exposure.
► Trades individually have a small profit, usually between 5 and 10 pips.
► The profitability of the strategy is given by the sum of the benefits of all the operations carried out.
► It is common to use leverage to increase the profit of each operation.
► A scalping strategy is usually developed in a few hours in which the market is especially conducive to its development, for example, because it has high liquidity.
When to Use the Scalping Strategy?
As indicated, a scalping strategy is based on carrying out many operations, of very short duration and during specific moments of the market.
Based on these premises, an operator who wants to develop this type of trading must have the following qualities:
► Availability of time to be fully aware of the market.
► Evidence to carry out a high number of operations.
► Discipline to close operations in a very short space of time.
► Be willing to give up more profit opportunities in exchange for the security of getting smaller but more frequent benefits.
► Ability to cope with losses.
Operators who employ scalping strategies are characterised by being patient and disciplined. A trader with a more emotional style or who seeks to obtain great benefits in a short time and with few operations should not use this type of strategy.
As explained, a scalping operator has to be very methodical about their trading decisions and about the expectations of the market at all times. Due to the high number of operations, it is usual for some operations to have losses, but the operator must bear in mind that the final profit of the strategy will be the result of the final sum of all the operations.
Scalping is not only about taking advantage of news, economic events or price trends, but above all, the basic structure and the internal dynamics of the Forex itself.
In any case, if you want to check if scalping in Forex is a suitable strategy for your trading style, it is best to open a test account or demo account.
These types of accounts are free and allow you to implement different scalping strategies. All this without any risk since it is not operated with real money.
Keys to Success Using Forex Scalping
As explained in the previous point, scalping in Forex requires special qualities from the trader.
But, in addition to these characteristics, to be successful with a Forex scalping strategy, the following is necessary:
► Know how to choose the currency pair on which to operate.
► Choose a suitable broker for this trading technique.
► Choose the best time to operate.
► Employ leverage and proper risk management.
► Define a strategy to open and close positions automatically.
Know How to Choose the Currency Pair on Which to Operate
To develop a scalping technique, the trader should focus on one, or at most, two currency pairs. Each currency pair has its own traits that characterise its behaviour. To scalp, the trader must know perfectly what these traits are in order to correctly operate the pair.
To be successful with a scalping strategy, it is much more profitable to know the behaviour of a pair very well than to have a less extensive knowledge of several currency pairs.
The pair chosen must be included in the so-called main currencies, such as EUR / USD or GBP / USD.
These pairs are the most suitable for this trading technique for two fundamental reasons:
► They have greater liquidity.
► They present a more moderate response to market events than other minor currency pairs.
The pairs of so-called exotic currencies are generally not suitable for scalping, because unpredictable price jumps are more frequent, making it extremely difficult to properly manage risk on orders.
Choose a Suitable Broker for this Trading Technique
The choice of the broker is one of the most important decisions for the trader who wishes to operate with this type of trading.
There are key factors for the profitability of scalping such as spreads and the functionality and stability of trading platforms that do not depend on the operator but on the broker.
A suitable broker for scalping in Forex must comply with the following:
► Offer low spreads.
► Have stable trading platforms and analysis tools.
► Proven experience in Forex.
Low Spreads
Spreads are an especially sensitive element in a scalping strategy:
For an operator that opens one or two positions in a day, the spread is not such a relevant variable, since if it is successful in its operations, the spread will not stop being a very small cost that will not jeopardise its profitability.
In contrast, in a scalping strategy the situation is completely different. As the operator will surely open dozens of positions in a short period of time, the specific cost of each operation, spread, will have a very significant impact on the operator’s income statement.
Stable Trading Platforms and Analysis Tools
In a scalping strategy, technical analysis tools are used. In such short periods of time that scalping is used, the fundamentals of the currency pair being operated have no effect on the price or, if they do, in this time frame they are usually unpredictable.
Therefore, the platforms offered by the broker must include a complete set of technical analysis tools as well as, obviously, charts with a time scale of 1-2 minutes and up to 1 tick.
Proven Experience in Forex
Scalping in Forex is a very technical trading method that requires an efficient Forex broker and that has been at the forefront of online trading for years.
All these characteristics can be found in a world reference Forex broker that makes available not only the best trading platforms but a technical support service 24 hours a day, 5 days a week.
Choose the Best Time to Operate
Scalping in Forex is a high frequency trading that requires high liquidity in the market to ensure the execution of orders at the speed required by the trader.
It has already been pointed out that in Forex this high liquidity is normally only found in the main currency pairs.
But, in addition, to ensure greater liquidity, scalping must be carried out during the hours of the day in which the highest trading volume is recorded. These hours correspond to the time of day when both the London and New York markets are open.
The London market opens at 7:00 GMT and closes at 16:00 GMT. On the other hand, the opening of New York occurs at 12 noon GMT. The moments before the opening of New York, and the first hours of this market, in which the London market is still open, are the most conducive to developing a scalping operation.
Employ Leverage and Proper Risk Management
A good scalping strategy must combine the use of leverage with proper risk management. Because the positions have a small profit margin, leverage increases their profitability. But, on the other hand, since the use of leverage can increase losses, it is essential to carry out good risk management, which defines at all times how to exit operations to minimise losses.
This risk management is carried out by defining a “stop loss” for each position we open. The stop loss minimises losses if the operation does not go well and limits said losses to the amount that the operator can afford to lose in each individual operation.
Define a Strategy to Open and Close Positions Automatically
To open and close positions with the high frequency that scalping requires, it is necessary to have a system that allows operating almost automatically.
Since the high speed required by scalping does not allow in-depth analysis of each operation, it is important to have a system that you can use repeatedly with a reasonable level of confidence. To develop these systems, very short-term graphics will be necessary: tick, one or two minutes or, at most, five minutes.