What is Scalping in Forex?
By Paul Choufani, Updated on: Dec 15 2023.
Scalping in forex is a day trading strategy used by traders on a very small time frame, with the trade usually held for a period of minutes or even seconds, with the aim of capturing quick profits while benefitting from small price movements in the process.
Imagine, for example, the case of an employee working a full-time job at a company based in the Middle Eastern region. He/she happens to have a lighter schedule in the afternoon, and maybe decides to open up some forex charts involving USD-quoted pairs, such as EUR/USD. It is morning in the United States, and the market opens in New York City, and there is the daily expectation of potential price movemthents and volatility at this time.
The trader sets the EUR/USD chart on the smaller, 15-minute time frame, and, based on his/her prior study conducted on the currency pair, implements the trade, or order, to potentially profit from a movement of 10 pips (percentage in points) by the pair the chart. This transaction, which results in a running trade for a few seconds or minutes, is called a scalp.
Understanding Forex Scalping – how does it work?
Forex scalping mainly involves trading on small time frames by traders, normally ranging from 1-minute to 15-minute charts for the forex pair. Since they attempt to profit from a small price movement, such as 10-15 pips (percentage in points), they would usually utilize higher leverage on the trade in order to capture significant profit from their transaction. As these transactions happen very quickly, scalpers seek to capitalize on these profit-making opportunities several times a day or during a single trading session.
Forex scalping would normally be implemented during periods of expected market volatility, such as opening times in different global markets, such as New York City, London or Tokyo. Additionally, scalping tends to be most prevalent just moments after highly-anticipated data news releases, such as unemployment data in the United States or Federal Reserve interest rate announcements, for example. Since these events are characterized by market volatility in a very short period of time, scalpers would seek to capitalize by placing long or short trades on different currency pairs.
Moreover, scalping in forex would entail both manual and automated techniques. The manual system would involve the example described earlier, with the trader watching the charts in real-time and implementing a trade. The automated system would involve high-frequency trading operations done by an automated trading system based on computer programs which prompt the trading system to enact multiple trades in a fraction of a second, a form of algorithmic trading.
Forex Scalping Strategies & Examples
There are a number of scalping strategies which traders utilize while trading in forex. The methods used can be placed under two general categories:
- Forex scalping through price action
- Forex scalping through indicators and signals
Forex scalping through price action
Traders could opt to enact trades and orders through the price movements represented by the candles on the chart. These price actions would be governed through support and resistance levels, as well as price momentum in a certain direction, whether it is with the trend or in opposition to it.
For example, if we consider the following 15-minute chart, representing the EURUSD currency pair:
The scalp operation which traders took here is shown in the blue circle. After the 15-minute candle above broke through the critical support level, a sell opportunity presented itself when the following red candle wicked upwards before dropping down below. The 'wick' is the thin vertical line just above the thicker candle body, and reflected a retesting of the original support level which turned into resistance, before the subsequent price fall to lower levels.
Here we have the 15-minute chart representing the AUDUSD currency pair:
In the first situation shown above, price action had broken a critical resistance and retested it as support. The retest presented itself as an opportunity for traders to successfully place a buy order (long trade) at the support level, which would have resulted in profit. As the price continued to rise, it hit the next resistance level for the first time, and this presented itself as a profitable short trade opportunity for scalpers. With a small stop loss (quantified risk) taken in each of these scalping attempts, both trade setups were not only ultimately successful but also had a desirable risk-reward ratio.
Forex scalping through indicators and signals
Indicators and signals provide another avenue when scalping in forex. Such tools used by scalpers would include:
- Bollinger Bands
- Moving Averages
- Relative Strength Index (RSI).
The following is an example of scalping using Bollinger Bands:
As shown above in the NZDUSD chart on the 15-minute time frame, there are several buy and sell opportunities on the pair. Scalps can be opened at the bands representing the sides of the channel, with the high probability that the price moves inward, inside the channel. The same strategy can be used in the 1-minute, 3-minute and 5-minute time frames. The Bollinger Bands tend to be effective during periods or for currency pairs characterized by low price volatility, since there would be increased price predictability and therefore more opportunities for scalped trades using this indicator.
The moving average crossover strategy is another tactic used by scalpers in trading forex:
As we see above in the EURJPY 5-min chart, when the 20 EMA crosses over the 50 EMA, it represents a bullish signal, representing the opportunity for a long trade. On the other hand, when the 50 EMA crosses over the 20 EMA on the 5-min chart, it represents a bearish signal, representing the opportunity for a short trade.
The following chart demonstrates the use of the scalping strategy using the Relative Strength Index (RSI) indicator:
As shown in the CADJPY chart on the 15-minute time frame, it is highly likely that an overbought RSI (RSI greater than 70) would present a sell opportunity to the scalper, while an oversold RSI (RSI less than 30) would represent a buy opportunity for this currency pair.
Is forex scalping always profitable or are there risks involved?
Scalping in forex can definitely yield significant profits, if the trader has the necessary knowledge and experience to enact his/her scalped trades in the correct way. With the high speed of the price movements in a very short period of time, there is high profit potential which can be realised due to the significant leverage implemented in the trade.
Based on the sheer number of trades the scalper wishes to implement, as a result of the brief nature of the scalp and the potential profits to be acquired from significant price movements on the smaller time frames, the scalper would foresee significant profit potential in a single trading session using his/her strategy(ies) of choice.
However, there are serious risks which are present while scalping in forex, which could lead to losses capable of wiping out an entire day's profit or even a significant portion of the trader's initial capital. For example, the trader should anticipate a reversal in the price, and if that happens, he/she should avoid holding on to a trade for too long. Additionally, if the scalped trade is taken in a certain direction, but if the price moves in a different direction from the beginning, then the trader should cut losses early to avoid drawdowns for an extended period of time.
Risk management and emotional management are key elements in these kinds of situations. Often, traders hold on to losing positions, and end up suffering severe losses in their initial capital, or at the very least, a significant decrease in their daily profit margins. This is especially due to the high leverages utilised in the scalps, which can cause serious damage if the trade goes against the trader. It is advisable to also use stop losses for the trades in question. Stop losses are the price at which the trader automatically exits the trade when the price moves in the opposite direction to the desired target.
Additionally, the risk-reward ratio tends to be more unfavourable during scalping in relation to other types of forex trading methods on higher time frames, such has day trading or swing trading. Therefore, to increase the potential for rewards and profits captured during scalping, there is a necessity for enhanced and thorough preparation prior to implementing the trade, as well as risk and emotional management while the scalp is running.
Ultimately, as trading for profits is a game of numbers, the scalper needs to ensure his/her wins are more significant, in terms of number and trade size, than his/her losses. This involves accounting for both the risk and reward during the scalping process, and proceeding accordingly.
Important Considerations while Scalping in Forex
There are a number of necessary contextual considerations the trader needs to account for while scalping in forex. They are as follows:
Fees and Liquidity:
The trading account used by the scalper should be linked to a broker or exchange that offers low spreads, low commissions and high liquidity and volume for the currency pair. These factors are important to ensure a smooth scalping process which facilitates the effective implementation of the trader's strategy. Additionally, USD-based currency pairs are usually very liquid and provide excellent options for scalping.
Platform Familiarity:
The trader should be familiar with the trading platform used. If he/she presses a wrong number or button by mistake and the trade is executed, then there could be serious negative repercussions in the scalped trade and the impact could be severe on the trader's profit margins.
Trader Self-awareness:
The trader should be alert throughout the trading and scalping process. Emotional and physical well-being is key to success in trading. It is not recommended at all to engage in forex trading, let alone high-stakes scalping operations, while the trader is stressed, tired, sad, angry, or hungry.
Significant individual energy is required for the forex trading process during a single session, including during the preparation stage involving the technical study of the charts as well as during the subsequent live trade itself. It is essential that these efforts are not in vain. Therefore, it is advised for the trader to be in a state of relative calmness and peace at the beginning of a trading session.
The Preparation Stage:
It is advisable for the trader to establish his/her trading setups prior to the trading session. The preparation would account for technical studies of the forex charts, as well as fundamental analysis which includes global market sentiment, specific data releases and central bank statements. Any of these factors would aid in the decision-making process on the strategy the scalper would use, and a decision made beforehand would subsequently simplify the scalping process during a live session.
Deciding to switch strategies during a trading session, from, say, a price action method to an indicator method, is not advisable, as it can cause unnecessary uncertainty and subsequent stress for the trader, resulting in increased risk of losses during forex scalping.
Initial Capital:
It is advisable for the trader to have a significant amount of funds as his/her initial capital, in order to make the scalped trades worth the effort when making profits. Increased leverage in scalps can only happen when the available funds are large enough, since the size of the trade is automatically bound by the broker or exchange's parameters, which accounts for the size of the available fund in the account.
Scalping Personality – Is Forex Scalping suitable for me?
In assessing the potential for adopting forex scalping as a trading strategy, one has to assess the level of suitability of forex scalping to his/her personality or lifestyle. There is a certain level of temperament needed for this high-stress trading activity, as well as the patience needed to spend several hours at a time observing charts on a computer screen. Additionally, the level of concentration and quick analytical thinking required as well as the ability to adapt and react to quick unexpected movements, such as exiting trades due to sudden price reversals, are necessary traits the scalper needs to possess. Thriving in high-pressure market environments and fast price movements is key to success in scalp trading in forex.
Furthermore, the person's lifestyle is an important factor in deciding if forex scalping is for them. They may not have much time during the day to observe charts on the screen, due to other commitments, such as work and family. They may also be more proficient at other trading styles on a larger time frame, such as day trading or swing trading, and may decide against engaging in scalp trading in order to make the best use of their time during their day.
Conclusion
The sheer potential to make quick profits in today's global and market environment makes scalp trading with international currencies an attractive and popular option for traders today. Yet, it serves as a double-edged sword because its success depends on a number of technical and fundamental factors at play. To achieve consistent profits in scalping, the trader must decide on whether scalping suits their personality and lifestyle, before practicing on specific strategies and systemizing the process while managing risk and emotions.
Scalping with no prior experience or knowledge is akin to gambling, especially as the trades themselves are leveraged to begin with, and so could easily result in massive losses due to a lack of risk management measures. As with any area of forex trading or a life profession in general, the effort needs to be invested in order to acquire the desired results. Scalping, which involves high-stress trading activities in a market designed to liquidate retail traders, is no exception to the rule.
Frequently Asked Questions
Is scalping good for beginners?
It is advisable that beginners learn the basics of trading in the financial markets, before focusing on a specific trading strategy. Should they determine that scalping is a good fit, they should practice a proven scalping technique systematically on a demo account or using a small fund, and achieve consistent positive results in the process, before engaging in scalping with a larger capital amount.
Can you get rich by scalping?
It is possible to grow an account using proven scalping methods, and consistent portfolio gains can be made with a higher number and volume of wins than losses through scalping in the market. Successful systemization of the scalping process by the trader in his/her daily life would establish the potential for growing an existing fund.
How many pips are good for scalping?
A successful scalp would account for five, ten or even fifteen pips (percentage in points). Some scalpers also leave part of the trade running after closing at least half or the bulk of the initial position.
What time frame is best for scalping?
Usually, the optimal time frames would include the 1-minute, 3-minute, 5-minute and 15-minute time frames. The scalper's choice of the time frame he/she uses would depend on the forex scalping strategy that they deem appropriate while trading.