In forex terminology, ‘scalping’ is the name given to a quick-fire, high volume trading strategy where positions are only left open for a matter of seconds or minutes at a time.
The primary goal of scalping is essentially taking a ‘quantity over quality’ approach to the nth degree, with these types of traders working to gain very small amounts of pips — but in comparatively high volumes — as fast as possible during peak trading times (i.e. global trading session overlaps).
A fairly distinctive (and sometimes controversial) trading method, currency scalping carries with it a completely different set of aims and considerations to longer-term strategies such as swing or trend trading, which often entail a greater degree of planning and forethought and where single positions can be held open for days or weeks on end.
What Attributes Make an Effective Forex Scalper?
As a dynamic, fast-paced and proactive discipline, forex scalping is often considered one of the more exciting forms of trading and is therefore more suited to those who dislike having to sit and wait for things to happen to them.
However, since scalping is incremental in nature — as it relies upon making lots of small (e.g. five-to-ten pip) gains to accrue a larger, tangible profit in the long run — this doesn’t mean you don’t need patience; in fact, patience and perseverance are key to making sustainable gains from this type of strategy.
Unlike longer-term methods where you can simply set your position and forget about it for a while before coming back and re-assessing, scalpers have to open and close their trades within a very short timeframe. This means you’re effectively committed to sitting in front of your chart screen for the duration of your trading session — often for hours on end, during unsociable times of day, to make best use of peak market movements.
For this reason, it’s typically geared towards individuals who possess long attention spans, along with the ability to concentrate hard, think on their feet and react quickly — imagine playing a four-hour game of Whack-a-Mole, but with money on the line, and you’ll have an idea of what’s in store!
Conversely, scalping maybe isn’t the most advisable strategy for you if:
- you’re easily stressed or particularly susceptible to ‘analysis paralysis’
- you’re unable to devote large blocks of time each day to focusing on forex
- you naturally favour a ‘less is more’ approach with fewer, more considered trades
Further reading: https://www.investopedia.com/articles/trading/05/scalping.asp
What are the Risks Associated with Scalping?
Given that forex scalping is such a characteristically speedy and labour-intensive approach to currency trading, this method does unfortunately entail a number of unique risks that are worth bearing in mind before your start.
For instance, the strategy’s short-term focus means you’ll necessarily be sacrificing the chance to capitalise on any wider market trends (and the lucrative opportunities that they could bring) and instead be dedicating your time solely to making small, steady profits. This will no doubt test your resolve, as well as your ability to resist throwing in the towel to resume more conventional trend-trading methods!
In addition, and perhaps more seriously, you’ll have to quell the temptation of trying to take shortcuts to victory that don’t actually exist — namely, whatever you do, don’t try and cheat the system by using excessive leverage on your quick-fire trades, as the results can easily wind up being catastrophic.
As a currency scalper, you’ll have to commit to (and come to terms with) the fact that your progress and overall profits will be slow in the making; otherwise, you can wind up blow your account trying to artificially boost your gradual winnings.
How Do I Scalp Forex Without Getting Burned? (or, Scalping Risk Management 101)
Despite the above concerns, there are a few shrewd steps you can take to protect yourself from unnecessary mishaps, and to ensure you have your best foot forward when first trying your hand at currency scalping.
As always, practising responsible money management is a must: set yourself rules before you begin (for instance, ‘I won’t bet more than X percent of my account on a single position’) and trade with stops in place to safeguard against dramatic losses. In the unfortunate event you do hit your stop loss limit, resist the urge to throw good money after bad — simply accept it, learn from your misfortune and move on!
What’s more, because you’re going to be dipping in and out of the market at a much higher frequency — and with less time to consider each move you make — it’s especially important to keep track of the spreads being offered on the positions you’re opening, as these will ultimately make or break your net profits. As a rule of thumb, it’s wise to make sure your targets are double your spread (at a bare minimum) to give you breathing room on those occasions when the market goes against you.
Finally, it’s critical that you insulate yourself against technical difficulties before you take up scalping; now is the time to make doubly sure that you have access to multiple ways of entering (and, more importantly, exiting) a trade if your internet connection goes down.
When dealing with quick-fire transactions, confirming that you have a sure second line of defence — for example, a number for direct connection to a dealing desk — is paramount to avoiding worst-case scenarios becoming a reality. The last thing you want is to have opened a position with the intention of making a snap profit only to be locked into a reversing market without a reliable way of withdrawing!
Further reading: https://www.moneyshow.com/articles/currency-32818/
How Do I Start Making Money as a Currency Scalper?
If you feel like forex scalping is something you’d like to try, you should begin by picking a specific currency pair to focus on; since scalping is often an incredibly intense and fast-paced practice, you’ll have a better chance at success if you streamline your efforts into a single currency pair, at least at first.
You’ll definitely want to choose a major pair — one that includes the US dollar, the global reserve currency, such as EUR/USD or USD/JPY — as market liquidity is your best friend in the scalping game. Similarly, you’ll want to choose a specific chart timeframe as your weapon of choice (a two-minute chart, five-minute chart etc.) as once you begin you’ll seldom have time for more in-depth adjustments and analysis.
Taking your time to acclimatise to the hectic pace with a single instrument on a single timeframe will factor out a lot of the noise, stop you from being completely overwhelmed and allow you to focus on reading the market, which is the key to capitalising on those tiny, fleeting windows of opportunity.
As with any form of forex, it’s vital that you use common sense and exercise caution; above all, remember that trying a high-speed trading strategy does not mean you should start being reckless and begin opening and closing positions indiscriminately. Once you get more confident with your instrument of choice, you can test the waters with a second pair simultaneously — but this is one occasion where trying to run before you can walk almost certainly spells disaster!
Further reading: https://www.mytradingskills.com/1-minute-scalping-strategy
Use at your own risk disclaimer
The content contained herein does not construe any form of advice and the user must not take this as such. We do not accept any liability for the direct or indirect usage of the content held in this article. We are strongly advised that you obtain independent financial, legal and tax advice before proceeding with any currency or spot metals trades.
