Forex scalping is a trading technique that involves opening an FX position and closing it within a short space of time with the intention of speculating that price will move slightly in favour of your position before closing it, for a small profit.
Typically, forex scalpers make a very large number of trades and it is not uncommon for a scalping trader to make well in excess of 100 trades in a week.
Most traders who attempt to scalp the forex market fail rather miserably. This is because for the inexperienced scalper the odds are set well against them. I will demonstrate why this is below:
Let’s say a scalper wants to earn 10 pips by speculating that the price of GBP/USD (Cable) will move from 1.9990 to 2.00. Typically, with most retail the brokers the spread for this pair is 3 or 4 pips. In this example we will use 4 pips. We will also use a 10 pip stop loss.
If the scalper is correct and price hits 2 before the stop loss, he will earn the 10 pips minus the spread of 4 pips, a net gain of 6 pips.
However, if the stop gets hit, the scalper loses 10 pips plus spread, which nets -14 pips.
So in this instance, the winning trade made 6 pips net profit and the losing trade made a 14 pip loss. OUCH!
With this example the trader would need to win 70% of his traders to just break even!
The spread you trade with can massively affect the outcome with FX Scalping. In this above example, if the spread was 2 pips instead of 4 pips, the trader would only need to win around 60% of their trades to break even. A big difference.
Forex Broker for Scalping
There are many FX brokers out there nowadays, but many of them are unsuitable for scalping. Some brokers do not like their clients to scalp the forex market, whilst others have too wide a spread for it to be profitable. One broker that does not seem to have any objections to scalping is Oanda and their spreads about the lowest around. Some ECN Brokers may be suited for currency scalping, for example mbtrading.com. ECN brokers often have lower spreads, sometimes much lower, but there is often a commission fee to pay for each trade.
Scalping Forex Strategy
There are many forex scalping techniques used when scalping the forex market. Some rely on indicators whilst others rely on support and resistance. One simple scalping strategy I have tried personally is marking major support and resistance points on my chart and putting a limit order at them and try to catch a few pips on the bounce. It’s important not to be greedy with this strategy and just get a quick scalp.