Scalping for Beginners
One of the challenges new Forex traders face is deciding which of the various trading styles — scalping, day trading, swing trading, or position trading — to follow. While each of these styles can be profitable when followed properly, as a beginner trader, you need to be sure that scalping is the right trading style for you.
In this article, we will discuss the basic things a beginner should know about Forex scalping, including what scalping is, the personality for it, the charting time-frames, and the various scalping strategies for a beginner.
Table of Contents
Forex scalping is a style of trading style that tries to profit from minor price movements mostly on the lower time-framed charts. It is a fast-paced style of trading and the quickest way to earn some profits from a trade, no matter how small. With this style, a trader opens and closes his trade once it has earned a little profit or loss (5 to 10 pips) and move on in search of other trade setups, with the hope that the little profits will accumulate over time.
A trader who uses this style of trading is called a scalper. Depending on the time-frame a scalper uses, a trade may last from a few seconds to some minutes. Most times, scalpers don’t hold their positions beyond a few minutes — whether profitable or not — as they are always analyzing the market for any sign of weakness.
One thing which traders try to avoid in Forex scalping is taking a large loss from a trade. Some scalpers use profit targets and stop losses to ensure fast exit from the market. Others employ strict manual exit strategies. The manual exit strategies help traders execute entries and closes more swiftly, but it can add risk. If you are leaving open stop losses, and a trade goes quickly the wrong direction, you could take a much bigger loss than intended.
Scalping is a very tedious and mind-wrenching task — watching the market all the time, analyzing every bit of price data whilst entering and exiting trades swiftly. That is why many legendary scalpers are looking into algorithmic trading. They try to automate their Forex scalping system by creating trading robots. Over half of the trading on the stock market is now reported as automated, and only 10% are from retail clients!
Forex scalping is not for everyone — not all traders can bare the risks involved or have the temperament to effectively implement the strict rules needed in scalping. So, if you must scalp the market, be sure that you have the personality for it.
A scalper must have the ability to concentrate on the market for a long time, so should be someone who enjoys sitting in front of the screen analyzing the minute-by-minute market data. The slightest bit of distraction can cause a huge loss.
The ability to monitor markets for prolonged periods of time is not the only scalping requirement. To effectively scalp the Forex market, the trader must be able to react quickly to changing conditions in the market. He must be able to pull the trigger without hesitation when he needs to do so.
In other words, a delay is very dangerous when scalping. For instance, if you fail to quickly take your profit, the market may turn against you and wipe out the profit in a split second. You may even end up taking a loss. Similarly, hesitating to close a losing trade may lead to a larger loss which could eliminate the many small gains you have had. We have noted the necessary traits of a good trader. Please click here to read more on the psychology of trading.
When scalping, you are trying to capture the slightest price swings in the currency pair. So, it makes sense to analyze the market on the lowest possible time-frame.
Many Forex scalpers trade on the 1-minute chart or the tick chart, but some may trade on the traditional 5-minute chart. However, it may be best to employ the multi-time-frame approach — using multiple time-frames and the tick chart.
With this approach, you may analyze the market on the 15-minute and 5-minute charts and step down to the 1-minute chart or the tick chart for a better entry level. After entering a trade, you monitor it on the 1-minute or tick chart.
There are many ways to scalp the market. For most traders, scalping involves using technical analysis signals derived from price actions and indicators. However, some scalpers like to trade the high-velocity moves that happen when important economic data is released.
These are the common Forex scalping strategies for beginners:
This strategy is based on the fact that price moves in waves and tends to revert to its mean value after moving significantly away from it. Scalpers who use the mean-reversion strategy don’t care about the direction of the trend. One popular indicator for this strategy is the Bollinger band — either used alone or in combination with an oscillator like the stochastic.
You can trade this strategy using a moving average indicator or a simple trendline to indicate the trend. Then, use a momentum indicator, such as stochastic, RSI, OsMA, Williams R%, CCI, or MACD, to estimate when a pullback is over.
Another simple scalping strategy is to trade price bounces at a strong support or resistance level. What you need is to identify the resistance or support level and wait for the price to get there. If the price gets there and reverses, you may place a trade in the direction of the reversal.
Before using this strategy, make sure that the market volatility is low to reduce the risk of sharp breakouts. Also, you need to learn reversal candlestick patterns and look out for them when a bounce happens.
Some scalpers love the high volatility that comes with the release of economic data. Examples of this include the non-farm payroll (NFP) and the CPI, or a speech from a central bank governor. Certain political news can cause huge price movement too.
It is important to know that scalping a highly volatile market is a double-edged sword; can make huge profits if you’re right, but you can lose more than planned if you’re wrong.
Conclusion
Forex scalping is a fast-paced trading style in which a trader aims to take numerous small profits. It may be a fast way to make money in the Forex market for a beginner, but it can also be the fastest way to ruin a trading account. Be sure you are up to the task before choosing this style.
This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.