Updated: Mar 23, 2021
Scratching your head about scalping Forex? Scratch no more! Just hold tight, this article will scratch that itch by providing you with the answers that you're looking for.
It'll also prevent further head scratching that could make your scalp sore.
In this article, you will learn & scalp the following knowledge:
What forex scalping is?
What is a scalping trader?
Forex scalping strategy
Why scalping is not allowed in forex?
How many pips a day is good?
The reality of forex scalping vs swing trading
Whether scalping is profitable in today’s world?
What is Forex Scalping?
Forex scalping is a style of trading adopted by Foreign Exchange traders where they buy a currency pair and then shortly after sell off the same currency pair with the objective of making a profit.
Once bought, the trader holds onto the currency pair for a short timeframe, perhaps for a couple of minutes or up to fifteen minutes, with the sole objective of making a profit.
What is a scalping trader?
A scalping trader is somebody who seeks to make small short term gains from the market, with the aim to have a high "success rate" but lower "risk reward".
For example, a simple scalping traders approach could hope to have statistics like this to be profitable:
For every £1 they lose they make £1
They make £1 over 51% of the time
Those 2 conditions in the above example must be satisfied to be a successful scalping trader.
A scalping trader must be very disciplined in his decision making and prompt with his trades. Moving too late could be financially costly.
A scalper may well place over a couple of hundred trades a day in the hope for a return of a small profit. In reality a 100% return on every trade is unlikely however a successful scalper would walk away at the end of the day with a profit.
Forex scalping is a longer term methodology where small profits are collected consistently rather than for those who are looking for larger returns regularly.
How do Scalpers Measure Their Profit?
The way these very short term traders measure there profits, as they're so small, is in terms of pips.
A Pip is a Percentage in Point. A pip refers to the smallest movement a currency can possible be involved in.
To be more specific, a pip is a movement of 0.0001 in the exchange rate.
Whilst keeping an eye out for small changes in price, a forex scalper will buy in at a lower price and then sell after a small price hike, otherwise known as a movement of pips.
These trades will be made throughout the day as the trader will look to make profit from the many small pip movements (price changes) that happen that very same day.
Profiting from forex scalping will involve the movement of only a small number of pips.
A scalper is quite literally looking to ‘make a scalp’ and move swiftly onto the next trade.
A forex scalper is akin to the tinder guy (or gal) who likes to swipe left a lot. The long-term trader is the two-year relationship type. As a scalper, you might trade that currency again, but you won’t get hitched to it!!!
It is important to note that a forex scalper looks to swoop in and out making regular trades whereas a forex trader will buy in for the long haul and will most probably aim for larger returns.
This is why a scalper is like the tinder user and a regular trader is more like the two-year relationship type.
Currency Pairs & Forex Scalping
Forex scalping is the action of buying a chosen currency pair at a certain price , waiting a small timeframe for a price rise and then selling the currency pair at a higher price point for a profit.
For example, you may want to trade the EUR/USD currency pair. In this case, you will look at the price movements for this pair. Below is a demonstration of a currency pair:
In the image above, it shows you would have to pay 1 Euro to buy 1.1543 Dollars, and vice versa. This indicates an exchange rate of 1.1543.
An example of Scalping
In the below scenario, the trader would pick up a $1000 profit:
Entry at lower price point: Trader places a buying trade where they buy 10,000 GBP for 14,000 USD
The hold: Trader waits for a small timeframe keeping an eye on price movement and prepares to jump in and sell at a pre-decided price at which a profit is made
Exit at higher price point: Trader sees the movement in price and places a selling trade selling 10,000 GBP for 15,000 USD
A $1000 profit has been scalped
Note: The act of making trades on small price movements is known as position trading.
Forex Scalping Strategy Explained
A scalping forex strategy often relies on indicators of price, trend or volume (or all three) to make it known at what point should the trader buy and sell.
Some scalpers will look for at least two indicators (confluence) before deciding whether to engage in a buying or selling action. This is an idealistic approach and not one that is suitable for every forex scalping trader.
How to scalp in forex - 3 simple strategies:
Like with any approach to forex trading, there are many strategies traders deploy, based on their experience, and personal preference.
There is no 'single right way' to actually trade the market, because if there was everybody would be making money... and majority, are not. - Marcus, CEO
So below I've decided to go through 3 popular trading strategies to give you an idea of what the majority of forex scalpers use:
1) Analysing Price Action & Volume
This strategy is laid on the foundations that theoretically price action is usually preceded by an adjustment in volume.
At low volumes, a trend can appear to be taking a dip before returning to a rising trajectory. Generally speaking, low volume is followed by high volume. The result of this movement is price action. Price action is based on the movement of the price.
Two occurrences must take place in order to use this strategy:
A spike in volume must be visible
AND you must see price move.
If both criteria are met, the trader will buy in promptly and sell once the price shoots up. If the scalping trader doesn’t react fast enough, the opportunity is missed.
When trading volume, do not trade over witnessing a single movement, hold off until you have seen several and trade upon that will strengthen the chances of there being a good trading opportunity.
2) Bollinger Bands
Bollinger bands are used to measure volatile fluctuations in price.
This type of band focuses on the highs and lows the currency pair goes through. A Bollinger band is like a marriage counsellor watching a couple through their good and bad times, and it pops up to give advice at just the right time.
When the price hits the lower band, a trader will normally buy in and sell as soon as there has been a movement of 10 pips.
The more volatile a market is the further apart the band is. A less volatile market will mean the bands are narrower and closer together. If the bands are very close together, this is probably not a point you want to buy in at.
3) Exercising Stochastics and Trend Lines
The stochastic indicator is simply an oscillator and by utilising the stochastics indicator in addition to a trend line, you can gather whether something is underbought or overbought.
At 80 you would consider the currency pair to be overbought.
At 20 you would consider the currency pair as being underbought.
When to buy using stochastics:
When you see an uptrend and you see the stochastic lines have fallen past the 20 mark, as well as an upward trend of the candlestick
When to sell using stochastics:
You should sell when the trend is moving downwards and the stochastic line has travelled past 80, as well as the point where the candlestick starts to point downwards.
Scalping Forex Strategy: The basics of forex scalping?
Think of a scalping trader like a bodybuilder. In order to build muscle (make profits), you need to drink your protein shake and undertake muscle building exercises (learn to scalp forex). The results will follow the application of a solid scalping strategy.
Home Truths about Forex Scalping
Forex scalping can be tiresome, and cause a lot of stress, anxiety and some cases depression.
As the stop losses are very small, it's easy for non-predictable market "noise" to stop a scalper out of a trade. This is due to many scalpers not actually setting their stop losses based on average volatility of price.
It's typical for a forex scalper to be working 12 hour days, 5 days a week, with minimal breaks.
As we're in the age of High Frequency Trading Algorithms, it gets increasingly difficult (almost impossible) for a forex scalper to keep his edge on these smaller time frames, unless he's using some sort of automation.
Is scalping trading illegal
As long as you abide by the regulations, scalping is NOT illegal unless the broker specifically states that it does not allow the scalping of forex.
If you work against any of the terms and conditions set by the broker, of course, you can sink into murky waters. The consequence? You could find yourself in a bubble of unwanted trouble. Best bet? Read the T&C's.
Why scalping is not allowed in forex?
There are certain brokers that do not allow forex scalping because whilst scalping may be profitable for the trader, the trader scalping is not always profitable for the broker.
The system that the forex broker has in place must successfully close the trade within a sufficient timeframe. If the scalper makes a quick scalp and the broker does not have sufficient time to close the trade on their end, the broker will incur a loss.
The broker offers all of its services with the intention to make money and if they are not making money, that leaves no reason to allow certain types of trading activities. For some brokers, one such trading type is forex scalping.
How many pips a day is good?
In forex trading working out your reward in daily pips is the wrong way to go about it. It's like calorie counting when you're trying to lose weight. The truth is in the actual physical results not the estimated calorie deficit.
The markets are always going up and down, and having losing months is part and parcel of the game. It's not quite a 'no pain, no gain' mantra, however, you have to be prepared to stomach the losing months just as well as you digest the profits.
The only sensible way to measure what a 'good' return would be to look at it on an annual basis, and not in terms of pips, but in terms of percentage.
Pips are for pipsqueaks. Percentages for pro's.
The reason for this, is that a percentage is a base metric, and is unilateral across any asset you trade... whereas pips, they're worth different amounts on each asset, and their value changes based on the risk!
So, with that said, a good annual return would be anything greater than 10% per year (which is greater than the S&P500 benchmark rate).
And exceptional return, would be in excess of 50%+ per year.
Well, they say an apple a day keeps the doctor away, be that true or not, when it comes to trading, neither the apple or the pips within the fruit are of much use where profit and loss are concerned. What matters? The RESULTS. End of.
Which forex broker is best for scalping?
The forex broker's best for scalping, are the investment banks. And unless you have at least $100 million USD to trade with, it's very unlikely you'll be able to open a trading account directly with an investment bank.
Unless you're rolling in the moolah, it's a load of hoo-ha because without that $100M stack, the odds, well they'll not have your back.
Add in the robots, algorithms and the big boys (or girls), and you're like the kid at school who never quite makes it to the football team. You might be the next Lionel Messi or Tom Brady but without the coaches backing, your chances will be lacking.
So, what choice do you have? The answer, none really. Most retail forex brokers spreads, commissions and rollover fees make it increasingly difficult to make scalping profitable at all.
But, if you're adamant you still want to scalp your way to victory, then check out this forex broker selection guide, which gives you a few pointers.
Pros and cons of scalping forex: Is forex scalping safe?
With most things in life, there are pros and cons. Trading forex is no different. Let’s take a look at some of the key points you will want to know:
What are the advantages of scalping forex?
Scalping allows you to trade over short time frames, and therefore eliminate the costs of rollover fees.
As forex markets are very liquid, there is an abundance of opportunities with almost instant transaction time
What are the disadvantages of scalping forex?
There is increased cost spent on spread and commission due to more transactions, and the cost per transaction.
The trader must use HUGE amounts of leverage (anywhere up to 500x) to amplify smaller market moves into an acceptable profit. Over-leveraging like this is a 1-way ticket to blowing up a trading account.
The majority of brokers state that stop losses are NOT guaranteed. This makes slippage a very real and harsh reality that could lead to detrimental losses that a trader was not prepared for. If the price drops considerably, the stop loss set by the trader may be bypassed and therefore not actionable. By the time the trader realises, the losses could be severe and of course highly damaging.
Volatility in the market can swing in your favour for greater profits or swing the other way to heighten losses.
HFT (Age High -Frequency Trading) algorithms have enabled high level traders to use bots that are in and out of transactions in a matter of seconds, they algorithms are faster than a human can even compute movement.
Profits are often smaller than successful longer-term investments & it’s almost certain to take longer to reach a lofty financial milestone the trader has set.
Where HFT's are concerned, it is nigh on impossible for a human to compete with a bot that acts on automation and instantly recognises deviations in the market.
Prior to the internet reliant age, perhaps thirty or so years ago, this was not a valid problem but now the automated bots have dispersed across the scene making it very difficult indeed to consistently forex scalp to any substantial degree at all.
How is successful scalping of forex possible?
Essentials to make scalping possible:
Costs of broker must be as little as possible
Utilise automation as much as humanly possible so that you can honestly & effectively compete with HFT’s
Do not scalp at all if you cannot implement both of the above
As much as trading of any type is a thinking person’s type of mission, forex trading, and in particular forex scalping, is a mission for those who are adept to thinking quickly AND reacting fast.
If you don’t make note of the memo about analysing quickly and reacting fast, the mission could well simulate the Titanic.
If you utilise a scalping strategy effectively, you’ll have to act fast during the trades but in terms of overall financial growth, it’s very much a case of the tortoise beating the hare.
Slow and steady progress can be made in terms of financial gain if scalping is undertaken with a disciplined strategy. Although, modern technology and study of trading styles has made forex scalping tougher to profit from consistently.
Forex Scalping vs Swing Trading
The leverage required for swing trading vs forex scalping is significantly lower than that for forex scalping.
With careful risk management and patience, the outcomes are often more profitable.
Scalpers almost obsess over their transactions due to the nature of a trading style heavily conditional upon reaction and speed whereas swing traders will hold their trade patiently only checking every so often.
Taking the above into account, Swing Trading is considered a ‘better’ type of trading style and requires a calm patience rather than a constant focus.
Scalping Forex Basics:
Scalping can be a very stressful type of trading as you have to maintain great-focus and be prepared to take action fast, both at buying and selling points.
You must be able to gauge entry points and exit points very quickly, and you must be prepared to take action promptly to take advantage of the position.
Swing Trading Basics:
Swing Trading refers to a trading style that is undertaken over several days or weeks rather than minutes.
Managing risk effectively makes swing trading a viable pathway for successful trading as long as you can be patient to keep a hold of your trades and wait for the swing in price.
Click here to watch a video explaining simple swing trading strategies.
Is forex scalping really profitable?
Having considered swing trading as well as scalping, the conclusion is as such:
Scalping Forex can be profitable when undertaken with a clear enter & exit Scalping Forex Strategy BUT it has proven to be a much more difficult task than the pre-internet age with the automation and bots that technology has allowed henceforth it’s considered swing trading is a better option when managed effectively alongside risk.
(Note: Click here to if you want to know the top 10 reasons forex traders lose money so you don’t have to sulk like the kid on the left!)
The Logikfx Academy – Learn to trade Forex
At Logikfx, we want to make forex trading easier and less jargon heavy so whether it’s the articles, videos or images we have in place, make use of them to give yourself an advantage as a forex trader. The more you know, the better your chances of success are.
The Logikfx resources allow you to LEARN IN YOUR OWN TIME. No being late for the class. No missed breakfasts. No riff raff.
The interactive resources, infographics and real-life examples are all collated, organised and ready for use. Come rain or shine, the material will always be there ready and waiting at your service.
Become a LITA trader with Logikfx TODAY by joining the forex trading academy now!