Scalping is a short-term trading method where you attempt to profit from small movements in an exchange rate. Your entry and exit strategy require a strict risk management style as the goal is to make and lose very small amounts which will not work if you let your losses accumulate. To accomplish your goals you need to have:
- Access to real-time markets
- Charting software
- A direct-market-access broker
- Robust risk management
How Scalping Forex Works
The concept is pretty simple. It’s based on the idea that a currency pair has an impulse move that might be followed up or reversed. The goal is to capture the impulse move as it begins and then take-profit immediately. Scalpers take several small profits throughout the day and as many as possible. You might even see a scalper enter and exit a position multiple times during the same impulse move. The more winners you have the better your results. The strategy is the opposite of a “let your profits run” strategy. The reason behind the strategy is that you will avoid having the impulse move reserve and generate a loss that is larger than the gains that you expect to generate.
The Trading Math
As a scalper, you need to work on the premise that you will win more times than you lose. This compares to some longer-term trading strategies, such as a trend following strategy, where the number of losses is greater than the number of wins, but the amount you win is much larger than the amount you lose. In a scalping strategy, the amount you win is likely equal to the amount you lose so you need to win more than you lose to have a profitable strategy.
One of the benefits of scalping is you avoid event risks. You are only exposed to the markets for a short period, helping you avoid economic releases or even unforeseen announcements. One of the benefits is that smaller moves in a forex pair are easier to come by compared to larger moves that will allow you to catch a trend in an exchange rate. For example, it’s a lot easier to find a 5-pip move in the EUR/USD than a big-figure move. Your risk to reward ratio should be 1:1. If you find that you have a strategy that wins a lot more than it losses, you might consider a risk to reward profile that is less than 1:1.
Scalping as a Trading Strategy
If you plan to scalp as a primary trading strategy you are likely to make multiple trades a day, possibly in the hundreds. You will need to utilize short-term market movements and have access to real-time markets. You will need trading software to follow 1-minute or tick charts to determine the next potential move in an exchange rate. You will likely need instant execution of orders which is crucial to a scalper, so a direct-access broker is a necessity.
Types of Scalping Strategies
A strategy you can employ is one where you ack as a market maker. Your goal will be to buy on the bid and sell on the offer. You can watch a forex pair and look for support and resistance areas. Around these levels, you can place a buy order on the bid near support, and a sell offer on the asking price near resistance hoping to repurchase or sell out of your position nearly immediately. Alternatively, you might be a market taker where you are looking for a specific market setup before you pull the trigger on a trade.
The Benefits of Scalping the Forex Markets
One of the benefits of scalping the forex markets is that you generally will not pay commission and you have access to leverage. Brokers like Rakuten Securities Australia do not charge a brokers commission. Instead, they offer a bid/ask spread. This means that you will never pay a commission which allows you to scalp the market for free. Rakuten Securities Australia provides a bid/ask spread on major currency pairs such as the EUR/USD as low as half of a pip. Additionally, you can enhance your gains with leverage allowing you to be profitably capturing the small moves that occur in the forex arena. These tight spreads are on the leverage of 100-1. This allows you to capture small moves in the market and generate gains with little upfront capital.
When Do You Execute a Scalp Trade
You can transact on both sides of the market. You can sell or buy a currency pair and quickly look to cover your position. You should consider using traditional technical analysis tools, such as support and resistance, swing trading, or even formations such as bear and bull flags as well as triangles.
Tips for Scalpers
Since trading using a scalping technique has a low barrier to entry and very low costs, given you will not pay commission, your focus should be on a strategy. You want to make sure you are comfortable entering and exiting quickly. If this does not fit your trading personality, don’t force the issue. Scalping requires a disciplined approach. You need to spot opportunities and quickly react. If you are impatient and feel gratified by picking small successful trades your personality might be perfect for scalping. You want to make sure that you don’t have delayed order execution as a malfunction could wipe out your profits.
The Bottom Line
A scalping strategy can be a very successful way to trade the forex markets. The goal is to make several trades per day, capturing small movements while rising similar amounts. Your risk to reward profile should be about one to one. You should not try to let your profits run which is generally the key to success in other strategies. Make sure you have access to real-time data and your broker provides instantaneous execution. You can use a market making strategy or a traditional strategy that relies on a trading setup.