Forex Scalping Strategies: What You Need To Know
Because of how quickly the forex market moves, the right way to trade will depend on how closely you follow the market and whether you are focused on the tiny ripples or the massive waves they form.
Most of the time when we talk about forex trading, particularly if you are signing up for a prop firm that provides instant funding, it tends to make more intuitive sense to look at the longer-term trends and devise more holistic strategies for trading in the market.
However, every trader has different strengths, different goals and different mindsets when it comes to trading, and whilst some people will pactive day trading approach.
One of the fastest high-energy types of trading on the market is scalping, which, in one sense, is the opposite of conventional trading.
Rather than employ long-term analysis to buy low and sell high for a significant gain, you trade multiple times a day to catch small movements and gains in asset prices.
Because profits come from small accumulations, it requires a particular set of analysis skills, strategies and a disciplined mindset to make the most of the small gains, and this handy guide will let you know everything you need to know about the top scalping strategies to make consistent gains.
What Is Scalping… And What Is It Not?
Despite the name, scalping in the context of trading and especially in the context of trading forex is a legitimate strategy that focuses heavily on making the most out of what would otherwise be relatively marginal gains.
A form of day trading, scalping involves making a relatively large number of trades in a single day, taking advantage of price action and the fluctuating nature of the market to buy low, sell enough pips higher to cover any fees and making immediate albeit relatively small profits.
Unlike day trading, which accelerates the pace of trading but otherwise resembles short-to-medium term strategies, scalping often involves hundreds of trades a day, often holding positions for hours, minutes or even seconds.
It is not high-frequency trading, a controversial system banned by many prop firms, which relies on using computer algorithms to make huge numbers of trades in less than a second, but it does often rely on rapid technical analysis and almost reflective decision-making.
It is also not related to the similarly controversial business of reselling concert tickets or highly desired products, also known as scalping, although some versions of the strategy involving high leverage or building up large positions to sell gradually over the day can sometimes superficially resemble it.
How Does Forex Scalping Work?
There are a few strategies that are used for successful scalping, some of which rely on taking a large position very quickly and gradually exiting throughout the day, some involve buying during a little dip and selling when it makes a relatively small but large enough gain, and lots of others in between.
Unlike high-frequency trading, it can be done completely manually, although it is generally advised to set up some risk management tools and stop-loss orders to minimise the chances of missing the market by a few seconds and losing considerable amounts of money.
Generally the spread between buy price and stop order is very small for exactly this reason, and many trades of this type are made with leverage to maximise potential gains from relatively low-risk trades.
Alongside this, scalping only really works within highly liquid and volatile markets, and whilst trading the news directly as it happens should be avoided, the existence of volatility leading up to and in the aftermath of major economic events can help scalpers considerably.
One of the most effective markets for scalping is forex, because the currency market is inherently liquid and inherently volatile, being the largest market in the world and often moving in very small measures.
This allows you to buy in with more leverage and exit your position exactly when you want to, as opposed to less liquid markets, where you may have to wait until your window has passed.
What Are The Most Common Forex Scalping Strategies?
There are several major scalping strategies, which involve the use of technology, rapidly entering and exiting trades or buying large amounts and selling over the course of a day.
As a trading technique so reliant on technical analysis, there are an almost limitless number of potential strategies, but many of them can be easily categorised into a few relatively loose columns
Following a trend and catching a rising rocket. Whilst typically ill-advised for long positions, it is far easier to make a profit if the aim is only a small gain.
Anticipating a fall and shorting a rising currency, expecting bad news. This is more difficult to make money from in the short term in a volatile market.
Support and resistance trading, which involves buying near the floor of the range and selling near the resistance range, makes money through the relatively natural actions of a particular asset.
Seeking out and trading with certain anomalies or patterns of financial behaviour.
Ultimately, the strategy is to make a small amount of money multiple times in a day to hit your target, rather than buying and holding until you reach your price goal.
What Are The Benefits Of Forex Scalping?
Whilst most day trading strategies are rather daunting for newcomers, it can be a very effective way to learn how to trade, as the liquid nature of forex means that you can buy, trade and sell within minutes, learning the basics of the market in the process.
Scalping also does not require a lot of theoretical knowledge of trading and financial markets (although it does still need a plan), as it focuses more on technical analysis and recognising the market as it exists on an hour-to-hour, minute-to-minute or second-to-second basis.
Finally, it is perfect for relatively impatient traders, as you are rarely waiting for a position to close and that in itself inherently stops overtrading.
What Are The Potential Risks Of Scalping?
A lot of scalping strategies, especially in forex, rely on holding large positions, which often require leverage in order to make the trades worthwhile. Sometimes, traders invest tens of thousands of pounds to make a profit of between £50 and £100.
Leverage maximises gains, but it can also magnify losses as well, and with such fine margins, small tailwinds of volatility can have dramatic effects.
It also requires the opposite type of discipline to conventional trading; there is no room to think or second-guess yourself once in a position, and any decision to enter or exit must be made immediately, or you might miss your window.