"Sounds scary!" — someone may say about the word "scalping." But nothing to worry about. It is a trading strategy, and we'll tell you about it in this article!
What is Scalping
Scalping is a type of intraday speculative trading strategy based on making numerous short-term trades for a small profit. In total gives (or may give) the desired percentage of profitability.
Is Forex Good for Scalping?
The short answer is yes, in its own way. Forex scalping strategies can become a short practical course in stock trading in complicated circumstances. If you want to try dealing with hard deals, you should practice scalping first.
The Advantages and Disadvantages of Forex Scalping
As with any strategy, scalping has its pros and cons. Let's take a look!
Advantages:
- High-frequency signals and fast results. Scalpers open several dozen trades daily, while intraday traders can wait several hours for one signal.
- The efficiency of trading according to fundamental analysis. Volatility increases when the news and the market statistics are released. And while other traders place pending orders and try to determine the direction of the trend, scalpers earn on price fluctuations.
- The possibility of trading in a flat. What an intraday trader on the hourly time frame would call a flat, a scalper on the M5-M15 interval would call two-way volatility. Scalpers squeeze profit out of any move.
- Small deposit for a start. The high speed of transactions allows you to quickly disperse the deposit. Short stops allow to open more trades and take less risk.
Disadvantages:
- Small earnings per transaction. The trader must open several dozen transactions daily to reach the desired profitability.
- Price noise influence. Chaotic, unpredictable price movements are often observed in short time frames and complicate technical indicators' use.
- Market makers' influence. Big capital prefers quick short-term earnings with large volumes of applications. They turn the price in the short-term direction in the direction they want. It is considered that technical analysis is less effective and gives more false signals in short time frames.
- Redraw of indicators. At long intervals, in the event of a redraw, the trader has time to find confirmation of the signal. In scalping strategies in Forex, there is no time for deep analysis. Therefore the number of unprofitable transactions increases.
- Psychological load. A trader must constantly look for signals, monitor open transactions, and quickly react to market changes. If an intraday trader can afford to move away from the computer, the scalper does not have such an opportunity.
- Slippage. The deal opens/closes at a worse price than the trader expected. There are many reasons: high volatility, server delays in signal transmission, etc. In scalping strategies, where every fraction of a second is essential, this moment is fundamental.
How to Choose Best Forex Pairs for Scalping
Using scalping for trading involves many different technical issues. One of them is the choice of a currency trading pair.
It is essential to find a currency pair that shows good movements. That is, there should be high volatility in a short period as the scalper's earnings depend on the size of the volatility.
What Makes a Good Currency Pair?
There are three main features:
- Minimum spread. It is the most critical requirement for a currency pair for scalping. Trading the currency pair with the smallest spread will lead to a much faster profit.
- Spread type. Floating spread is more optimal as it allows to close deals quickly and in a less volatile market.
- Volatile currency pairs. As it was said before, scalping is better in a volatile market. The higher the currency pair volatility, the higher the trader's chances of getting the maximum profit.
Choose the Best Forex Pairs to Trade Due to Your Trading Style
Scalping strategy has some styles. Choose what is right for you:
- Pipsing. In terms of profit, it is called the most profitable and risky strategy. Trading takes place on the M1 interval, and transactions are carried out on the market for several minutes.
- Medium-term scalping. It involves a relatively more minor number of open trades, the duration of which is 5-15 minutes. The range is M5.
- Conservative scalping. Transactions can last up to 30 minutes, M15 timeframe.
Best Forex Pairs for Scalping
- Major pairs: EUR/USD; GBP/USD; USD/JPY.
- Minor pairs: EUR/AUD; GBP/JPY; EUR/JPY.
- Exotic pairs: USD/SEK; USD/ZAR; USD/TRY; USD/MXN; ZAR/JPY.
Remember that this list of the best Forex pairs to trade for scalping strategy can change, so follow the economic and political news to stay in touch.
Which Pair is Easiest to Trade
The most common trade pairs are EUR/USD, GBP/USD, and USD/JPY. They always have up-to-date statistics updated online, and enormous volumes of transactions are made on them. Still, these pairs could be challenging for starters, as it requires experience with quick decisions, processing a large flow of information, and assessing the significance of a particular factor.
So, the best Forex pairs to trade for beginners (at least for scalping) are currency pairs that do not contain USD. It may be AUD/JPY, NZD/JPY, or EUR/AUD. They are considered to be more volatile compared to classic pairs and often show a pronounced trend.
Using Major Forex Pairs for Scalping
Major currency pairs are the most popular among traders because of the high liquidity of these currencies and low spreads.
The so-called market noise for the EUR/USD and GBP/USD currency pairs averages 10-20 points, which allows you to earn good profit even with weak movements.
Trading on these currency pairs will be especially effective for scalpers who use volume analysis in trading since it is on these highly liquid pairs that the actions of prominent market players are visible.
Still, as we wrote in the previous section, majors are not the best forex pairs to trade for beginners in scalping.
Which Forex Pairs Don't Work for Scalping
You should avoid currency pairs for scalping if they meet the following criteria:
- Wider spread;
- Fixed spread;
- Low dynamics.
Carry Pairs have very high Forex liquidity and are too volatile. For example, USD/JPY and EUR/JPY. They are traded worldwide, and their high volatility is since financial institutions invest in Japanese yen and issue loans, which is associated with increased risks.
When there are any turmoils in the market, the currency pairs mentioned above react sharply to any event. And therefore, it is pretty challenging to predict their movement, and it is complicated to do it at short time intervals, which scalpers use in their strategies.
How Many Pairs Should a Scalper Have
Scalpers can make from ten to over a hundred trades per day. The number of currency pairs is not so important. But if you trade manually, keeping track of several currency pairs will be complicated.
Best Time for Scalping
One of the key factors contributing to the implementation of scalping transactions is the volatility of the traded asset. So the best time for trading on scalping is the opening of the trading session and the period of publication of US macro-statistical indicators.
What Does the Average Profit Scalper Make?
Scalping may seem a highly profitable type of trade. Using such a strategy may well double the deposit during the trading session. Traders usually expect a return of 5 to 10 pips per trade.
Still, the profitability for a single time interval does not guarantee a permanent result. Also, the complexity of trading and high requirements for the trader's professionalism significantly reduce the likelihood of organizing work according to all the rules of such trading systems.
Why Scalping May Fail
Even choosing the best scalping strategy on Forex, you can make mistakes and go into the red. Here's what to avoid:
- incorrectly determining daily drawdown;
- focusing on leverage in risk management;
- "merge" the deposit due to the wrong trading time;
- incorrectly calculating the position volume from the spot;
- not keeping trade statistics.
Conclusions
Scalping is a potentially profitable strategy. On the one hand, it does not require big investments. On the other hand, it is necessary to carefully approach the organization of the trading process. Worth a try. Perhaps scalping will become your gold mine.
by , 2023.04.24