The scalping strategy explained
The basic principles of the scalping strategy are simple, however the trading method itself is extremely difficult. It is estimated that scalping is one of the most difficult investment methods by which the vast majority of individual investors incur losses. This method also carries a high mental burden, so it should be used by investors who already have experience in the market and know what to expect.
However, new investors do not like to wait for the effect of their actions, therefore 90% start with low time intervals, seeing the changing market, and trying to catch an opportunity, quickly opening and closing a transaction, thanks to which the investor becomes convinced that he has more control and can decide more about his earnings. However, get down to business. In another section, investment strategies will soon be placed that can be used in scalping on the Forex market and more.
To better understand what scalping is in the Forex market, and more specifically how forex scalping works, let’s look at the following issues.
Choice of broker and currency pairs with the lowest spreads
FX scalping strategies do not rely on huge returns on one or two trades, but rely on small returns of 1 to 15 pips. Therefore, large broker spreads can easily eat these profits and take away a significant portion of a trader’s income.
Consequently, those who are wondering how to scalp Forex or CFDs should be more selective about brokers and the currencies they choose to trade. For a practical example, let’s look at some of the spreads we work with. IC Markets – broker description.
The company offers clients three types of accounts, each with different spreads, but we will consider the lower ones. In addition, it should be noted that the spreads are variable and there may be moments where they will be 0.0 pips but also 0.5 pips, but most of the time the spreads are very low.
As you can see in the chart above, EUR / USD, as the most traded currency pair, has the lowest spread averaging 0.1 pips. Traders can also open positions with other pairs including GBPUSD, USDJPY, AUDUSD, USDCAD with spreads up to 0.5 pips.
Hence, for those traders using the IC Markets trading platforms, the currency pairs shown in the table are well suited to simple Forex scalping strategies.
The pairs shown in the image above may not be the best option for this type of trade due to the higher trading costs that spreads are, but they can also be useful in some cases.
The example currency pairs mentioned above are relatively less liquid, such as EURNOK which has an average spread of 7 pips, so some traders may find this is not the best instrument for scalping. For example, if a trader is aiming to post a profit of 10 pips on each trade, in the case of EUR / USD it will need 11 pips to make the expected profit, but in the case of EURNOK it is already 17 pips because 7 pips is the spread.
Of course, in long-term transactions, a change of 3 or even 5 and sometimes 10 pips may be insignificant, but in the Forex scalping system it makes a noticeable difference.
Also, emerging market currencies such as the Turkish Lira, Russian Ruble and others may not be good for scalping. Due to low liquidity and high volatility, the percentage spreads on USD / RUB and USD / TRY for example are much higher than in standard currency pairs.
Choosing more liquid pairs
Spreads aren’t the only useful criteria when selecting currency pairs for your scalping trading strategy. Another important factor is volatility. As this style of trading tends to make quick profits, the market must move faster to achieve these results.
Less stable pairs are not useful for this system as it may take much longer for the price to change. Consequently, instead of trading 5 or 10 minutes, the trader may wait half an hour or more for the pair to reach the desired level and not always.
EURUSD, GBPUSD, USDJPY are a few examples of currency pairs with relatively high volatility. Also, gold and silver prices tend to fluctuate more during trading days, making scalping highly appropriate.
Avoiding brokers from Dealing Desk or Market Maker
It goes without saying that in trading it is always important to find a broker with a good reputation. However, if one uses the scalping method on FX, it becomes even more important. In this style of trading, every second counts.
Therefore, the worst case scenario for any trader would be to open a position, make a profit of 10 or 15 pips, but prevent him from closing the position as some trading positions at this point with the broker refuse to execute orders. This can be especially harmful if some important economic announcement or event is taking place as the trader may lose a significant amount of earned money because of it.
Fortunately, there are many brokers these days with no trade or conflict of interest department who also offer competitive spreads on currency pairs. In order to compare brokers, please visit the compare brokers section.
Of course, we do not cancel Market Maker brokers because they also have their advantages.
The most important features of scalping
Forex scalping strategies typically involve 1 to 15 minute trades.
Finding a broker and currency pairs with tight spread ranges is essential to an effective Forex scalping strategy. As most traders only aim to make a profit of between 1 and 15 pips, brokerage fees have a significant impact on the profitability of a strategy.
Even after applying a few technical indicators, there is no 100% guarantee that the trader will win most of the trades.
According to research, scalping is the most difficult investment method on the markets. New investors often start with this method wanting to see quick profits, however, the method should be used by experienced investors due to the high mental burden and high familiarity with instrument players.
How many transactions do scalpers make daily?
As we already know what scalping is in the Forex market, we can write that it depends on the individual preferences of the investor. Most part-time or hobby-only traders can settle for 1 or 2 trades a day.
When it comes to full-time professionals, they can aim for a larger trading volume which can be 50 and in some cases even 100 trades per day.
What are the most common mistakes made by scalpers?
One of the most obvious and common mistakes scalpers make is to hold losses when the market moves in the opposite direction. This is especially dangerous considering that in this case, one big loss can easily liquidate the gains in several trades.
Too much leverage is another very common mistake. Since most scalping traders aim for 1 to 20 pips profit, they increase their leverage to make their profits greater.
The problem with this type of approach is that the risk increases significantly, which we write about in the risk management department. For example, with a leverage of 1: 400, it is enough for the market to move in the opposite direction by 0.25% for the entire position to be cleared. Even with a relatively safer position and a 1:50 margin, it is only 2%.
Finally, closing profitable positions too late is another common problem. Investors can hit their 10 or 20 pips plus, but instead of closing the trade, they hold the position open in the hope that the position will earn even more. However, with scalping, it is a very risky tactic with some trades eventually breaking even or even catching a stop loss.