Beginner’s Guide To Forex Scalping

Scalping is a fast-paced trading style that provides a lot of trading opportunities in any market with constant price fluctuations. This can be referred to as volatility of a trading instrument which describes the extent to which it can move in a specified period of time. Another prerequisite for scalping is the trading volume or liquidity. Because without liquidity, one cannot enter or exit trades freely as the broker needs to find a matching order for trade execution. The high trading volume resulting in more than enough liquidity and frequent currency price movements in the forex market makes it a perfect place for scalping. However, a beginner needs to learn a lot before becoming a scalper in the dynamic currency market.

In that case, you are at the right place as I will be sharing a lot of valuable information about forex scalping through this beginner’s guide including the benefits of being a scalper and the challenges to keep in mind. 

How is Scalping done and how is it different from Day Trading?

Scalping is done by opening and closing multiple trade positions within a short span of time, typically 1 to 5 minutes. The goal of scalping is to make profits from short-term volatility and small price fluctuations that happen during the most active market hours. The active market hours are characterised by high liquidity and there can also be volatility due to news events or key economic data releases. However, scalpers tend to trade major pairs like EUR/USD and USD/JPY due to their high trade volume which allows them to enter and exit positions with greater ease.

The best time for scalping is major trading sessions and session overlaps which provide a lot of trading opportunities. Scalpers tend to open smaller-sized trades to minimising the risk exposure. However many scalpers make use of leverage for margin trading for maximising their profit potential with amplified trade size. In that case, they enter trades after calculating the margin requirement which is the minimum amount of account balance or trading capital needed for entering a trade with leverage. It is quick and easy to calculate margin, courtesy of a margin calculator. Scalpers are advised to not use excess leverage as they enter more trades and using high leverage adds to the risk.

Now, if you ask about the difference between scalping and day trading, day trading is less intense and the timeframes are longer than the ones used by scalpers. Day traders monitor the charts for time frames between 5 minutes to 30 minutes. Some day traders may rely on 1-hour charts to get a clearer view of the market situation. However, day traders don’t enter as many trades as scalpers and the duration of trades is longer as the only rule in day trading is to close all positions before the day ends. 

Day traders do not take overnight risks just like scalpers but they wait for the prices to move and target to catch a higher number of pips while executing a lesser number of trades. But scalpers open more trades but they target a smaller number of pips. In scalping, you will be closing the trades with a target of 5 or 10 pips which may look very small but they reach their profit targets by executing multiple trades within a short span of time. However, being consistently profitable as a scalper requires a sound strategy with a high win rate.

Another aspect of becoming successful at forex scalping is risk management. Many think that scalping is a simple and low-risk strategy as you will not hold any position for a longer duration and scalpers exit their trades within minutes. But the risk is still there and trading shorter time frames can be harder and time-consuming than trading with longer time frames. Hence, having an optimal risk/reward ratio and placing a stop loss in every trade is recommended for minimising the potential losses.

Don’t forget to calculate the number of pips you want to capture at the end of a trade and this has to be determined based on pip value. For this, you can depend on a pip calculator that quickly estimates the value of pips in your account base currency based on the currency pair and trade size. This tool helps decide your take profit and stop loss levels based on pip movements. Scalping is suitable for those who are willing to monitor the market for hours and make quick profits without overnight risk.

But you need to be good at technical analysis and timing is the most important for making gains from the minor price fluctuations. Because entering and exiting the trades at the right time and at the most favourable price is crucial to making profits. It does take some time to develop this skill and continuous learning and practice is what makes you good at scalping. It is a short-term strategy, but you still need to be patient and disciplined as being impulsive will never yield good results.    

Benefits Of Being a Scalper in the Forex Market

l  Adaptability

Scalpers are known for their adaptability as they remain flexible with a unique strategy that can be applied in any market situation. In a rising market, they will go long and when there is a downtrend, they will just short the pair. Being a scalper, you can trade in both trending and ranging markets which means you won’t have to worry about the market being choppy or stagnant. Even the small sideway movements can present you with opportunities for scalping.

l  High-profit potential

Scalping is a short-term strategy as I mentioned earlier and it also offers high profit potential within a short span of time. You just need to be skilled enough to find the right trade setups based on technical analysis and you will be able to make profits on a regular basis once you get a grasp of the market. You can use trading tools like profit calculators for determining the potential outcome of a trade which is useful for assessing your profit potential and making necessary adjustments. Such tools are essential for making informed decisions.

l  No overnight risk

As I said earlier, scalping is less risky in comparison to other trading styles when it comes to overnight risk. Overnight risk is the risk that you take when you hold a position for more than a day. Scalpers close their trades within the same day and that too within a few minutes. Hence, they don’t have to worry about swap rates or rollover fees which is the cost of keeping a trade running for a longer duration. This is based on the interest rate differential of currencies in a pair and can add up to the trading cost.

l  Quick Results

Those who want to make quick profits without waiting for a significant swing in prices prefer scalping over other strategies for getting quick results. You can make small profits by executing multiple trades a day and the duration of your trades will be less than a few minutes making the trading process faster and you get instant results whether it is a profit or loss.

l  High probability of wins

Scalpers are always aiming for a small movement in prices when they execute trades which have a high likelihood of success as smaller fluctuations can be predicted based on technical analysis alone. Hence, those who are good at interpreting the market situation and making calculated moves will find scalping to be an ideal trading style with a high probability of wins with frequent market fluctuations.

Challenges in Forex scalping

l  Higher trading costs

When you execute multiple trades, you will have to pay spreads and commission for all trades that get executed which increases the cost of trading even though you won’t have to worry about rollover fees. But one way to minimise this cost is sticking to major pairs which have the lowest spreads due to the liquidity and trading during major sessions to avoid slippage due to insufficient liquidity. You need to find a broker charging low commissions and tight spreads along with fast order execution. This way, you can minimise the trading cost and maximise your profit potential.

l  Time-consuming

The duration of trades is shortest when you are scalping but monitoring the market and spotting ideal trading opportunities does take a lot of time. The timeframe for analysis is short but this does not mean you just need a few minutes for the trading process. You should be prepared to watch the charts throughout the day to find trade setups that resonate with your strategy. Scalping is an intense trading style that makes the trading process stressful and may not suit everyone. 

Final Thoughts