Here is the list of seven basic methods of the best scalping strategy:
- Choosing Pairs with Lowest Spreads
- Picking More Volatile Pairs
- Avoid Brokers with Dealing Desk
- Using Simple Moving Averages
- Utilizing Bollinger Bands
- Trading Support and Resistance
- Executing Trades Manually
To get a better idea of what is scalping in Forex and, more precisely, how scalping the Forex market works, let us go through them one by one.
Choosing Pairs with Lowest Spreads
As mentioned before, FX scalping strategies are not about making massive returns on one or two trades, it operates on small 5 to 15 pip gains. Therefore, large broker spreads can easily eat into those margins and take out significant portions of the trader’s payout.
Consequently, those who are considering how to scalp Forex might be more selective about the Brokers and currencies they wish to trade. For a practical example let us take a look at the Airy Forex Spread.
The company offers three types of accounts to customers, each having different spreads. For the sake of simplicity, we will consider the Standard trading account.
As we can see from the chart above, EUR/USD, as the most traded currency pair has the lowest spread of 1.2 pips. Traders can also open positions with some other pairs, including USD/JPY, GBP/USD, EUR/GBP, EUR/JPY and AUD/USD with less than 2 pip spreads.
Consequently, for those traders using Airy trading platforms, those 6 currency pairs mentioned above are well suited for simple Forex scalping strategies.
Pairs in the middle of the chart, EUR/AUD for might not be the best option for the type of trades, but in some cases, they might be still useful.
On the other hand, some relatively less liquid pairs, for example, GBP/NZD has an average spread of 4.4 pips, so some traders might not find this to be the best vehicle for scalping trades. So for example, if a trader is aiming for 10 pip payouts in each trade, in case of EUR/USD he or she simply might need 11 or 12 pip gain to achieve that, but in case of GBP/NZD – that is 15 pips.
Obviously, in the long term trades, 3 pip variation might be insignificant, but in the Forex scalping system, this can make a noticeable difference.
Emerging market currencies, like Turkish Lira, Russian Ruble, and others might not be that useful for scalping as well. Because of low liquidity and high volatility, in percentage terms spreads on USD/RUB and USD/TRY, for example, are much higher than in Forex Majors.
Picking More Volatile Pairs
Spreads are not the only useful criteria when choosing currency pairs for a scalping trading strategy. Another important factor is volatility. Since this style of trading seeks quick gains, the market has to move faster to produce those results.
Less volatile pairs are not that useful for this purpose since it might take much more time for the rates to move. Consequently, instead of 5 or 10-minute trade, the trader might have to wait for half an hour or more for the pair to reach the desired level.
AUD/JPY, GBP/AUD, GBP/NZD are some examples of the currency pairs with relatively higher volatility. Actually, Gold and Silver prices usually also experience a greater degree of variation during trading days.
Avoiding Brokers with Dealing Desk
It goes without saying that, when it comes to trading, finding a broker with a good reputation is always important. However, if one uses FX scalping techniques that becomes even more crucial. In this style of trading, every second counts.
Therefore the worst scenario for any trader would be if he or she opens positions, achieves 10 or 15 pip gains, but is prevented from closing positions because some Dealing desk rejects to execute orders. This can be especially harmful, if some major announcement or event is taking place, since a trader can lose a significant amount of money, because of that.
Fortunately, nowadays, there are many brokers with no dealing desk and conflicts of interest, who also offer competitive spreads on currency pairs.
Using Moving Averages
Moving on to the technical indicators used in the methods of scalping Forex strategy, for many traders the Simple Moving Average (SMA) or Exponential Moving Average (EMA) can be a very helpful tool. Traders can use a 5,10, 50, or even 100 period SMA or EMA or higher depending on his or her preference.
One way to go about this is to look at the direction of the moving averages and open positions in accordance with them. Obviously, longer-term trades might require much more analysis, but in 1 to 15-minute trades, it might produce some results. This might not be one of the best Forex scalping techniques, but it can work for many traders.
Utilizing Bollinger Bands
Bollinger bands can be a very handy Forex scalping indicator. A flat Bollinger Band line suggests that the market is settling down for a tight range trading. The basic strategy here is very simple: a trader can buy a currency pair if it moves close to the lower bound and sell pairs where the price is close to the upper band.
Clearly, this does not guarantee that all positions will succeed, however, this tactic might help traders to win the majority of the trades.
Trading Support and Resistance
This might not be the best Forex scalping strategy, but it is very simple. It is similar to the previous method, mentioned above, however, instead of looking at the Bollinger charts, traders can just take a look at the support and resistance.
Lucky finding out about those levels does not require complex analysis. Most Forex news websites publish 3 resistance (R1, R2, R3) and 3 support levels (S1, S2, S3). In most cases, R3 and S3 marks are considered stronger and more likely to hold the line, compared to other ones.
So essentially, a trader can take a look at the latest technical data from the Forex news websites, then buy currency pairs near support levels and sell pairs which trade near resistance.
Again, this might not be a viable option in case of long term trading, since sooner or later the market eventually breaks out. However, for such a short timeframe it helps traders to succeed.
Executing Trades Manually
The importance of placing Stop-Loss orders is underline in countless Forex manuals and webinars. However, when it comes to scalping trading, there might be an exception. The fact is that putting a Stop-Loss order in place usually requires some seconds, during which the price might change by several pips.
It might be also helpful to keep in mind that, when it comes to 1 to 15-minute trades, it is easy to always keep an eye on the platform for any major changes. However, if the time frame of the trade is larger, like days or even weeks, then it makes a lot of sense to keep Stop-Loss order in place.
Therefore many professional traders prefer to execute all of their scalping trades manually. This saves time and makes the process much simpler.
Forex Scalping Guide – Key Takeaways
- The FX scalping strategies typically include trades with a 1 to 15-minute timeframe. Because of this, most professional traders do not use profit/loss orders and prefer to execute trades manually.
- Finding the Broker and currency pairs with tight spread ranges is essential to a successful Forex scalping strategy. Since most traders only aim at 5 to 15 pip gain, the brokerage fees can make a significant difference.
- Even after using several technical indicators, there is no 100% guarantee that a trader will always win the majority of the trades. As a measure of precautions, in many cases it might be better for traders to close losing positions at a smaller number of pip losses, compared to gains made with winning positions.
FAQ: Forex Scalping Methods
How many trades do scalpers execute per day?
As we have discovered in this guide to what is Forex scalping, this depends upon the preferences of an individual. Most of the part-time or just hobby traders might settle for just 1 to 8 trades per day.
When it comes to full-time professionals, they might aim for higher volume, which might even include 50 or even in some cases 100 trades per day.
What are some of the most and least volatile currency pairs in Forex?
There are many measures for this, but if we take the average daily volatility during the last 52 weeks as a standard (using investing.com calculator), there are some important patterns.
Currency pairs in which the central banks intervene frequently are usually less volatile. Two examples of this would be EUR/CHF and USD/CNY. Considering that Switzerland is surrounded by Eurozone countries any sharp appreciation of Franc against the Euro in the short term can be damaging for the Swiss economy. Therefore SNP intertwined in this pair’s exchange rates frequently, even going as far as imposing a 1.20 floor on EUR/CHF rate for several years, until it collapsed in 2015.
The curious thing about the EUR/CHF from 2011 to 2015 was that it lost significance for long term traders. The Euro could not get much higher than 1.22 and SNB defended the 1.20 floor. So essentially for those 4 years, this pair was only interesting from traders who used scalping strategy Forex methods.
China is famous for its cheap exports, consequently, the massive appreciation of Yuan can hurt the competitiveness of this country. Therefore, the value of USD/CNY is closely managed by the People’s Bank of China.
On the other end of the spectrum are Gold and Silver. According to the last 52 weeks of market data, they are at least 1.5 more volatile than most of the major currencies.
As for the currency pairs themselves, some of the most volatile ones are AUD/JPY, GBP/AUD, USD/ZAR, USD/TRY, NZD/JPY, GBP/NZD, EUR/AUD, and USD/RUB.
Who is designated as Pattern Day Trader (PDT) and what type of regulations apply to those individuals?
According to the Financial Industry Regulatory Authority (FINRA) definition, a Pattern Day Trader (PDT) is a trader who executes 4 or more trades within five business days, while using a margin account.
According to the FINRA regulations, the individuals with such designations must maintain at least $25,000 on their accounts and must trade only on margin accounts. It might be helpful to note here, that this is an equity requirement, so it does not have to be all cash.
Luckily, most Retail market maker Forex brokers are exempted from those regulations, so that the majority of traders can execute trades frequently without having to maintain a $25,000 on the account.
What are some of the most common mistakes scalpers make?
One of the most obvious and most frequent mistakes scalpers make is not cutting their losses on time when the market goes in the opposite direction. This is especially dangerous considering that in this case, one big loss can easily wipe out several trades worth of gains.
Overleveraging is another very common mistake. Since most traders with scalping strategy are aiming for 5 to 20 pip gains, they increase leverage to make their payouts more significant.
The problem with this type of approach is that it magnifies the risk. For example, in the case of 1:400 leverage all it takes is the market going in the opposite direction by 0.25% for the entire position to be wiped out. Even in case of a relatively more conservative 1:50 margin position, that number of only 2%.
Finally, late exits are another frequent problem. Traders might achieve his or her 10 or 20 pip wins, but instead of closing trades, he or she keeps the position open in the expectation that they could make even larger payouts. However, in scalping, this is a very risky tactic, with some trades eventually giving up all of their gains.
Why do some traders choose to avoid scalping in trading?
There can be several reasons why some traders might prefer to avoid scalping in Forex:
- As mentioned before, a successful scalping requires finding securities with low spreads. This limits the field of choices significantly. For example, a trader might identify a very useful indicator GBP/NZD, however, with a simple scalping strategy this might have to be discarded because the average spread on this pair is 4.4 pips. Essentially the problem here is that the client is limited to only a small number of currency pairs, which can lead to many missed opportunities.
- Scalpers usually stay away from the major news releases since it can cause a 20 or 50 pip swing in a matter of seconds. However, many traders want to get involved in those high volatile trades.
- Scalping trading strategies can also be very stressful for some people. Some long-term traders devote some specific time to analysis, open positions with Stop-Loss orders, and then go about doing their other daily business without the need to constantly be in front of the trading platform. Scalping, on the other hand, requires constant vigilance, which can be very exhausting and stressful for some traders.
- Finally, some traders prefer to aim for big payouts when it comes to trading, instead of 10 or 20 pip gains. The upside to this strategy is that one large winning trade can offset losses from several smaller ones. Since this is not possible with scalping Forex strategy, some traders might prefer to avoid this method.