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CFDs are complex tools. Leverage can make you lose money quickly. Make sure you understand how this product works and whether you can afford to risk losing money. CFDs are complex tools. Leverage can make you lose money quickly. Make sure you understand how this product works and whether you can afford to risk losing money.
Scalping in forex trading is a style of opening and closing multiple positions in one or more forex pairs in a single day, usually within seconds or minutes. Instead of opening a position at the beginning of a trend and closing it at the end, scalpers open and close multiple positions during the trend.
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Forex scalpers aim to gain a few pips at a time, looking for several small profits rather than a few large ones. A pip is a common unit for measuring movement in forex trading that shows the change in price to four decimal places. For example, if the quoted price of a forex pair falls from 1.3980 to 1.3979, it has decreased by one pip. There are some exceptions, such as the Japanese yen, which is quoted to two decimal places.
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Scalpers often use derivatives such as CFDs to trade forex pairs whose value is rising or falling. If they think the price will rise, they will open a buy (long) position, and if they think the price will fall, they will open a sell (sell) position.
Leverage products like these allow traders to open a position with a deposit called margin. This can increase profits, and losses can be easily increased because your profit or loss is calculated from the total value of the position. Therefore, it is essential to have a proper risk management strategy regardless of which scalping techniques you use.
Before adopting a forex scalping strategy, it is important to understand the liquidity and volatility of the currency and the pros and cons of this trading style.
About $6.6 trillion in forex transactions take place every day, making it the most liquid market in the world. Liquidity refers to the ability to buy and sell quickly without affecting the market price. Hh liquidity makes forex a good market for scalpers who need to get in and out of their positions quickly – sometimes within seconds.
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Currency liquidity is not fixed; This can vary depending on a number of factors, including the time of day, the number of traders active in the market at any given time, and wider economic conditions such as countries’ inflation (GDP) rates. The most liquid forex pairs are the most traded ones such as EUR/USD, GBP/USD and USD/JPY.
In liquid markets such as forex, where the bid-ask spread is in the tens of thousands, transaction costs are affordable despite the large number of scalpers’ open positions. As profits are compounded, smaller spreads allow for larger profits.
In other markets, liquidity means stability, but Forex is volatile. This means that major short-term price movements can occur at any time, causing currencies to rise and fall in value within seconds. This volatility provides greater profit potential – another reason why scalpers often favor forex. But on the contrary, it can lead to increased risk.
Volatility is beneficial in derivatives trading because it allows traders to profit from rising and falling market prices. However, it is important to have a risk management strategy to minimize losses, especially when using leverage to open a position. Since scalping is most successful when markets are volatile, the best time to open a position is at the opening and closing of the session.
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Some forex pairs such as AUD/JPY, GBP/EUR and USD/MXN are more volatile due to decreasing liquidity and economic factors such as trade agreements, exports and natural resources. Even with the Weekend GBP/USD, Weekend EUR/USD and Weekend JPY/USD offers, if volatility is hh on Saturday and Sunday, you don’t have to wait until the markets open on Monday to take your position.
When learning to scalp forex, it is important to keep in mind the following pros and cons of this trading method:
Many traders use Bollinger Bands to indicate areas of market volatility. Bollinger Bands rely on a simple moving average (SMA) that defines a standard deviation above and below to show how volatile the market could be.
Traders assume that large standard deviations indicate increased volatility in the underlying market. Conversely, if the bands are narrow, it means that the underlying market is stable.
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When the standard deviations (bands) widen, traders call this a ‘Bollinger Rebound’ – and this is considered a sign of an upcoming correction. The narrow bands are called “Bollinger troughs” and are considered to indicate an impending breakout of the underlying asset.
A moving average is a mathematical formula that helps to find emerging and general trends in the markets, presented as a single line showing the average. There are two types of moving averages – Simple Moving Average (SMA) and Exponential Moving Average (EMA). Moving averages are popular indicators in most forex scalping strategies because they are easy to read.
SMA adds a set of numbers and divides by the number of values in that set. For example, a scalper can add the price of a currency pair at five-minute intervals every hour and divide the total value by 12.
Forex scalpers will look for the point where the five-period moving average crosses the 20-period position opening in the direction of the trend. This is indicated by the arrows.
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On the other hand, the exponential moving average (EMA) usually reacts to more recent price changes. In the example below, we can see how the data shows more up-to-date activity for each moving average – three, 12 and 100 periods – on the same currency pair.
Any forex scalping strategy should include good risk management and stops are important to avoid big losses.
The Stochastic Oscillator is a technical indicator that compares the current value of a forex pair with its range over the last period. Scalpers can use the stochastic oscillator to predict when the trend will turn bullish or bearish.
On the Stochastic Oscillator, when the solid black line – called the %K line – crosses the dotted red line – called the %D line – a change in market direction is imminent. These highs and lows usually occur at the extremes of the recent price range.
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If %K rises above %D it is a buy growl and if %K falls below %D it is a sell growl. You can see this in the graphic below:
In this case, looking at USD/CHF on the three-minute time frame, the arrows are pointing to a buying spike, so a scalper would consider opening a long position at this point. They close their position when the %K line crosses the %D line at the upper end of the range.
Conversely, scalper mht opens a short position when the %K line crosses above and below the %D line and closes his position when it crosses the %D line at the lower end of the range.
Parabolic SAR is a technical indicator displayed as pips above or below the market price. It is mainly used by scalpers to find potential reversals and the best time to enter and exit the market.
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When the red dots are above the current price, it acts as a sell signal, indicating that a bear market is imminent. If the green dots are below the current price, this is understood as a buy signal, indicating potential market growth. After a series of red dots, for example, scalpers mht take the shape of the first green dot after a series of reds as the start of a bullish reversal – opening a long position in the process. Conversely, if a red dot appears behind the green dot trend, the trader decides to open a short position.
In the following AUD/JPY example, the arrows indicate the points at which a scalper would open a long or short position depending on the trend reversal.
The RSI is a momentum indicator that uses a range between zero and 100 to assess whether the current direction of the underlying market is likely to reverse. It uses support and resistance levels – set at 30 and 70 respectively – to determine when the direction of the market trend will change.
When the RSI rises above 70, it indicates that the market is overbought and the trader can benefit from opening a short position. If the RSI is below 30, it means the market is oversold and the trader should open a long position. In our example of the GBP/JPY pair, you can see how the RSI has moved above 70, indicating an imminent trend reversal.
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