Same as day trading, scalping is aimed at profiting from short-term market movements. If a day trade may last for a few hours, a scalping position is typically open for 1 or 2 minutes. Each successful scalp will bring a trader about 5-10 points. Although such returns of a single order might sound discouraging, a big number of those boosted by leverage will make this strategy worth your attention. Scalpers (scalping traders) may place as many as 100+ trades within a single day. Let’s take a closer look at some of the advantages of this strategy.
Scalping traders exploit minor price fluctuations and benefit from a large number of successful trades.
The Advantages of Scalping
- Due to the nature of a short-term trade, it is harder to lose any significant sum of money. Thus a single scalping position implies less risk than any other type of trade. In other words, one has to get unlucky more than once to incur severe losses. Setting a stop-loss does a great job of limiting potential losses.
- Like other types of day trading, scalping implies no rollover fees (swaps).
- Scalping is a non-directional strategy. It means that a trader doesn’t need a specific trend to prevail in the market in order to implement the strategy. Whether your instrument is moving in an upward or downward direction in the long run, there is still room for fluctuations and, as a result, profitable scalps.
- Scalping trades are relatively easy to automate using systematic trading systems. Scalpers tend to use computer programs more often than other types of traders.
Scalper's Personality
The scalping trading strategy requires active engagement from a trader. Unlike position trading, where a trader can occasionally check charts, scalping takes a lot of time during the most active market hours. Only those who treat trading as a full-time job have a chance to earn a decent income.
A good scalper can be impatient but not undisciplined. The strategy seems to have been designed for people who would be too bored to wait for the price to move in their favor. If you can make decisions quickly and act without hesitation, this strategy is for you.
It is hard to stay calm when experiencing a few stop-losses in a row within a single trading day, although it happens all the time in scalping. This is why a scalper must keep a cool head and carry on.
Best Practices
Currency pair
Scalpers benefit from frequent price changes. Thus they tend to choose the most volatile pairs. Having the most significant trading volume, majors such as EUR/USD, GBP/USD, and AUD/USD fit that criteria. Not that scalpers don’t trade minor currency pairs, they do, but less and with the focus on fundamentals. Apart from being very volatile instruments, majors also outperform other pairs as they have the lowest spreads, so important for profitable scalping.
Time
Scalping works best in the most active trading hours when prices experience high volatility. The busiest time in the round-the-clock forex market starts at 3 am EST when the London session opens. Another world economic center, New York, begins to trade at 8 am EST, picking up the market activity. In general, the early hours of these sessions are considered the best for scalping. However, if you trade the Australian dollar or the Japanese yen, it makes sense to get up earlier and trade during the Pacific or the Asian session.
Broker
By saying "a good broker," we mean good trading conditions. Are there any commissions? How big are the spreads? If the difference between the bid and ask price is high, you might want to look for another broker. How do you protect your position from slippage? Your order must be executed at the price you request. Only this way will you get what you aimed at. Also, pay attention to the amount of margin required and what happens if the price goes against you.
Platform
When a transaction has to be completed in a matter of a second, it is essential that you use a convenient trading platform. As the speed of your trading operations grows, more room for a mistake comes up. You don’t want to hit the "buy" button when you want to sell, or vice versa. So our recommendation is to find the most comfortable platform and master its functionality before you invest.
Best Forex Scalping Strategy
There are several forex scalping strategies. Which one is the best? This one is hard to answer. We believe that the strategy choice must be justified by a trader’s personal goals, experience, and risk tolerance. Thus the best scalping strategy is the one that you have learned, tested, and benefited from. To introduce you to scalping, we provide an example of one of the most popular scalping approaches known as scalping with two moving averages.
Scalping with two MAs
Scalpers rely heavily on technical indicators, mainly focusing on short-term time-frames. Scalping with two moving averages (MAs) is probably the most straightforward variation of the strategy. It deals with two EMAs: the 7-period MA and the 14-period MA. The M5 and M15 timeframes are relevant here.
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Place both 7-period MA and the 14-period MA on the chart. You can do it by clicking "Insert," "Indicators," "Trend," and "Moving Average." Then set the following parameters:
- Period: 7;
- Apply to: Close;
- MA method: Exponential.
Click "OK." Then repeat the same steps but set the period at 14 this time.
EMA Settings - While entering a trade, set a stop-loss right behind the nearest low (if you’re buying) or the nearest high (if you are selling). It is considered the best tool for limiting losses.
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Open a "buy" order when the EMA (7) crosses the EMA (14) from below.
Open a "sell" order when the EMA (7) crosses the EMA (14) from above.
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Following the moving averages will allow you to catch the best time for closing the position.
Cose the "buy" order once the EMA (7) crosses the EMA (14) from above.
Close the "sell" order once the EMA (7) crosses the EMA (14) from below.
The EUR/USD Example
- Currency pair: EUR/USD;
- Timeframe: M5;
- Trade direction: Sell;
- Entry signal: EMA (7) crosses EMA (14) from above;
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Closing signal: EMA (7) crosses EMA (14) from below;
EUR/USD Example - Trade direction: Buy;
- Entry signal: EMA (7) crosses EMA (14) from below;
- Closing signal: EMA (7) crosses EMA (14) from above.
Trying Sculping with Demo Account
We encourage novice traders to use a demo account as a tool for testing strategies. A demo account shows the current situation in the forex market and allows one to open positions without the risk of money loss. Although teaching accounts operate with fake money and don’t imply gaining profit, they serve as a great educational tool for those who want to learn to trade.
For those confident in their skills, we offer beneficial trading conditions, including low spreads, 0% withdrawal commission, and up to 120% bonus for the initial deposit. Open a trading account to make real money today!
Conclusions
Scalping traders profit from trades that may last as little as a few seconds. The fact that a single trade does not bring huge income is compensated by a large number of such trades. In pursuit of a higher income, professional traders often use leverage. To succeed in scalping, one has to pick the right currency, time, broker, and platform. Backtesting the strategy and setting stop-losses will help limit losses.
by , 2023.04.24