What is a Forex Scalping Strategy?
Forex scalping is a trading strategy where forex traders will buy or sell currency pairs over a short period of time in order to try and make a profit from the difference in prices from when they enter and exit their position.
Forex scalpers usually place trades throughout the day on lower term chart time frames such as the 1-minute, 5-minute and 15-minute charts. Scalping can involve being in positions from just a few seconds to minutes.
Forex scalping looks to compound small gains from frequent trades compared to more long term trading strategies such as swing trading which aim to gain from holding positions over a more sustained period of time ranging from several weeks to months or a year.
What are the Advantages of Forex Scalping?
As forex scalping is usually conducted on shorter term time frames, this can mean that there are plenty of trading opportunities throughout the day. If you don’t have much time to dedicated to trading, you can still find ample opportunities across multiple currency pairs using a forex scalping strategy. On the contrary, long term trading can also mean less chart watching and scalping can take hours of practice to master.
If you can scalp the forex market successfully, there is the potential to compound an account as you are frequently increasing your equity. If you are taking long term trades you may need to wait for them to come to fruition before compounding.
There is an abundance of free and paid forex scalping indicators available online to assist with forex scalping strategies. These can be combined to create your own unique scalping strategy or you can opt to use an already established strategy.
Forex scalping can be flexible as you may look to pick off trades during a trending market are to capitalize on reversals in a ranging market.
There is also no overnight risk or weekend gaps with scalping as trades are usually closed during the day. This also means that you do not have to pay swap rollover fees unless scalping around the opening of the Asian trading session.
Fundamental factors do not always have a major impact on scalping strategies as the trades happen so quickly. However, one should be wary if attempting to scalp currency pairs around major economic news releases as this can cause volatile market conditions. Unless of course you are using a news trading strategy.
What are the Disadvantages of Forex Scalping?
Forex scalpers will have to pay more costs to their forex broker due to the fact that they are taking more positions. Each position will usually incur a spread and commission fee. These fees can add up over time compared to a trading strategy that holds positions much longer.
Scalpers are exposing themselves to market risk on a more frequent basis. The more trades that you enter, the more chance there is of taking a losing position.
As with any trading strategy, you should use sensible money management although this can be difficult when scalping. The reason being is that scalping strategies usually target just a few pips profit and thus the stop loss will need to be extremely tight in order to not wipe out consecutive winning trades with 1 losing trade. Therefore, it can be very difficult to maintain a favorable risk to reward ratio when scalping the forex market.
Execution speeds can also be a major issue for traders who are scalping. As you need to be in and out of the market very quickly, small execution delays and slippage can cause entry/exit prices to differ from when you sent the order request. I would always prefer to use an ECN forex broker for the reliable execution speeds at the best available prices from their liquidity providers (LP’s).
Spreads are a major factor with a forex scalping strategy. I have seen a difference in forex broker spreads cause the same scalping strategy to have completely different results. Spreads on major currency pairs such as the EURUSD can start from 0 pips but around hours of low volume or volatility, they can increase significantly. As scalpers are targeting just a few pips profit, an increase in spreads can eat into profits and even cause winning trades to be losing positions. Thus, if you are looking to scalp the forex market, you may want to consider a forex broker with tight spreads and low commission fees. Feel free to browse my forex broker reviews for inspiration.
Forex Scalping Strategies
There are thousands of forex scalping strategies that you can find online. You can also use the technical indicators built into trading platforms to create your own scalping strategy template that suits your individual trading style. The primary concept of scalping is to be in and out of the market as quick as possible and in a profitable position.
Forex Trend Scalping Strategy
Scalping into a trending markets is a popular choice amongst many forex traders. This involves first identifying a trending market and then looking for an opportunity to enter in line with the trend during a pullback. Below is an example of how a trend scalping strategy could work.
- Identify trend direction using a combination of moving average indicators
- Look for a pull back into the trend using the stochastic oscillator to spot overbought/oversold conditions
- Confirm entry with price action analysis
- Enter in the direction of the trend
- Place stop loss below previous support/resistance and take profit with a risk to reward ratio of at least 1:3 (note, many scalpers would exit a position depending on how the market reacts rather than sticking to fixed stop loss and take profit levels)
- Exit position to either minimize loss or collect pips
Forex Reversal Scalping Strategy
The reversal scalping strategy first involves identifying a ranging market. Such market conditions are usually more prevalent when the major markets are not overlapping. Thus, around the NY close and Asian open, you will tend to find that markets range more although due to a lack of liquidity, spreads can also be greater than usual. This is something to factor into your money management is using a scalping strategy. Once a range bound market has been spotted, we can then look for price to reverse from the highs and lows of the range. Below is an example of how a reversal scalping strategy could work.
- Identify range bound market using support and resistance levels
- Look for price to reach the top or bottom of the range
- Use a technical indicator such as the CCI and RSI to spot overbought/oversold market conditions
- Confirm reversal with price action analysis
- Enter in the opposite direction
- Place stop loss on other side of the support/resistance and take profit with a risk to reward ratio of at least 1:3 or opposite support/resistance level
- Exit position to either minimize loss or collect pips
Forex Scalping Conclusion
Becoming a successful forex scalper can take many years of practice. It is not the easiest way to make a living from forex trading in my opinion. It will require immense trading discipline, good money management, and a bullet proof trading plan.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all scalping strategy signals. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice forex scalping, you can open an account with a forex broker and download a trading platform completely free of charge. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.