Forex Scalping Guide - Key Takeaways
- The FX scalping strategies typically include trades with a 1 to 15-minute timeframe. Because of this, most professional traders do not use profit/loss orders and prefer to execute trades manually.
- Finding the Broker and currency pairs with tight spread ranges is essential to a successful Forex scalping strategy. Since most traders only aim at 5 to 15 pip gain, the brokerage fees can make a significant difference.
- Even after using several technical indicators, there is no 100% guarantee that a trader will always win the majority of the trades. As a measure of precautions, in many cases it might be better for traders to close losing positions at a smaller number of pip losses, compared to gains made with winning positions.
FAQ: Forex Scalping Methods
How many trades do scalpers execute per day?
Obviously this depends upon the preferences of an individual. Most of the part-time or just hobby traders might settle for just 1 to 8 trades per day.
When it comes to full-time professionals, they might aim for higher volume, which might even include 50 or even in some cases 100 trades per day.
What are some of the most and least volatile currency pairs in Forex?
There are many measures for this, but if we take the average daily volatility during the last 52 weeks as a standard (using investing.com calculator), there are some important patterns.
Currency pairs in which the central banks intervene frequently are usually less volatile. Two examples of this would be EUR/CHF and USD/CNY. Considering that Switzerland is surrounded by Eurozone countries any sharp appreciation of Franc against the Euro in the short term can be damaging for the Swiss economy. Therefore SNP intertwined in this pair’s exchange rates frequently, even going as far as imposing a 1.20 floor on EUR/CHF rate for several years, until it collapsed in 2015.
The curious thing about the EUR/CHF from 2011 to 2015 was that it lost significance for long term traders. The Euro could not get much higher than 1.22 and SNB defended the 1.20 floor. So essentially for those 4 years, this pair was only interesting from traders who used scalping methods.
China is famous for its cheap exports, consequently, the massive appreciation of Yuan can hurt the competitiveness of this country. Therefore, the value of USD/CNY is closely managed by the People’s Bank of China.
On the other end of the spectrum are Gold and Silver. According to the last 52 weeks of market data, they are at least 1.5 more volatile than most of the major currencies.
As for the currency pairs themselves, some of the most volatile ones are AUD/JPY, GBP/AUD, USD/ZAR, USD/TRY, NZD/JPY, GBP/NZD, EUR/AUD, and USD/RUB.
Who is designated as Pattern Day Trader (PDT) and what type of regulations apply to those individuals?
According to the Financial Industry Regulatory Authority (FINRA) definition, a Pattern Day Trader (PDT) is a trader who executes 4 or more trades within five business days, while using a margin account.
According to the FINRA regulations, the individuals with such designations must maintain at least $25,000 on their accounts and must trade only on margin accounts. It might be helpful to note here, that this is an equity requirement, so it does not have to be all cash.
Luckily, most Retail market maker Forex brokers are exempted from those regulations, so that the majority of traders can execute trades frequently without having to maintain a $25,000 on the account.
What are some of the most common mistakes scalpers make?
One of the most obvious and most frequent mistakes scalpers make is not cutting their losses on time when the market goes in the opposite direction. This is especially dangerous considering that in this case, one big loss can easily wipe out several trades worth of gains.
Overleveraging is another very common mistake. Since most traders with scalping strategy are aiming for 5 to 20 pip gains, they increase leverage to make their payouts more significant.
The problem with this type of approach is that it magnifies the risk. For example, in the case of 1:400 leverage all it takes is the market going in the opposite direction by 0.25% for the entire position to be wiped out. Even in case of a relatively more conservative 1:50 margin position, that number of only 2%.
Finally, late exits are another frequent problem. Traders might achieve his or her 10 or 20 pip wins, but instead of closing trades, he or she keeps the position open in the expectation that they could make even larger payouts. However, in scalping, this is a very risky tactic, with some trades eventually giving up all of their gains.
Why do some traders choose to avoid scalping in trading?
There can be several reasons why some traders might prefer to avoid scalping:
- As mentioned before, a successful scalping requires finding securities with low spreads. This limits the field of choices significantly. For example, a trader might identify a very useful indicator GBP/NZD, however, with scalping strategy this might have to be discarded because the average spread on this pair is 4.4 pips. Essentially the problem here is that the client is limited to only a small number of currency pairs, which can lead to many missed opportunities.
- Scalpers usually stay away from the major news releases, since it can cause a 20 or 50 pip swing in a matter of seconds. However, many traders want to get involved in those high volatile trades.
- Scalping can also be very stressful for some people. Some long term traders devote some specific time to analysis, open positions with Stop-Loss orders, and then go about doing their other daily business without the need to constantly be in front of the trading platform. Scalping, on the other hand, requires constant vigilance, which can be very exhausting and stressful for some traders.
- Finally, some traders prefer to aim for big payouts when it comes to trading, instead of 10 or 20 pip gains. The upside to this strategy is that one large winning trade can offset losses from several smaller ones. Since this is not possible with scalping, some traders might prefer to avoid this method.