A Guide On The Basics Of Forex Scalping
There are many ways to trade forex effectively. The diversity is so great that there is no wrong way to trade- there is only profitable and not profitable. Forex Scalping is but one of several methods that traders employ to reap that profit. A trader that scalps is usually in the market for no more than five minutes at a time. Average trades tend to be about 1-2 minutes per trade. The trader maximizes their gain by using leverage and a broker with a very small pip spread.
Is Scalping Right For Me?
Not every trading system is going to be appropriate for every trader. There are some key qualities that a good scalper must possess. One must be calm under pressure and able to make snap decisions with good judgment. Scalping requires that you operate faster than the speeding bullet, too much time cannot be wasted on thinking about the trade otherwise the opportunity will disappear just as quickly as it appeared. Much of the thought that goes into a trade can be eliminated by developing a quality Trading Plan. Even still, the Trader's decision making ability is going to play a major role in successful scalping.
The successful scalper is focused on acquiring many small wins to build a long-term profit. They are more likely to avoid opportunities for major gain because they can easily go the opposite direction. One bad trade with a major loss can easily wipe out a day or two worth of scalping transactions. Thus, the scalper must adhere to their Trading Plan to control loss and look only for the opportunities defined by it.
Successful scalping takes a significant amount of focus and attention. Short-term trades are great because you minimize your exposure in the market. Gains and losses are all relatively small. The scalper must be able to find the situations that will provide the greatest chance for a profitable trade. A person can sit down for fifteen minutes or an hour to look for opportunities. During that time period, their attention is going to have to be on the market lest something materializes and is gone before they know it.
It is not a great choice unless you can create quiet time to dedicate to studying market movements.
About Automated Trading Systems
Many people look to automated trading systems to help lessen the demand of scalping on the trader. Scalping is very time-consuming for people who do not trade full-time. A majority of retail traders are people simply looking to add additional income revenue to their regular income. They do not have several hours a day to dedicate to scalping. There are some that try to circumvent the time demand through the use of automated systems.
No major corners can be cut in a legitimate way. There are no guarantees in forex trading, only a greater opportunity for success. A lot of sham products will try to offer promises or guarantees of profitability with their system if you just throw a bunch of money at them. They are con artists.
Automated trading systems can be incredibly helpful once you understand what you're doing in general. They can be used to handle miscellaneous functions; such as setting up your Take Profit and Stop Loss while you handle the bulk of the other work. A scalper needs to develop their skills and understand why they are taking the actions that they are so they can learn from their successes and mistakes.
After developing that understanding and committing their strategy to heart, one can always look at automated systems to help simplify processes. Whether or not it is a good fit will largely depend on you as a trader.
Currencies And Times
The question of what currencies to trade is at the centre of every strategy. The fact that there are hundreds of pairs to choose from seemingly only complicates the problem. Many scalping strategies can be applied to about any currency pair. The ones addressed in this section are best suited for scalping for the reasons detailed therein. Any not mentioned are typically considered to be suboptimal for their own reasons.
1. The Majors
The first look should be given to the Major pairs. The Major pairs include the currencies of some of the most dominant economic powerhouses around the world. EUR/USD, USD/CHF, USD/JPY, and GBP/USD are some of the most traded pairs. The large amount of participation from traders and financial institutions make these pairs relatively stable as opposed to lesser traded pairs. A market shock that results from a news announcement is less likely to send these pairs in a wild direction unless it is directly related to a currency in the pair. The screenshot below illustrates the stability generally associated to these liquid pairs, against the 15 minute chart.
Major pairs are a great place to start learning. They provide small, fairly consistent market movements that are perfectly suited to the scalper that wants to make conservative gains.
Brokers will typically offer the smallest spreads on these pairs
2. Yen Pairs
The Japanese Yen (JPY) plays a very significant role on their side of the world. The strength and stability of Japan's economy have played a great role in making the Yen a very attractive currency in addition to having one of the lowest interest rates of all currencies. Yen pairs tend to be more volatile than the Majors due to less participation with the exception of the USD/JPY. The USD/JPY tends to fall somewhere in between; not quite as volatile but still tempered with the presence of the Dollar.
Pairs that include the JPY are used in a different strategy known as Carry trading. Carry trading pairs a low interest currency with a high interest currency to generate larger profits. These pairs are great for scalpers to build their small gains thanks to the Carry traders contributing to their volatility. Carry pairs typically include either the JPY or the Swiss Franc (CHF).
These pairs are not suitable for new scalpers.
3. The GBP/JPY (the Guppy)
The Guppy warrants it's own section. No scalping or short-term trading discussion would be complete without it. This pair is quite likely the most volatile of all. It is not uncommon for the price to move a couple hundred points in the span of a day. That makes it very attractive to people that want to reap as great of a reward as possible in a short amount of time. That sword cuts both ways- great opportunities and great risk.
There are two primary schools of thought on the GBPJPY. The first is of the traders that feel it is too volatile to scalp comfortably in. It's harder to take smaller, consistent profits when a position can go from winning to losing in the blink of an eye. Then there are the traders that embrace the difficulty and seek to ride the wave. A scalper that devotes enough time and practice to the Guppy can generate a significant profit.
The screenshot below shows the level of volatility that can be expected on the GBP/JPY, illustrated on the 15 minute chart for a period in April.
Expect the GBP/JPY spread to be about 2.4-3.0. Normally this is considered to be too high to scalp comfortably. Not so with the Guppy. Price movements will easily accommodate it in a typical scalp trade.
This pair is not for beginners or even intermediate scalpers. Those intent on learning it should spend plenty of time trading it in a Demo account ahead of time. Exercise care while Live trading- this Guppy has teeth like a Great White shark.
When Should I Be Scalping?
Generally speaking, scalping can be done at about any time. The periods of time when there are more participants allow for cleaner and greater moves in the market. It's not worth your time and effort to look for opportunities during slow periods that do not suit your trading strategy. It's a quick way to frustrate and mentally exhaust yourself which will translate to mistakes and missed opportunities when it counts most. Keep yourself mentally fresh!
The answer to this question is going to change based on which currency pairs you decide to scalp. The most volatile time periods are those that have multiple major markets open. New York opens midway through the London session. The GBP/USD will see more activity during this time frame than one would expect to see with just one or neither of these markets open. Other markets that cross hours include Tokyo/London and Sydney/Tokyo.
Other time periods to keep an eye on are the hour just before a market tied to your a currency in the pair opens, the first hour it is open, and the hour or two leading into the close. There is an exception. The Friday close for the New York market can be quite unpredictable. Sometimes there will be volatility as traders prepare for the weekend close, other times the market will be flat. As a rule of thumb, don't plan on getting much accomplished after noon (Eastern Standard) on a Friday.
Try and stick with a pair that includes a currency whose market will be active during your scalping time. More is not better. Focus will let you develop an understanding of a pair's nuances and peculiarities.
Brokers and Scalping
There are hundreds of brokers providing a variety of services to forex traders and scalpers at present. All of those brokers are not equal in how they approach certain styles of trading. There are technical and ideological limitations that must be accounted for. Simply put, some brokers do not approve of the practice of scalping. Their platforms are not designed to be friendly to that type of trading or their own technical limitations prevent them from providing the right type of trading environment for a scalper to be successful.
It is very important to choose a broker that accommodates and is friendly to scalping otherwise you may find yourself set back by the broker's limits.
1. Brokers that cater to scalpers specifically will typically make that knowledge available on their front page. If not, your first stop should be broker's FAQ in support. Search for terms such as “scalp”, “scalping”, and “short term trading”. These keywords should help turn up appropriate questions on how the broker views scalping practices. The most typical language used in place of scalping is “under 5 minute trades”. If you've found commentary on that subject, you're in the right place. While you're there, check for “maximum trades”. Brokers that want to discourage scalping may cap trades at something like 3 to 5 a day on a pair. That doesn't work for a scalper that will be making dozens of trades.
2. The next step is to look at spreads for the pairs you want to scalp in the time slots you want to trade. Most brokers will provide access to a list of their average or best spreads so you can get a general idea. For a scalper, this won't be enough because of the number of trades you will be executing. Your options are to set up a demo account so you can check or examine their live list (if applicable) during the time period you want to scalp in.
3. Technical analysis is king for scalpers. The broker needs to offer a strong suite of technical analysis tools that will help drive your decision making process. Not all brokers have a good selection of technical tools particularly if the owners have strong feelings for fundamental trading. The short-term nature of scalping makes fundamental analysis almost useless as a decision point for executing a trade. The exception is trading news items.
4. Customization options are very important. You do not want to fatigue yourself by staring at a bright screen with a hard to read layout thanks to an unchangeable color scheme. A simple approach that provides easy operation is going to be a better visual than a screen cluttered with too much information. Multiple time frame displays of one currency are also quite helpful. Though scalp trades take place in low time frames, it is helpful to know what is going on in the bigger picture if you opt to trade with a greater market sentiment.
5. The final consideration is going to be technological. The broker must provide accurate quotes and have little to no slippage. Execution of trades must be timely. A scalper could be placing dozens of trades. Slippage can prevent trades from being executed altogether. Misquotes will skew your profit/loss margins to the point that trading may not even be worthwhile. A quality broker will have these subjects covered in their documentation. Be certain to double check even if the broker claims their platform is specifically built for scalpers.
Many of these things may seem like matters of convenience or not all that important. Their importance is magnified when paired with the high stress environment of scalping. You want as little interference with your thought processes as possible to retain a clear mind and make good decisions immediately. That's hard to do when you're squinting to see your chart through all the garbage that some brokers insist on to make their client aesthetically appealing. Utility is king.
Brokers and Leverage
Leverage is an important part of successful scalping. It is the means that a scalper uses to turn his small trade into a much larger one. Augmenting a trade with leverage carries greater risk and reward since you are effectively inflating the value of the trade. The scalper needs to ensure they are comfortable with the amount they are dealing with.
A broker will have limits on how much leverage traders can use. Though you can find the brokers who will offer 100:1 or greater leverage, it's not a good idea. The most you should ever need is 50:1. It provides a good platform to earn from while not carrying an anxiety-inducing high amount of risk.
A new scalper should avoid using a high amount of leverage until they are certain they can be comfortable and profitable with their strategy.
Favorable Scalping Patterns
Scalping success is largely built on analyzing and predicting price movements to enter favorable trades. Different traders all have their own ways of finding profitable opportunities for themselves. One way is through chart patterns that indicate a potential for the favorable circumstances a scalper wants. These patterns and events are recognized as some of the most favorable to scalp.
Range Bound Price Action
A predictable market is the greatest asset for a scalper. A great time to look for opportunities is when the currency is bound in a particular range, bouncing back and forth between price zones on the chart. The price does not have to bounce exactly to the pip. Think of the area more as a zone of a few pips in either direction at the closest point.
You do not want to enter the market exactly where it would bounce. Wait a candlestick or two to see which direction the price is going to start moving. If it's in the direction you would expect to see from being range bound, you can enter the market accordingly.
However, a candlestick that closes outside of the range is quite possibly signaling a breakout condition. The great news is that a breakout is another time that provides a short window of predictable price movement with a significant amount of volatility.
A support or resistance breakout can occur for numerous different reasons. The reasons for the breakout are not as important to the scalper as they would be to other traders. That sort of information is more important to fundamental analysis.
A common catalyst for a breakout is a news announcement. Several trading websites offer economic calendars that provide a list of upcoming news events with a projection of how drastically they can affect a currency pair. This is an essential tool if you want to scalp after news announcements. Of course, not every announcement can be accounted for. Periodically a surprise announcement from a government or major financial body will create some turbulence.
Other breakouts may occur for seemingly no reason at all. There is the possibility that they are attached to other catalysts somehow. Figuring out the connection is not worthwhile. By the time the scalper identifies it, assuming he's even correct, there's a good chance they have already missed their trading window. That is why fundamental analysis is not used for scalping.
Certain news announcements can create a great amount of volatility in the market. The price value of the affected currency is often drastically up and down for the first 5 to 10 minutes after an announcement. The whipsaw action is too erratic to accurately implement in a strategy for consistent returns. It is better to wait for about 10-15 minutes after the announcement before placing any orders. The time up until that point can be used to help determine what the overall sentiment of the participants towards the announcement.
Trends do not play as large of a part in scalping success as it does in other areas of trading. There are strategies that embrace the direction of the dominant trend to help carve out successful trades. So long as the trend stands, the participants can get an idea of which general direction the price is going to want to move over a longer period of time. Some scalpers prefer to take trades that favor the trend to help minimize their risk.
The downside is that there are fewer trading opportunities presented since you are removing opposite movements from the equation. The benefit of scalping with a trend is taking more out of a trade than you may have initially anticipated. While scalping typically means you don't stay in a trade longer than five minutes, there is no mandatory requirement to do so. You can always advance your stop as the price moves with the trend and stay in it until it starts to show weakness. Doing so increases one's risk and exposure in the market in a very limited way.
Candlesticks tell a story of their own so long as the trader can read it. They are a very common technical indicator and provide insight into what other traders are thinking about a pair's price movement. There are hundreds of different candlestick signals that can be taken in different contexts. A trader does not need a huge encyclopedia of signals so long as he makes the few he focuses on work for him. It is better to trade less very strong signals than several average.
Many of these candlestick formations become self-fulfilling. Anyone else following the pair is going to see the same signal forming and fall in accordingly. Support and resistance levels are an essential part of analysis because good signals typically form on them. A pair that has reached a significant level of support is going to need strong momentum to break through the number of traders piling in for the reversal.
As a scalper, these levels can be exploited in small time frames if you have a good idea of how the rest of the market is going to react to a level being reached.
These following few formations are some of the most popular and strongest signals used by traders.
1. The Pin Bar
A Pin Bar is mostly wick with only a small amount of body to one end. They may also be called Shooting Stars, Hanging Mans, or Hammers. Just the presence of a candlestick with this set up is not enough for it to be a valid signal. The pin bar must be relatively alone- at the top of or bottom of a price movement. It indicates a price reaching a certain point and the market rejecting the attempt to find a new low or high. When this happens, the chance of the price reversing is much greater. It's not uncommon to see these in the middle of a band of activity. If it's in the middle, it's just noise. If it forms at a resistance or support level, or at the end of a price movement- then you may have an actionable signal.
2. The Engulfing Bar
An Engulfing Bar forms when price reaches a point and doubles back on itself. The candlestick will completely engulf the previous in the opposite direction. This formation indicates a strong rejection of a price. Like the Pin Bar, Engulfing Bars can appear in several locations on the chart. They are only considered a valid signal if they are at the end of a larger price movement. Consider this signal stronger if it forms in favor of a trend or on a level of support or resistance.
3. The Inside Bar
The Inside Bar is different from the Pin Bar and Engulfing Bar in that it does not signal a change. Instead, it signals a continuation. This is exceptionally helpful for trend following traders. The formation appears in the opposite direction of the previous candlestick; but closes within the body of the former. In other words, the bar fits inside of the previous bar. The indication is that the price just hit a soft spot for the moment. There was slightly enough activity in favor of the reversal to push it a little bit, but the trend-followers are still matching their presence. It is quite likely that the price will eventually continue in the direction of the dominant trend.
The subject of what technical indicators will help you attain success is an important one. The internet is packed full of advertising and testimony about the greatness of this product or that. Most of it is garbage. A “best free”, “best”, or “amazing” system is nothing more than an advertiser utilizing keywords that people search for when looking for this information. Does that mean they are all garbage? Not at all. It does make finding quality information much harder than you may expect.
Simple is better when it comes to scalping. More indicators just makes it more difficult to come to a decision quickly. Too many indicators also sends back conflicting information which requires further thought and interpretation before it is actionable information. That is a sure way to miss opportunities as they present themselves on a minute chart.
There is a very popular method of trading known as Price Action. Price Action trading relies mostly on interpretation of candlestick patterns at support and resistance levels with due attention given to movement on a higher time frame chart. Combining this technique with a 50 EMA (Exponential Moving Average) is a great basis for a scalper. The EMA provides a point of reference for the price that can help you find entry locations.
Example: The price has been in an uptrend for the past 30 minutes, bouncing steadily off the EMA. Thus, we can surmise that it is likely going to do the same thing the next time the price pulls back to the EMA. That gives a simple, potential entry location.
There is no right answer as to what indicators to use for forex scalping. The indicators that other traders use are similarly useful for the scalper though they may provide different performance.
Types of Technical Indicators
Different families exist under the technical indicator umbrella that can provide useful market information. These are trend, momentum, volatility, and volume related indicators.
1. Trend Indicators – This type of indicator is the most common. They are used for a simple identification of the dominant trend which gives you an idea of what direction price is likely to move. Trend indicators are useful for finding entry locations in locations where traders on other time frames would find them.
2. Momentum Indicators – A momentum indicator helps measure the speed of a market movement and whether continuation is likely. It is especially helpful in strong trends because it can indicate when the trend is starting to falter or if it will continue on.
3. Volatility Indicators – The family of volatility indicators compares the extremes of the present price movement with historical averages. It is a way to gain some insight on how far away from average the price is moving.
4. Volume Related Indicators – Volume is an important driving factor in a price movement. At it's most basic- a trade with a significant volume of traders behind it is going to be more likely to continue moving in that direction. A weak volume may falter or otherwise signal the potential for a reversal. A high volume in the direction you are trading increases the likelihood of a good trade.
As you look for the indicators that best suit your style, you do not particularly need multiple indicators from the same families.
Finding An Established System
An established system is a great way to sidestep some of the learning curve in using indicators to scalp. It definitely helps to have knowledgeable, profitable people to bounce ideas off of and help you figure out where you went wrong in a trade. The best way to meet both of these goals is to join a forex community.
There are several websites that were created to bring together forex traders. Many of them include write ups of systems with the indicators that they use. Depending on the community, professional forex traders may visit to provide free information as a way to attract new students or customers. Additionally, you can benefit from the knowledge and suggestions of regular users.
This is a better option than dropping hundreds of dollars on a “professional system”. Professionals mostly use the same tools that the rest of the forex trading community does.
A Final Word On Indicators And Systems
Indicators are tools. Nothing more, nothing less. An indicator cannot, and should not, replace your ability to make educated decisions in opening a trade. It should enhance your ability to make those decisions for yourself. The forex market can be very chaotic. There are no absolutes. Indicators can help shine light on potentially profitable opportunities that are developing. Be wary of any product or website that promises any more than that.
Scalping Trading Plans And Discipline
A coherent, concrete trading plan with great discipline are essential components of a successful scalping strategy. These two things may be the most important part of succeeding in forex scalping. The trader must have a strong idea of the circumstances he is looking for to open a trade, as is typically defined in a plan. Additionally, the trader must be able to weed out false signals, not trade from their feelings, and wait for opportunity to present itself.
This is even more important with forex scalping than other strategies. A scalper placing several orders of varying sizes creates an erratic profit and loss. Not adhering to tight principles to generate profit is about as effective as throwing buckets of money out of your window. A methodical, calculating approach will reap great reward over the long-term.
Your scalping Trading Plan should include the following points.
- Entry criteria. What are your indicators showing?
What candlestick formations are you trading?
- Exit criteria. Define how you will set your Stop Loss and Take Profit.
Are you using a Timed Stop?
- Any limitations. When is it time to stop scalping for the day- meeting a dollar amount for gain
and loss? Or from your determined start time to stop time?
- Stipulate your trade size. Random sizes make it harder to generate profit due to consistency.
- Long-term goals. Where do you want to be with your trading in six months? A year?
- What measures will you take to improve if you cannot generate winning trades repetitively?
A forex scalper (and trader in general) needs to be careful about setting minimum goals for their trading day. A participant can only take out what the market gives him. By setting a minimum goal, you are effectively forcing your mind to look for opportunities that may not be there. A better approach for a goal is to grow your account by 5-25% in the span of a week. As long as you're profitable, you are ahead of a significant number of other traders.
Live and breathe your trading strategy and plan. Your time should not be spent mulling over the intricacies of your trading plan when there is an opportunity opening. Trading discipline is developed through the rigorous application of your trading plan to generate a profit. If you have to, print out a copy of the plan that includes the parts on choosing trades. Keep it near the space you trade in so you can refresh your mind easily with the information.
Stops and Take Profit
Appropriate Stops and a Take Profit will help preserve your account balance. A scalper that is placing several orders cannot afford to float their money into the market without a tight grip on the potential loss. An appropriate Take Profit is about 15 pips while the Stop Loss can be set in the 7 to 9 pip range.
Many traders also use a “Time Stop”. The trader will close out a trade after so much time has elapsed since placing it if price has not hit the Stop Loss or Take Profit. Signals are only temporary indications of a potentially profitable movement. A movement that doesn't materialize soon after the signal is just one of several false starts the trader will find in their charts.
A good rule of thumb if you opt to do this instead of letting the price hit the Stop Loss or Take Profit- if the movement doesn't start materializing within two candlesticks, close out the trade and move on. There is still a chance it could move in the direction you want but that chance is much smaller. The line of thinking is applicable on any time frame.
Forex scalping can be very profitable for those that put in the time and effort to learn it properly. It is not an easy style to master for a novice in the forex market. Even experienced traders can have difficulty transitioning to it. A fresh start with a solid understanding and a plan of action can provide the edge you need to scalp forex successfully.
This guide was designed to provide the basic information you need to become a successful scalper. It should not be your only reading material. There is plenty of great information out there on using indicators effectively and scalping strategies. Be wary of offers too good to be true and never stop learning!
Don’t forget that you can Sign up to our demo account now to test out your trading skills with $100K of demo money!
This post was written by Daniel Lindsay.
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