Scalping in Forex and its main techniques
Once you've set yourself up for Forex trading and learned about currency markets a bit, you inevitable come to a conclusion that you need a good strategy to use that knowledge in practice. A strategy is a set of instruments and a sequence of actions that allows a trader stay follow his or her plan and make profit from trading. A way from theory to developing your own strategy is a long one. Usually, it takes a lot of trials and errors before you find your own style that works particularly for you.
While there is no universal recipe for successful trading, there is a good old strategy which fits both new and experienced traders, the Forex scalping strategy. Below, we will explain what it is, how it works, and what you can expect of it. Also, we will provide you with some tips on how to make it more profitable.
Explanation of scalping in Forex
In the currencies market, scalping implies trading a number of positions during short periods of time. This allows traders gain many small profits, up to 10 pips each. It surely looks insignificant, which is why there is a need for frequent trades. Some traders who rely on Forex scalping strategies can make up to a hundred or more trades daily.
How to know if scalping will work for you
Time is the first thing you should consider when deciding if scalping is right for you. Do you have enough of it to spend on analyzing the market, placing orders, and analyzing once again after the trade has been made? Bear in mind that you will have to repeat this procedure at least several more times, as the profits from single trades are really small. So, are you willing to have trading as a full-time job? Or can you afford just a few hours a day? In this case, your profits from trading won't be enough to ensure your financial stability. If you are short of time, scalping isn't probably the best choice for you.
Speaking of financial stability… How well do you take failing? How ready are you to accept the risks of losses? A trader is never protected from those, especially a scalper who makes lots of trades during short periods of time. Your goal as a short-term trader would be to balance out your losses and gains, so that you have more of the latter. Using a scalping Forex strategy often means that you should be able to sell your positions when you are losing, to avoid even bigger losses. If you are ready for all of it, then go for scalping.
Another essential criteria for choosing scalping would be how quickly can you make decisions. Also, how comfortable you are with such a fast pace when your order's lifetime might be a few minutes or even several seconds. So, you almost won't have enough time to think about the favorable market conditions or to analyze the chances that the trend will continue to move in the necessary direction. There are people who do not feel comfortable when the time is pressing, and scalping should be avoided by them.
Once you have got an idea of the scalping in general and estimated whether it suits you or not, it is time to find the best Forex scalping strategy and get some practical tips on using it. Let's read this below.
The existing FX scalping strategies
Scalping is a trading strategy itself, which presumes making a lot of small trades which often last a few minutes or mere seconds. Still, there are variations of scalping which were developed by traders who wanted to make it more convenient to use or more structured. Again, we will repeat the most important thing that every trader should be aware of: there is no universal strategy; they all need to be adjusted to the current market situation (which is subject to constant changes) and to the idiosyncrasies of your trading style. Therefore, you can take one of the strategies below, but do not forget to set them up for the best result.
A good FX scalping strategy is 1-minute scalping. It is just what it sounds like: trading positions with duration of 1 minute each. This sub-strategy allows you making a big number of trades per day or even per hour, while keeping you tied to the certain time frames. The latter doesn't mean restrictions (well, not only), but rather additional opportunities.
To use this 1-minute scalping strategy, you need to have the chart you are working with set to a one-minute period. The strategy also requires using a number of indicators — they can be set by default for some trading platforms, such as MetaTrader 4. However, you should enable them manually within others. Let's see more on the indicators below.
One of the indicators is EMA, or Exponential Moving Average. When using Forex scalping technique, you need to choose the 50 and 100 periods for your EMA. It would be also good to mark the two EMA lines with different — preferably contrast — colors. Beside your EMA, you should also use the Stochastic oscillator (5, 3, and 3). These indicators will help you with signals for opening your positions.
If your 100 EMA line goes below the 50 EMA, then it might be the time for opening a long position. To be certain, you need to look at the Stochastic, which must go upward and cross the level 20. Also, your entering price must be about the same as that EMA suggest. When all of the above coincides, then it's definitely time to open your long order. If you are selling, then you should look that your indicators are the other way around.
The above concerned long orders with 1-min scalping. For the short positions, you should look for the EMA 100 below EMA 50, while your entry price should not differ from the price at EMA lines — it should be as close to them as possible. Also, the Stochastic should cross level 80 in the downwards movement.
So what markets can you trade using the scalping strategy in Forex? It is actually good for trading anything, from currencies to precious metals. However, the only limitation is that 1-min scalping is better used for currencies with a non-significant difference between the ask and bid prices. It means that major currency pairs fit the strategy the best. Still, you need to go after high volatility in this simple Forex scalping strategy. This is why it's advisable to trade in-between the London session opening and NY session closing, when the volatility is especially high.
Below, we will provide some more information on the scalping strategy. We'll cover scalping techniques and the way in which the strategy itself can be improved.
Scalping strategies that work
It might come as a surprise, but 1-minute scalping is the most popular and the most trusted strategy among Forex traders who are only starting their journey into the depths of trading. It is an instrument that will work on its own; what you might need is to adjust the indicators that you have chosen as an alternative to Stoch and EMA. Also, you can simply change your one-minute chart to 5-minute chart.
Using Forex scalping techniques
Once you have chosen the scalping strategy, you will want to learn how to use it to your maximum profit. For example, in order to improve your Forex scalping methods, you can compare your main trading chart with a different one (such as an M1 and M5 charts). It will help you better recognize the signals for opening a position.
You should never forget about stop-loss orders. It is one of the most crucial scalp trading methods, for example when you might get carried away in hope to reduce losses or maximize gains of one trade by prolonging it. While the revenue from scalping is often miniscule, setting up a stop-loss level will be able to save your money over the long term. Do not avoid this loss protection method, especially when you are a beginner.
Some platforms, like MetaTrader 4, allows using the 1-click tool for trading. It allows you to open your positions in just a click, not after setting up everything manually. When you are working with short-term positions which last a minute or so, speed is everything. That's why speeding up your trade with 1-click tool is always a good idea.
One of the most beneficial tips would be to make your strategy fully automatized. It doesn't mean that you can fully let go and rely on the default setup; you are free to make your trading automatic only after you've set everything up manually. This means that you do need to spend a significant amount of time setting up and trying out your scalp trading methods, but after that, you are free to leave it all to the automated process, which will save you some time.
All FX scalping strategies are all about short-term trading. If you have decided to try scalping, this will require from you a lot of patience, as well as fast reaction and quick decision-making skills. You will need to be able to analyze your 1-minute chart (as in 1-min scalping) and react by opening a position once you see it's time. This is not easy at all. That's why we suggest that try trading with a demo account first, to see the strategy in action and to decide whether you are fit for it or not.