Fast and furious price action for those not faint at heart!
Traditionally, forex scalping has been regarded as the practice of taking just a few pips of profit, i.e. scraping or scalping the market.
Very tight stops are employed, but they may represent several times the intended take profit.
For example, a scalper may enter a trade on the EURUSD with a 10 pip stop and take the trade off once it has moved 3 to 5 pips in profit, depending on any number of reasons such as:
- price is approaching support or resistance level
- price is approaching a pivot point
- price is approaching Fibonacci level
- price is approaching a Round Number
Obviously for such a strategy to pay off the trader must be enjoying a very high win to loss ratio, combined with a good average win size to average loss size. Typically, forex scalpers enter and exit the market many times in a trading session.
This style of trading is attractive to those who like their forex trading action-packed. One top trader I know likes to recount the tale of sitting in with a scalper friend of his during a trading session. The scalping trader consumed a bottle of red wine and most of the contents of a packet of cigarettes during that session. And he was only marginally successful 🙂
A cautionary tale for those who would consider this style: that scalper is now apparently in poor shape…
However, for those undeterred, the benefits of successful scalping are:
- Since many trades are taken in a typical session, the risk on any one trade can be very small. For example, whereas a day trader may risk anywhere from 0.5% to 2% of their account on a single trade, the scalper would most likely risk much less, say, anywhere from 0.1% to 1%.
These are just guidelines of course, the actual risk that any particular forex scalper employs will be tailored to their own risk profile principally, but also will be influenced by the prevailing market fundamentals, the actual session and currency pair traded etc.
- Following on from the first point, if many trades are done in a session, the overall profit from that session can be quite high if the normal expected win to loss ratio and average win size to average loss size ratio operates. A day trader may risk 1% on a single position and walk away from a successful days trading with 2% profit. A scalper may risk 0.5% per trade, but trade perhaps 20 during the course of the day. If the scalper therefore averages a high win to loss ratio, say 70% wins and their average winner is equivalent to their average loser, they have in fact won 4% profit for that day/session – twice that of the day trader.
- There is less need to monitor the market when you are scalping. Apart from preliminary scanning of the fundamentals prior to entering the session, your focus and concentration are limited to the duration of that session, perhaps 1 to 2 hours work. Longer term traders may need to constantly monitor the market for opportunities, as well as adjustments to open trades.
Obviously the down side of trading this methodology in an unsuccessful fashion is relatively rapid ruin!
There are a number of other things the forex scalper should consider:
- Since you will only be making a small number of pips profit per trade, the spread you pay to your broker is of critical importance. It’s no use taking five pips profit and paying 2 to 3 pips in spread, the costs of doing business that way are ruinous. Your choice of forex broker therefore becomes a prime consideration.
- It is imperative to limit your potential loss by setting a stop at the same time as you enter the trade, or immediately thereafter. This of course is important for any trade, but even more so for scalp trades. Why? Since you will be most likely trading at a time of high volatility – as this is best for scalping small quick profits – this injects another element of risk into the equation in the event price does a rapid turnabout and heads in the opposite direction to your intended trade. In this scenario you could be facing a loss of 20 to 30 pips or more before you are able to close out the trade. Considering your average profit would be many times less than that, this is a disaster scenario! Some scalpers boast that they never set stops, but I honestly don’t know of any long-term successful scalper who doesn’t.
- It will be difficult for you as a scalper to cover a number of pairs at the same time, therefore it is advisable to choose one pair in which to specialise and become expert. Generally it will be a pair that enjoys high liquidity during the session you intend to trade. For example, you might decide to trade the AUDUSD during Asia and the EURUSD during the London session.
- Having said this, the best scalping strategy I ever encountered is one where the number of pairs covered is scalable, i.e. the more experienced trader may choose to cover several pairs while a less experienced trader would concentrate on one or two in the early stages of getting comfortable with the method. This strategy also stretches the definition of a scalp, as it typically aims for 10+ pips profit. More on this particular strategy below…
- The profit limits that you set will normally be small and centred around such things as support/resistance, pivot points etc as mentioned above. The forex scalper is much less likely to set a distant take profit limit and attempt to trail the stop behind price. The market will be moving much too fast and the reactions of intervening significant levels, though small, will likely be sufficient to wipe out your profit if you try to do this.
- Many scalping strategies are based on Price Action Trading. This is because in the heat of the moment it is much simpler to concentrate purely on what price is doing at any particular moment, without the distractions of monitoring indicator behaviour.
- It is also possible to fundamentally scalp the market around news announcements, and there are a number of examples of FX trading software designed for news trading. However, scalping forex in this manner is generally a fraught endeavour best left to very experienced traders.
If you still fancy scalping as a way to trade I have two possibilities for you:
1) check out our free forex trading strategies on the following page:
The five strategies I present there can all be adapted to a scalping timeframe.
2) You could also consider the London Close Strategy, created by Shirley Hudson and refined with assistance from the legendary Vic Noble!
To find out more go to London Close Strategy