What is Scalping in Forex?
Scalping is a style of forex trading that aims to capture small price movements of an asset at a time, eventually building this up to make a reasonable profit. This article explores the fundamentals of scalping: what it is, how it works, and the best scalping strategies and indicators to use.
I. Introduction to Scalping in Forex
How does scalping work?
The aim of scalping is to make a little profit on small price movements. Scalpers usually do not stay too long in the market and get exposed to all kinds of market risk events. It is a commonly used trading strategy in the forex market. The saying that “little drops of water make a mighty ocean” drives scalping trading strategies.
- Scalping trading techniques are a way to make quick profits. The scalping technique means that several quick, profitable trades can be accumulated to make significant profits.
- By not staying in the market for too long, scalping enables the trader to avoid market risk events.
- Scalping is also a method of trading high-impact news events, especially when aiming to catch the initial spike following a news release.
- Scalpers can enter and exit trades in highly liquid markets without impacting the price.
Depending on the asset class being traded, there can be more benefits than risks or vice versa.
- Due to the large trade count that follows scalping, the trader tends to incur significant trading costs in spreads and commissions.
- Scalping techniques can quickly go south if there is market slippage.
- The trader is always under pressure as maximum attention must be paid to the charts and computer screens at all times.
- If the scalper fails to use a stop loss, a single loss can wipe out any profits made.
- Scalping induces psychological pressure on the trader due to the stress of always being on the charts. In terms of trading styles, we have scalpers, day traders, swing traders, and position traders.
Scalping differs from other trading strategies regarding the mindset required, the time it takes to execute trades, and what needs to be done to stay profitable. Here are the key areas in which scalping differs from other trading styles.
- The time frames
The time frame for scalping is even shorter than for day trades. Scalping trading is done in seconds or minutes. Hardly will you find any scalp trades that extend more than 5 minutes. Day traders typically put on trades lasting for hours and closed within the same trading day. In contrast, swing and position traders pile on trades lasting for days, weeks, and even months.
- Trade frequency
Scalp trades are all about a high frequency of trades. It is common to see a scalper making between 20-50 trades daily. The other strategies rely on far fewer trades which tend to stay on much longer.
- Targeted profits
Scalpers only target a few pips or points at a time. Swing and position traders aim for more pips per trade.
- Stops and profit targets
Scalpers must make their stops tight so their gains do not outstrip their losses. Swing and position traders can afford to use generous stops since their targets are equally large.
Having a proper mindset for scalping
Scalping puts a lot of psychological pressure on the trader. Since scalping requires spotting setups that can be exploited for snappy gains, a scalper cannot afford the loss of concentration. The scalper has to keep scouring the charts to spot opportunities. It is a high-energy, high-pressure game to stay in the game and remain afloat.
II. What are the best scalping strategies for Forex Trading?
Forex scalping can be done using the following strategy types:
- News trading
- Technical setups
- Range trades
- Price action setups
Trading the News
Every news trade has several components. For the scalper, the most important are the initial spike that occurs as institutional traders respond to the news numbers and the retracement that occurs when they start to exit their positions.
These two phases are the most important for a scalper because the price moves are large. This provides ample opportunity for the scalper to get in and out of the significant moves quickly.
When the market is trading sideways, the market is said to be in consolidation or is range-bound. Ranging markets are marked by highs around the same level and lows around the same level. No higher/lower highs or lows exist, so there is no trend. The scalper can buy at support or sell at resistance in this condition.
A ranging market forms a pattern called the rectangle. Whenever a rectangle forms, you can use a rectangle tool on the MT4 or MT5 platform provided by TFF for your funded trader evaluations to restrict this area. For safety and best practices, any scalp trades made on a rectangle pattern should follow the initial trend that preceded the pattern.
The snapshot below shows an example of a setup that could be exploited using scalp trades.
The chances of a scalp range trade succeeding are higher if you traded in the direction of the prior trend. In this snapshot, the initial trend was a downtrend. The rectangle pattern representing the range-bound market presented two quick selling opportunities while the market consolidated.
Price action setups
Price action setups are trades that aim to capitalize on the momentum of a currency pair in a particular direction. For instance, you may notice on the chart that a currency pair or commodity is attracting a surge in selling or buying volumes. Even without analysis, you can set a trade that quickly gets into profit using the momentum of the asset before it hits a projected resistance or support target.
For instance, Gold (XAU/USD) had a big move on Monday, 20 March in the early London session that propelled it from 1976.00 to 2010.00. This move of 3400 points is considered a very sizable move for gold pairs.
The 15-minute chart for the XAU/USD pair shows that this move was engineered within three of the seven candles, especially on the two penultimate 15-minute candles. When a scalper sees such volume entering the asset, chances are that a scalp trade that follows this momentum can be made, aiming to capture as little as thirty to fifty points of this move. Using a standard lot translates into $300 to $500 profit.
But it is more complex than this. For each 15-minute candle, there are three 5-minute candles, and a look at the smaller time frames reveals that a lot of action happens within each candle that appears massively bullish on the 15-minute time frame. The scalper must decide where to place entry and exit trades to capitalize on the momentum of the big moves.
The best scalping strategy for beginners
Beginners must start with the simpler setups before going on to the complicated ones. For instance, scalping the news requires some skill and experience and should not be undertaken by beginners. Beginners should start with technical setups as these are easier to identify and trade. The beginner must ensure that no high-impact news is on the horizon as these have the capacity to completely change the outlook of the market and override any technical setups. The economic news calendar allows beginners to check when the news will hit the markets.
How to identify market conditions suitable for scalping
These market conditions can be suitable for scalping:
- During the initial spike and retracement phase of a high-impact news release
- When the market is ranging
- When there is a momentum move
These conditions have already been described above, but a summary of how to identify these market conditions is provided below for clarity.
- For high-impact news, check the economic news calendar for news releases with a red colour code or with 5 stars, 5 bars, or any other means of depicting the strength of the news release. The economic calendar is available on the internet for free. You can also look at the MT5 platform provided by TFF for the funded trader evaluations for this tool.
- A ranging market is a market in consolidation. You can easily identify this when the market trades sideways, without higher highs/lows and devoid of lower highs/lows.
- You can spot a momentum move when a long candle is forming. Usually, such a candle pushes through short-term support and resistance barriers.
Importance of risk management in scalping
Scalping can easily lead to devastating losses if there is no risk management in place. A common way such losses occur is when the trader opens trades without setting a stop loss. Due to the nature of scalping, there is a tendency not to set stops, mainly when the trader is focused on catching a move in seconds or minutes.
Losing trades are a part of forex trading. But what makes a trader eventually end up profitable is controlling the losses. Risk management is the practice that ensures that losses do not end up becoming too damaging. Please refer to the article on risk management to get a full description of this topic.
III. Best Indicators for Scalping
It is more appropriate to speak of the most suitable indicators, as each trader may have a different preference for the indicator for scalping trading. Also, note that the trader’s skill in using an indicator is the most important factor, and not getting fixated on the “best” scalping indicator.
What are the best scalping indicators?
There is no such thing as the best scalping indicators. Indicators are neutral tools. How they perform depends on the trader’s ability to use them for the intended purpose. An indicator may misbehave in one trader’s hands but work wonders in the hands of another. The trader must work to research and test the performance of various indicators to see which is suitable for the scalping operation.
Overview of popular scalping indicators: Moving averages, Bollinger Bands, and MACD
Popular scalping indicators include trend indicators and momentum indicators. The most popular use of trend indicators is when there is a moving average crossover, which can be used to detect a momentum move. The 200-day moving average is a popular dynamic support/resistance indicator. A popular way of using this indicator is to add a short-term moving average and scalp the crossover of this indicator over the 200-day moving average.
Some traders may prefer to trade where the price crosses the 200-day moving average and retraces with a bounce. If the cross is upward and the price retraces downwards to the 200-day moving average, you can trade the bounce as a quick scalp. Please note this does not always work, and you may have to add other filters to form a confluence of factors supporting the trade.
The role of custom indicators in scalping
It is not always that native indicators on the MT4 or MT5 can suit the scalping style of the individual trader. Some traders may prefer a particular way of scalping or prefer more clear-cut signals for scalping. That is where custom indicators can come in.
Custom indicators are pieces of code that are programmed on the MQL4 or MQL5 interface for use on the MetaTrader platforms. They can be programmed to contain elements not found on the native indicators of the MetaTrader platforms. An example is if a trader adds a colour code to the MACD indicator to provide a clearer picture of when a momentum move is occurring in the market. Another example is when elements of a native indicator are altered to produce more tradable signals.
The snapshot above features a custom indicator, which has a crossover signal component in the indicator window. Here, there are two signals. One is for the blue line to cross below the red line when the market is overbought, producing a sell signal. The other is a reverse signal in which the blue line crosses above the red line to produce a scalp buy signal. Notice that the moves were rapid and the profit objectives were very small, fitting into the motives of a scalping trading strategy.
How to use technical indicators in scalping
Scalping requires quick action and no delays in taking the trades once the signals are spotted. It is usually best to set your indicators to produce audible and visual alerts so that the trader knows exactly when to buy or sell or when to exit without delays. Always ensure a stop loss and profit target are set, and it is best to stick to these parameters once they are set.
IV. Scalping Signals and Trading Tools
What are scalping signals? Scalping signals are trade alerts usually derived from custom indicators or semi-automated expert advisors (EAs). They usually provide clear information on when to enter or exit a scalp trade.
How to use scalping signals in trading
Retail traders work within tight budgets. Most retail trading setups do not include multi-screen computers, mostly seen in institutional trading firms. Usually, a trader’s setup would include several charts. It would be nearly impossible to look at all the charts at the same time and execute, monitor and exit trades at the same time. Without the ability to monitor multiple charts effectively from a single trading station, using scalping signals helps mitigate this issue.
Usually, the trader can set an audible trade alert to provide information on when a price target for entry or exit has been reached. Some external charting tools also allow such alerts to be sent to the trader’s smartphone as a notification or show up as a desktop notification.
The trick is to identify what kind of setup that will be used. Next, set the alerts you want to use for your entry and exit on the charts where you have identified potential opportunities. Once the alerts go off, execute your trades quickly and promptly. Always have your smartphones with you so you can use the MT4 and MT5 mobile apps to trade if you are not close to your computer.
Overview of popular scalping trading tools: Price action, order flow, and volume profile
There are tools to help you in your scalping trading. Some are tools to detect order flow, buying or selling volumes, and price action tools. Here is a quick rundown of some of them.
- Order flow: The Depth of Market chart is used to check the order flows in the market. It is a tool that tells you who is buying what, at what price and quantity. It is used to detect when institutional traders are pouring into the market.
- Volume profile: The volume profile indicator is a popular tool used to detect what volumes are coming into the buy or sell side of the market. It is not found on the Metatrader platforms, so you must purchase one as a custom indicator. The difference between a volume profile indicator and the regular volume indicators found on the Metatrader or other platforms is that the volume indicators only indicate when buy or sell volumes are increasing, usually by the amplitude of the volume bars and the colour the bar assumes (green for buy, red for sell). The volume profile indicator is plotted on the chart’s x-axis, indicating what volumes are entering the market at a specific price. That indicates where institutional traders are buying or selling an asset. If you want to know more about volume profile indicators take a look at our funded trader’s interview, who is using one-of-a-kind to make $18,000 bi-weekly.
- Price action tools: Price action involves trading without indicators. This is where trading with chart patterns and candlesticks comes in. Tools like Autochartist have been developed to enable scalpers and traders alike to trade with price action in a more informed manner.
The importance of monitoring news and economic data in scalping
The news is what moves the market. In forex trading, the news follows a monthly schedule of releases, and the economic data covering several countries and their currencies create some of the heavy moves you see in the forex market.
News releases produce some of the most significant movements of currency pairs, stock indices, and commodities. A high-impact news release is followed by a large spike as institutional traders respond to the numbers. After this spike, there is a retracement as they exit their positions to take profit. A more sustained and slower response to the news follows.
Scalping trading strategies using the news aim to catch the initial spike or the retracement move. These moves play out in a matter of seconds or sometimes up to the first five minutes following a news release. If you know how to trade the news, this can be a blessing. However, this can also be a source of ruin to the uninitiated scalpers.
As a scalper, you need to monitor the news, whether or not you intend to scalp off the news. If you prefer to scalp using other methods that do not include news trading, knowing when high-impact news is to be released will help you avoid these risk events. The MT5 has an economic news calendar which can be a source for your news schedule.
Tips for using trading tools in scalping
Here are some tips for using trading tools in scalping.
- Keep it simple. Choose one style and one or two tools and stick to them. Better to master one or two tools thoroughly than to use many and master none.
- Use a tool appropriate for the scalping style you want to use.
- In as much as it may look like fun piling up the trades, it may be a good idea not to pile on too many of them as the multiple trades could prove challenging to manage.
V. The future of scalping
The future of scalping will lie in using indicators and EAs based on artificial intelligence. Scalping trading strategies are best automated as this will eliminate emotional trading, hunch trading or other forms of human behaviour that will ultimately impact the trading outcomes negatively. However, the use of AI-based robots and indicators in trading is not yet widespread and still has a long way to go.
Until then, there can be no immediate substitute for continuous learning and improvement in scalping through demo accounts and participation in funded trader evaluations. If you want to use scalping as a strategy in forex trading, ensure you pick an appropriate method, use the tools associated with that method and stick to it. Practice makes perfect, so keep working on your scalping trading strategies so that you can use them for the TFF funded trader programs.
The use of scalping trading strategies is allowed on the TFF Funded Trader programs. Scalping can help you get quick profits if you know how to apply the strategies discussed above. With a generous offering for successful traders, you will benefit by upgrading your skills and registering for the TFF evaluations so you can qualify for any of the packages available.