Forex Scalping - Extensive Guide on How to Scalp Forex (PDF) (2024)

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Forex Scalping – Extensive GuideonHow to Scalp ForexReviewed and recommendedby Rita Lasker, 2012

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ScalpingExtensive Guide on How to Scalp Forex* Source – free from the InternetLet’s take a look at the contents of this article where forex scalping is discussedwith all its details, advantages and disadvantages. Our suggestion is that you peruse allof this article and absorb all the information that can benefit you. But if you think thatyou’re already familiar with some of the material, to shorten your route, we present thetable of contents of this article.Contents1. How scalpers make money:* Here we will take a look at the logic behind scalping, and we’ll discuss the bestconditions and necessary adjustments which must be made by a scalper for profitabletrading.2. Choosing the right broker for scalping:* Not every broker is accommodative to scalping. Sometimes this is the stated policy ofthe firm, at other times the broker creates the conditions which make successfulscalping impossible. It is important that the novice scalper know what to look for in thebroker before opening his account, and here we’ll try to enlighten you on theseimportant points.3. Best currencies for Scalping:* There are currency pairs where scalping is easy and lucrative, and there are otherswhere we advise strongly against the use of this strategy. In this part we’ll discuss thisimportant subject in detail and give you usable hints for your trades.4. Best times for Scalping:* There is an ongoing debate about the best times for successful scalping in the forexmarket. We’ll present the various opinions, and then offer our own conclusion.5. Strategies in Scalping:* Strategies in scalping need not differ substantially from other short-term methods.On the other hand, there are particular price patterns and configurations wherescalping is more profitable. We’ll examine and study them in depth in this section.

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a. Range Scalping: Some traders consider ranging markets better suited forscalping strategies. Here we’ll examine why, and how to scalp under such conditions.b. Breakout Scalping: We’ll examine news breakouts, and technical breakoutsseparately and discuss suitable scalping strategies for both.c. Trend Scalping: Here we’ll take a general look at forex scalping in trendingmarkets.6. Trend Following while Scalping:* Trends are volatile, and many scalpers choose to trade them like a trend follower,while minimizing the trade lifetime in order to control market risk. In this part we’llexamine the usage of Fibonacci extension levels for scalping trends.7. Disadvantages and Criticism of Scalping:* Scalping is not for everyone, and even seasoned scalpers and those committed to thestyle would do well to keep in mind some of the dangers and disadvantages involved inusing the style blindly.8. Conclusions on Scalping:* In this final section we’ll combine the lessons and discussions of the previouschapters, and reach at conclusions about who should use the forex scalping tradingstyle, and the best conditions under which it can be utilized.Introduction to scalping:Forex scalping is a popular method involving the quick opening and liquidation ofpositions. The term “quick” is imprecise, but it is generally meant to define a timeframeof about 3-5 minutes at most, while most scalpers will maintain their positions for aslittle as one minute.The popularity of scalping is born of its perceived safety as a trading style. Manytraders argue that since scalpers maintain their positions for a brief time period incomparison to regular traders, market exposure of a scalper is much shorter than thatof a trend follower, or even a day trader, and consequently, the risk of large lossesresulting from strong market moves is smaller. Indeed, it is possible to claim that thetypical scalper cares only about the bid-ask spread, while concepts like trend, or rangeare not very significant to him. Although scalpers need ignore these marketphenomena, they are under no obligation to trade them, because they concernthemselves only with the brief periods of volatility created by them.

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Is Forex Scalping for you?Forex scalping is not a suitable strategyfor every type of trader.The returns generated in each positionopened by the scalper is usually small; butgreat profits are made as gains from eachclosed small position are combined. Scalpers do not like to take large risks, whichmeans that they are willing to forgo great profit opportunities in return for the safety ofsmall, but frequent gains. Consequently, the scalper needs to be a patient, diligentindividual who is willing to wait as the fruits of his labors translate to great profits overtime. An impulsive, excited character who seeks instant gratification and aims to “makeit big” with each consecutive trade is unlikely to achieve anything but frustration whileusing this strategy.Attention is essential for the forex scalperScalping also demands a lot moreattention from the trader in comparison toother styles such as swing-trading, or trendfollowing. A typical scalper will open and closetens, and in some cases, more than a hundredpositions in an ordinary trading day, and sincenone of the positions can be allowed to suffergreat losses (so that we can protect the bottom line), the scalper cannot afford to becareful about some, and negligent about some of his positions. It may appear to be aformidable task at first sight, but scalping can be an involving, even fun trading styleonce the trader is comfortable with his practices and habits. Still, it is clear thatattentiveness and strong concentration skills are necessary for the successful forexscalper. One does not need to be born equipped with such talents, but practice andcommitment to achieve them are indispensable if a trader has any serious intention ofbecoming a real scalper.

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Automated trading systemsScalping can be demanding, and time-consuming forthose who are not full-time traders. Many of us pursuetrading merely as an additional income source, and wouldnot like to dedicate five six hours every day to thepractice.In order to deal with this problem, automated trading systems have beendeveloped, and they are being sold with rather incredible claims all over the web. Wedo not advise our readers to waste their time trying to make such strategies work forthem; at best you will lose some money while having some lessons about not trustinganyone’s word so easily. However, if you design your own automated systems fortrading (with some guidance from seasoned experts and self-education throughpractice) it may be that you shorten the time which must be dedicated to trading whilestill being able to use scalping techniques. And an automated forex scalping techniquedoes not need to be fully automatic; you may hand over the routine and systematictasks such as stop-loss and take-profit orders to the automated system, whileassuming the analytical side of the task yourself. This approach, to be sure, is not foreveryone, but it is certainly a worthy option.Some words on trade sizes and forex scalpingFinally, scalpers should always keep the importance of consistency in trade sizeswhile using their favored method. Using erratic trade sizes while scalping is the safestway to ensure that you will have a wiped-out forex account in no time, unless you stoppracticing scalping before the inevitable end. Scalping is based on the principle thatprofitable trades will cover the losses of failing ones in due time, but if you pick positionsizes randomly, the rules of probability dictate that sooner or later an oversized,leveraged loss will crash all the hard work of a whole day, if not longer. Thus, thescalper must make sure that he pursues a predefined strategy with attention, patienceand consistent trade sizes. This is just the beginning, of course, but without a goodbeginning we would diminish our odds of success, or at least reduce our profit potential.

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1. How forex scalpers make moneyWe have already stated that scalping is aboutmaking small profits over a long time which canreach significant amounts when combined. But ofcourse, scalping is not about randomly enteringthe market and buying or selling while expectingluck to be on our side. Instead, a successfulscalper is very methodical about both his decisionsand expectations from the market. He aims tocombine various unique features of the forex market to create profitable conditions fortrading, and in this sense he aims to exploit the most basic features of the market forhis purposes. Scalping is not only about exploiting economic events, price trends, andmarket events, but also the basic structure, and internal dynamics of the currencymarket itself, and this is what sets it apart from other strategies such as swing tradingor trend following.Exploiting sharp price movementsMany scalpers like to concentrate on the sharp movements which frequently occurin the currency market. In this case, the aim is to exploit sudden changes in marketliquidity for quick gains later. This kind of scalping is not very much concerned aboutthe nature of the market traded, whether prices are trending or ranging, but attachesgreat importance to volatility. The purpose is to identify the cases where temporaryshortages of liquidity create imbalances that offer trade opportunities.In example, let’s consider a typical for traders of the EURUSD pair.In most cases, spreads are tight, and the market isliquid enough to prevent any meaningful gaps in thebid-ask spreads. But when, for whatever reason (often anews shock, but we don’t concern ourselves with thecause here), liquidity dries out, and a significant bid-askgap appears, the quote will be split into two distinctpieces of data: the bid is, let’s say 1.4010, while the askis 1.4050.A very short while, the bid-ask spread will narrow, and the price will gravitaterather hastily to one side. Scalpers use these very fast fluctuations for making quick

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profits. Right after the price has moved up to 1.4030, and the bid-ask spread hasnarrowed to normal levels, a scalper may sell, for example, and as volatility takes theprice lower to, 1.4020, he closes his short position to open a long one, and so on. Thepoint is to profit from the emotional reactions of the market by remaining calm, andbetting that behind the sound and fury, there is nothing of significance, at least for theimmediate term.We’ll discuss this trading method in greater detail while examining newsbreakouts. Gaps which can be exploited by scalpers appear most often in the aftermathof important news releases. The reader can himself open up the five minute charts ofthe price action after a non-farm payrolls release, for example, and observe the many“loops” where the price action returns to where it began after a series of very severezigzags. Some scalpers exploit such periods of emotional intensity for profit in themanner just mentioned. They will buy or sell just before the release itself, and tradethe sharp, brief swings for a quick profit.LeverageScalping involves small profitscompounded over a long time to generatesignificant sums. But often the returns fromscalping are so small that even whencombined over weeks or months the returnsare insignificant for the amount of effort involved, due to the small size of the actualmovements in the currency market. To overcome this problem, almost all tradersinvolve some amount of leverage while scalping the forex market.The level of leverage appropriate for a scalper is a subject of debate amongtraders. But in spite of the debate, the most solid advice that any beginning scalpershould heed is to keep leverage as low as possible for at least the first two, threemonths of trading. We do not want to take significant risks while we are still unsureabout which strategy we should be suing while trading. On the other hand, since thescalper is certain to use a predetermined stop-loss, and not to tamper with it (a scalperdoesn’t have that much time to spend on each individual trade), a leverage ratio that isinappropriate to slower traders can be acceptable for him. For instance, a trader whosepositions are held over weeks may take a long time before deciding to exit a position,even if the market is against him for a time. But the scalper will immediately close aposition as soon as the stop-loss level is reached (and the process is usuallyautomatic).

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In short, a higher level of leverage (up to 20 or 50:1) can be acceptable fortraders who open and close positions in very quick succession, provided that stop-lossorders are never neglected. But there is still one caveat: in cases like the aftermath ofa surprise Fed decision, or an unexpected non farm payrolls release, spreads can wideninstantly, and there may not be enough time to realize the stop-loss order even with acompetent broker, and losses would be multiplied if high leverage were to be used. Toprevent such outcomes from materializing, it is a good idea to lower the leverage ratiosignificantly if we seek to trade market events that can cause gaps in the bid-askspread, and create very large volatility.Scalping StrategiesAlthough we’ll discuss scalping strategies extensivelylater, we need to mention here that scalping requires aconsiderable command of technical analysis and strategies.Since one sizable mistake can wipe out the profits ofhundreds of trades taken during a whole day, the scalpermust be very diligent in analyzing the market, and disciplinedwhile applying his analysis and executing his strategies.The role of fundamental analysis in scalping is usually very limited. During thetime frames preferred by scalpers, markets move in a random fashion for the mostpart, and it is impossible to discuss the impact of a GDP release during a one-minuteperiod, for example. Needless to say, events influencing the forex market are notlimited to the clustered major releases of each day.Many scheduled and unscheduled events provide input to the marketscontinuously, and as such, even short term movements have some form of macro-reasoning behind them. However, it is exceptionally difficult for the retail trader to keepupdated with all kinds of news events occurring throughout the day, and what is more,the markets reaction is itself often erratic and unpredictable. Consequently, it is difficultto use fundamental strategies in scalping.Finally, some traders combine scalping with another approach such as trendfollowing or range trading and only differ from the pure practitioners of these strategiesin terms of their exposure times. Although this is a valid approach, the greatcomplexities of adjusting a trend following strategy to suit a micro-timing trade planmakes this impractical in terms of both analysis and execution.

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2. The Best Forex Brokers for ScalpingAs important as basic concepts like leverage andspreads are for forex scalpers, they are still secondarysubjects in comparison to issues related to the broker, hisattitude and preferences. Quite simply, the broker is themost important variable determining the possibility, andprofitability of a scalping strategy for any trader. A scalperhas control over his strategies, stop loss, or take profitorders, as well as his time frame for trading, but he has no say in matters such asserver stability, spreads, and the attitude of the broker to scalping.There are hundreds of brokers operating in the retail forex market today;naturally, each has a technical capability, and business model suitable to a differenttrader profile. These differences are immaterial to most long term traders, for swingtraders they are meaningful but not that significant, but for day traders and scalpersthey are the distinction between profit and loss. At the very basic level, the spread is atax paid on profits and losses to the broker for his services, but the relationship goes alot deeper than that. Let’s take a look at the various issues related to the scalper-broker relationship. (Once you've read this article make sure to stop by our forexbroker review section to find more informations on the most popular retail forexbrokers.)Low SpreadsA trader who doesn’t use the scalping or day-trading strategies will open and close may be oneor two positions, at most, in a single day. Althoughthe cost of the spread is still an important variable,a successful trading style can easily justify therelatively small fees paid to the broker.The situation is quite different for the scalper however. Since the scalper will openand close tens of positions in a short period of time, the cost of his trades will be a verysignificant item on his balance sheet. Let’s see an example.Suppose that a scalper opens and liquidates 30 positions on a day in the EURUSDpair, for which the spread is commonly 3 pips. Let’s also suppose that his trade sizes

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are constant, and that 2/3 of his positions are profitable, with an average of 5 pipsprofit per trade. Let’s also say that the average size of his loss is 3 pips per trade. Whatis his net gain/loss without the cost of the spread included?(Positions in black) – (Positions in red) = Net profit/loss(20*5)-(10*3) = 70 pips in total.Which is a significant gain. Now let’s include the cost of the spread, and repeat thecalculation.(Positions in black) – (Positions in red + Cost of the Spread) = Net profit/loss(20*5)-(10*3+30*3) = -20 pips in total.A nasty surprise awaits our hypothetical trader in his account. The number of hisprofitable trades were twice the number of his losing ones, and his average loss wasabout half his average gain. And in spite of that remarkable track record, his scalpingactivity gained him a net loss. To break even, he would need an average net profit of 9pips per trade, all else remaining the same.Now let’s repeat the same calculation, with another hypothetical brokerwhere the spread is just 1 pip in the EURUSD pair. The 5 pips per win, and 3 pips perloss (the same scenario which was examined in the beginning) with a one-pip spreadwould bring us an outcome of(20*5)-(10*3+30*1) = 60 pips in total profit.Why is there such a large discrepancy in our results? Although the numbers dospeak for themselves, let’s remind the reader that while we earn money only on ourprofitable trades, we pay the broker for every position we open, profitable or not. Andthat is the problem.In sum, we need to ensure that we choose the broker with the lowest spread forthe currency pair we’d like to trade. A scalper must scrutinize the account packages ofdifferent brokers thoroughly before deciding to become a client of one of them.Scalping PolicyWhat is a scalping policy? Although themajority of well-established firms with a history anda significant client base have an official policy ofallowing scalpers freedom with their decisions, somebrokers quite simply refuse to allow scalpingtechniques for clients. Others process client ordersslowly, and make scalping an unprofitable endeavor.What is the reason?