Anyone who’s traded forex will have come across the term scalping. One way to think of scalping is as a trading strategy based on real-time technical analysis. It’s often defined alongside day trading because the two share many similarities, mainly the fact that both day traders and scalpers profit from small price changes in the market.
However, with scalping, the potential profits happen quickly, within a very short timeframe, typically 1 or 2 minutes in the market. While day traders trade the market within a longer time frame usually 1 to 2 hours in the market.
Here we take a closer look at how scalping works and explore whether it’s a trading strategy that could work for you.
Scalping Defined
Scalping is a way of trading that specializes in profiting from small price changes in the market. It takes advantage of the small changes in the price of a currency pair over an extremely short period of time. When you’re scalping you’re basically making a huge number of trades with each of those trades potentially producing a small profit. Instead of holding a position for hours (like day traders do), scalpers hold a position for minutes, to potentially make a few pips in profit every time.
Scalping is made possible by the massive liquidity and volatility in the forex market. Scalpers attempt to profit at every possible opportunity from the many market fluctuations by quickly opening and closing trades for a few pips of profit at a time. Scalpers usually don’t expect to make more than 10 pips per trade or to lose over 7 pips in a trade, including the spread.
To make a substantial profit with just 10 pips per trade, you need to be a scalper trading in huge volumes. So scalpers don’t follow the 2% risk management rule and trade with large volumes during every trading session.
How Scalping Works
Scalping is based on the assumption that a given currency pair will complete its first stage of the movement, and from there, its movements are uncertain, it could advance or stop. So instead of waiting for large changes, the scalper takes the small profit in the least amount of time with larger volumes.
This strategy relies on the idea of lower exposure risk, because the actual time a scalper is in the market on each trade is quite small, decreasing the risk of losses caused by big price movements.
Scalping can be done manually or it can be automated. With manual scalping, the scalper sits in front of their console and observes market movements. They use the movement to open and close positions. With automated scalping, a trader creates a program that follows their set strategy. The program then carries out the trades automatically on behalf of the trader.
How to Succeed in Forex With Scalping
For a scalping strategy to succeed, it is imperative that you have these 3 essentials covered:
- A powerful trading platform
When you’re scalping, your trading platform needs to be able to keep up with the orders or get as close to them as possible. The MetaTrader platform is one of the best trading platforms for Forex scalping. It offers a charting platform that is not only easy to use but also simple to navigate. And features like 1-click trading are particularly useful if you’re scalping.
- A broker with super-fast execution
Choosing a broker with fast execution speeds is essential if you’re a scalper. You’ll be making quick decisions and for that to work, you need a broker that can execute your trades as fast as possible. To get the most out of scalping, look for STP and DMA access. These types of brokers give you greater access to the market and allow you to trade as closely as possible to the real market prices. Some brokers offer specific account types designed for scalping, so be on the lookout for those.
- The right mindset
Scalpers need to be able to cope with the stress of fast-paced, high-stakes trading. If you can remain focused, disciplined, and able to make quick decisions under immense stress, then scalping may be right for you. If not, then day or swing trading may be better options.
Like any other forex trading strategy, scalping takes time and practice to master. Make sure you’re on the right track by setting yourself up with the right broker, the right platform, and the right tools before you begin. Then take the time to learn as much as you can about the various strategies of forex scalping before you settle on one that works for you.