What Is Scalping and How Does It Work In Forex Trading?
The technique of “scalping” represents an interesting idea for those traders wishing to earn in Forex trading with minimal risk.
Scalping consists of executing a large number of short-term trades and so the best market for experimenting with this trading technique is the Forex market. This is because it is open 24 hours a day, has high liquidity and offers the possibility of operating with low spreads, essential for increasing earning potential.
A “scalper” therefore, is a type of trader who takes this approach with their trading.
Let’s take a look at what scalping really is and how it works on Forex.
What Is Scalping On Forex?
To scalp effectively it is necessary to be clear on four important points. These are a necessity for anyone wanting to work with this technique.
– Which currencies are the best for forex scalping?
The Forex is the most liquid market in the world. The presence of a high volume of traders and transactions renders this market the perfect terrain for scalping.
The best currency pairs for putting the scalping technique into action are those with high volumes of transactions that therefore provide a lower spread; specifically the following:
Euro – US dollar (EUR/USD)
US dollar – Yen (USD/JPY)
Euro – Yen (EUR/JPY)
Sterling – US dollar (GBP/USD)
These are the four currency pairs that have the lowest spreads: ie, the highest profit margins for the large number of trades executed, especially during the course of the day – between 9:00am and 6:00pm.
– What is the best timeframe for scalping?
The ideal timeframes for scalping are those that are the standard short term periods. More specifically:
The one minute graph (M1)
The five minute graph (M5)
The fifteen minute graph (M15)
The choice amongst these timeframes is very personal and depends on the average duration of the trades to be performed and the trader’s choice in risk aversion. In fact, M1 and M5 are more unstable and therefore signal alert situations more frequently.
In general M5 is the most used timeframe, precisely because it balances the strengths and weaknesses of the other two.
– Scalping means to follow the trend.
Once the currency pair and timeframe have been chosen, it is necessary to comprehend market sentiment.
Scalping means to take the principal flow of the day or the current “trend” and execute many, small profitable trades that follow the progress of the macro trend.
Going against the trend with a large number of positions is not ever advisable.
It is necessary therefore to identify the daily trend, check the longer timeframes and other technical indicators in order to understand the principal movement held by the pair and then follow this trend.
– The use of multiple indicators when scalping.
In order to prevent a trend inversion from comprising the effectiveness of scalping, it is necessary to integrate other indicators into the process that will keep the situation under control and signal any potential trend inversions.
The same scalping techniques, of which we will now see three practical examples, can be integrated with each other, allowing us to scalp on Forex, using simultaneous indicators, to provide greater consistency and improve results.
Scalping and Money Management
Scalping transactions can go wrong and we need to consider how to manage losses.
The large number of trades executed by a scalper arises from referencing a minimum earning point. This means that it is necessary to have a stop loss that will not be detrimental to the success of subsequent trades.
The concept of scalping entails entering a position, earning in the fastest time possibile and then closing that position.
For this reason, take profits and stop losses need to remain near the price, using the levels of the chosen indicator (moving average, Bollinger or stochastic) as a reference that represents the outer limits of what we accept as a loss or earn as a profit.
It is important to not fall victim to our emotions and to establish, better still with the experience of a period of time using a demo account, the amount of pips at which to place take profits and stop losses, according to preference and with respect to self-discipline.
Scalping On Forex: Advantages and Disadvantages
The advantages of scalping are clear at this point and can be summarised in the following points:
– A reduction in the risk caused by large price fluctuations
– Freedom to trade at any time of the day
– Constant control of results achieved
The main disadvantages of scalping on Forex are:
– Elevated stress caused by the high volume of trades performed and the reduced timeframes
– The necessary time required to obtain significant results
The technique of scalping has many fascinating aspects and to be taken on with success a trader should be prepared in the best possibile way.
A trial period using a demo account represents a great way to evaluate your predisposition to scalping, at the same time developing the little experience necessary to practice it to the fullest.