Forex scalping is a popular strategy employed by traders who want to spread their risk. Instead of a few large deals, they’ll break their deals down into lots of small ones. These deals will be placed (and will last) for five minutes at the upper end. Some might only last one minute.
It’s designed to take advantage of the latest market trends. Successful scalpers can be just as successful as day traders. Some investors might want to consider employing scalping as part of an overall trading strategy. They could place same day trades and spend the rest of the time searching for scalping opportunities.
In this article, we will focus on some of the most important aspects of the scalping strategy you should know about. In the meantime, I have found iforex to be a good resource for extra reading, they have a nice introduction to the strategy and explain how it works.
1. One Strategy
The Forex scalping strategy isn’t actually a strategy all by itself. It’s a term used to describe what could actually be multiple strategies. The only prerequisites for a strategy to fall into the ‘scalping strategy’ category is the trade lasts no longer than five minutes and the deal is small in relation to your total bank roll.
To learn how to scalp properly, you’ll need to learn about how to effectively wield scalping in a range of different situations.
2. Waiting Until the End
You don’t have to wait until the end of your trading period to pull out of the trade. Whilst some guides to scalping will say this great Forex strategy needs to run for the full four or five minutes, it doesn’t. Utilise common sense and pull out of the trade if things have gone south quickly.
This is a high volatility market. Your success depends entirely on your entry point. If you entered at the wrong time, feel free to stop the trade and pull out immediately.
3. Scalping Times
Although one of the most important Forex attributes is the market is open 24/7, this doesn’t mean scalping is available 24/7. Foreign exchange trading relies on high volatility to succeed. Without it, nobody would make any money. Scalping relies on high volatility to a greater extent.
During quiet periods, attempting to scalp will be quite pointless. Chart the progress of the four main stock markets of the world. These are London, New York, Tokyo, and Sydney. See when the market reaches its peak of volatility over the course of a few days and work out when the best times to trade are.
Example Image, Source: Flickr
4. Bankroll Management
Scalping might lower your risk by placing lots of small deals, but this has the side effect of easily losing track of how much your bank roll can take. Effective bank roll management means being able to set limits for yourself, and monitor how close you are to those limits.
With any scalping strategy, think of the worst case scenario. It involves some simple maths calculations. If you lose your next ten wagers, will you be able to handle it? If the answer is no, you know it’s time to rework your strategy.
5. High Volatility Currency Pairs are for Experts
Most people choose to trade in the EUR/USD and GBP/USD currency pairs. These are well-known currencies with medium volatility. In other words, most UK traders will find these ideal for employing a scalping strategy.
High volatility currency pairs, on the other hand, should be avoided. These high volatility currency pairs can switch within seconds and destroy your investment. Unless you’re an expert, or are employing quick 60-second trades, it makes sense to stick to medium volatility currency pairs to spread your risk.
6. Price Freezes
Sometimes, the price will freeze and this will eliminate your scalping deal. If the price freezes at any level, get out of the trade. This applies even if your wager is below your entry point. Once a price freezes the trend has stopped. You’re now in day trading conditions where the graph could go anywhere.
7. High Concentration
Unless you can concentrate for long periods, you won’t find any profitability from scalping. You need to have a number of successful investments to make yourself profitable. One small slip in concentration could mean entering at the wrong point and breaking away from the trade too early.
8. News Lines
Since fundamental analysis will impact the technical readouts you’re getting from recent price histories, you need to keep updated on the latest news. Without proper fundamental analysis, you won’t see when something nasty is on its way. Things change quickly within financial markets, so it’s best to be prepared.
Keep a news line open on your computer. This will enable you to get the latest news as it breaks.
9. Understand the Main Trend
If you look at the trend of anything, whether this is currency pairs or stocks, you’ll see the line is always jagged with lots of ups and downs. Observe the general trend each day before you start to scalp. You’ll be able to spot whether the market is bullish or bearish. This will give you some additional information on what you should do today.
It’s also wise to check out what’s happening on the stock market. The performance of a country’s main corporations can significantly impact currency values.
10. Know When to Stop
The best traders always know when to stop. This is a rare trait that the majority don’t possess. It’s why only a minority can make thousands of pounds from scalping in a short period of time.
If you’re losing heavily, it’s time to walk away. Again, this harkens back to proper bank roll management. Make sure you review your bank roll at the start of every day. Set yourself a limit that you can write down. If you fall below that limit, walk away and try another day.
Once an investor starts to become emotional, their chances of success collapse. You can’t afford to enter this state. Learn discipline and know when to walk away. That’s the most important investing lesson you’ll ever learn!