Forex Scalping & Trading Strategies Guide
What Means Forex Scalping
Forex Scalping means opening and closing trading positions on a regular basis, aiming to ‘scalp’ profits of 2-10 pips. These positions are opened and closed during tiny segments of time that usually last less than 1 minute. Scalping is the shortest form of day-trading and it becomes more and more popular among Forex Traders for many reasons. You may scalp Forex manually or automatically via the use of a Forex Robot (Expert Advisor). Scalping requires the existence of state-of-the-art trading technology, tight spreads, plus a perfect understanding of technical analysis and Real Price Action in Forex Trading.
What Characterizes Scalping?
These are the characteristics that are distinguishing Forex Scalping from other trading practices and styles:
1. Trading the 1-Minute chart (Fast-paced-trading)
2. Targeting profits 2-10 pips, stop-loss 2-3 pips below
3. Repeated Trades / High Leverage Used
4. Trading pairs with minimal spreads (most commonly EURUSD, USDJPY, and GBPUSD)
5. Choosing to trade only when liquidity peaks (liquidity peaks during market overlaps described below)
6. Using state of the art trading technology (hardware, software, internet connection, etc)
7. Trading with minimal delays (ECN/STP Broker needed)
8. Trading with no price manipulation and re-quotes (ECN/STP Broker needed)
9. Scalpers are using advanced platforms offering 1-click-trading (MT4, MT5, JForex, etc)
10. Automated scalping via the use of an Expert Advisor requires the existence of a VPS hosting service in order to achieve 24-hours trading
Scalpers need to search, read and perfectly understand the small print of any Broker’s agreement (liquidation, margin levels, stop levels, etc.)
Which are the Basic Forex Scalping Strategies?
These are the three common scalping strategies:
1) Trending-Market Scalping Strategy
Trending or Directional Markets are those markets following a very strong short-term trend. A strong trend is considered ideal for scalping. A short-term trending market is usually the result of an important news release. The best way to scalp those markets is by Running-Your-Profits. A very important news release may lead the market to 500 pip movements without any corrections at all. Don’t get in a hurry closing profitable trades in such markets -Instead, use a simple trailing stop-loss order. In this way, you may limit your losses but not your profit potential.
In order to validate and confirm a trend in such a market, you may use a great number of different technical analysis tools and indicators. As concerns charting you should use 2 charts. The first chart should be used for the evaluation of the trend and the second chart should be used for defining the optimal entry-level. Most commonly:
i) 5-Minute chart to evaluate the existence of a short-term trend
ii) 1-Minute Chart to determine the exact levels of entering the market
2) Ranging-Market Scalping Strategy
Ranging markets are a common phenomenon in Forex trading. A strong range can provide the ideal levels for target profit and stop-loss orders, at a glance. Some scalpers consider those markets even more lucrative than trending markets.
3) Price-Breakout Scalping Strategy
Price breakouts are triggered when a currency pair ‘breaks’ an important demand or supply level. This may be the result of news-releases or due to other technical reasons. When a price breakout occurs we are usually witnessing very strong short-term trends, ideal for scalping. A breakout may also trigger a significant price reversal. Be aware that many times a price breakout may be false (false reversals etc). Be sure that you are fully familiar with factors that are evaluating and confirming a price breakout before you try to scalp those markets.
In order to define and place the ideal target-price and stop-loss orders, you may use the Fibonacci levels.
Automatic Scalping Strategies via Expert Advisors (Forex Robots)
There are tens of automated scalping systems in the market today. Most of them are scalping EURUSD and GBPUSD and taking advantage of the high liquidity offered by these two pairs. Before you buy and use any automated scalping system you should research its past performance. In addition, when you buy such a system you should test it first on a demo account before moving to a real account. Testing on a demo provides traders the chance of evaluating performance but also the chance to define the optimal parameters. Finally, it is highly recommended to use any scalping system in separate trading accounts where no other trading activity takes place.
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Scalping and News-Trading
Some traders use scalping strategies to exploit opportunities in news-trading. Usually, when important news is released in the market, price volatility and velocity hit red. News such is:
- Inflation and Unemployment Statistics
- Interest Rate Adjustments by Central Banks
- GDP Announcements
What is the Best Time to Scalp Forex?
Scalping is more efficient and effective when the Forex market is considered liquid. Liquid markets offer the narrowest spreads. Tight spreads are particularly important when you are targeting 2-5 pips profit per trade. Volume in Forex is not equally distributed among the 3 sessions of the market. London’s market opening is signaling a volume peak. Moreover, the volume is peaking during market session overlaps. An overlap occurs when two Forex sessions are opened simultaneously:
(a) New York & London Market Overlap: 8:00 am EST to 12:00 noon EST
(b) Sydney & Tokyo Market Overlap: 7:00 pm EST to 2:00 am EST
(c) London & Tokyo Market Overlap: 3:00 EST am to 4:00 am EST
Best Time To Scalp the Market
Here is maybe the ideal time to scalp Forex:
■ 7:00 am EST to 8:00 am EST
At a Glance: “Ranging Market, don’t be greed”
During this one hour, the market is preparing for theNew York opening at 8.00 am EST. Price oscillation and ranging triangles are common phenomena during this hour and that may be suitable for particular scalping strategies.
■ 8:00 am EST to 10:00 am EST
At a Glance: “Trending Market, run your profits”
During this two-hour period theNew York and London Markets are opened simultaneously (market overlap). The market activity peaks and that means the highest liquidity there is. Additionally, important news is usually released during this period and that means also high-paced price velocity. That combination of liquidity and volatility creates the ideal trading conditions for scalping. During these two hours, the market is usually trending (directional moves) by following strong swings.
■ 3:00 pm EST to 5:00 pm EST
At a Glance: “Market Moves Correctional, be Quick”
During this period the US Banks are preparing their daily closing. Compared to the other two selected periods this period is witnessing considerably lower volume activity and commonly it is characterized by directionless price oscillations. During this period profitable trades may occur as correctional moves on high currency performers. Scalping must be rapid.
Basic Trading Tips when Scalping Forex
Here are some basic Trading Tips when scalping Forex:
1. Know what you are trading and choose the right time to trade it
2. Select very carefully your Forex Broker, don’t start scalping unless you have found the right partner
3. Read the terms of the agreement of each broker and don’t miss the small print (in my country we say “evil is hidden in details”)
4. Consider the possibility to join a rebate plan, it can make the difference as concerns your long-run profit potential
5. Before you start scalping for real money test and re-test your strategy in a practice account
6. Don’t trade during hours when liquidity and volatility are simply inadequate
7. Stop trade if you have lost many trades in a row. Set some money management rules and follow them
8. Discipline yourself and don’t get emotional
9. Follow your strategy, if your strategy proves wrong, stop-trading and re-evaluate everything by getting advice from others (tutorials, forums, etc)
10. Keep a brief log of what you are trading and aggregate your performance by using multiple criteria
In the final section of this scalping tutorial by ForexAutomatic, you may find 4 rebate plans specially designed for scalping Forex.
■ Forex Scalping & Trading Strategies
Giorgos Protonotarios -Investment Consultant / Financial Analyst