A beginners’ guide to a forex scalping strategy
Find out what scalping in forex is and learn about 5 of the best indicators for this trading style.
- What is scalping in forex trading
- Things to consider before you adopt a scalping strategy on the forex market
- How to scalp in forex as a beginner
- Top 5 indicators for a forex scalping strategy
- Scalping in forex summed up
What is scalping in forex trading?
Scalping in forex trading is a style that involves opening and closing multiple positions on one or more forex pairs over the course of a day, usually in seconds or minutes. Instead of opening one position at the start of a trend and closing it at the end, scalpers will open and close several positions over a trend’s course.
Forex scalpers aim to gain just a few pips at a time, looking for multiple small gains rather than fewer larger ones. A pip is a common unit of measurement of movement in forex trading, denoting a change in price at the fourth decimal place. For example, if the quoted price of a forex pair decreases from 1.3980 to 1.3979, it has fallen by one pip. There are some exceptions, such as the Japanese yen, that are quoted to two decimal places.
Scalpers often use derivatives like CFDs to trade forex pairs that are rising or falling in value. They’ll open a position to ‘buy’ (go long) if they think the price will rise and open a position to ‘sell’ (go short) if they think the price will fall.
Leveraged products like these also enable traders to open a position with a deposit, called a margin. This can amplify profits but can just as easily magnify losses, because your profit or loss are calculated from the full value of the position. That’s why it’s vital to have an appropriate risk management strategy in place no matter which scalping techniques you’re using.
Things to consider before you start scalping forex
Before adopting a forex scalping strategy, it’s important to understand currency liquidity and volatility, and the pros and cons of this trading style.
Liquidity in forex scalping
Around $6.6 trillion worth of forex transactions take place every day, which makes it the most liquid market in the world. Liquidity refers to the ability to buy and sell quickly without affecting a market’s price. High liquidity makes forex a good market for scalpers, who need to enter and exit their positions quickly – sometimes within seconds.
The liquidity of a currency isn’t fixed; it’ll change based on a number of factors, including the time of day, the number of traders that are active in the market at any given moment and wider economic conditions like the countries’ inflation rates (GDP). The most liquid forex pairs tend to be those most traded, such as EUR/USD, GBP/USD and USD/JPY (大口）.
In highly liquid markets like forex, the bid-offer spread tightens, making the transaction costs affordable despite the large volume of positions scalpers open. Because gains are incremental, smaller spreads allow for greater profits.
In other markets, liquidity often means stability, but forex is highly volatile. This means major short-term price movements can happen at any time, which can cause the value of currencies to spike up and down in seconds. This volatility presents opportunities for greater profits – another reason why scalpers often favour forex. But conversely, this can also lead to an increased exposure to risk.
Volatility in forex scalping
Volatility is favourable when trading derivatives, as it allows traders to profit from rising and falling market prices. But it’s important to have a risk management strategy to minimise losses, especially when using leverage to open a position. Because scalping is most successful when markets are volatile, the best time to open a position is during the session’s open and close.
Some forex pairs, such as AUD/JPY, GBP/EUR and USD/MXN, are more volatile due to their decreased liquidity, as well as economic factors like trade agreements, exports and natural resources. Plus, with our aptly named Weekend GBP/USD, Weekend EUR/USD and Weekend JPY/USD offerings, you don’t have to wait for markets to open on Monday to take your position if volatility is high on Saturday and Sunday.
When you’re learning how to scalp forex, it’s important to bear in mind the following pros and cons of this trading style:
| Forex scalping pros | Forex scalping cons |
| Magnify gains with leverage | Magnify losses with leverage |
| Open and close positions quickly | Potentially wipe out small wins with one large loss |
| Trade on hundreds of forex pairs | Risk your money on a highly volatile market |
| Reduce losses by holding positions for a short time | Gain profits slowly due to small incremental wins |
Understanding Forex Trading: A Guide to Investopedia
Forex trading, also known as foreign exchange trading, is the buying and selling of currencies to profit from their fluctuating values. It is the largest and most liquid market in the world, with an average daily trading volume of over $5 trillion. Forex trading offers immense potential for investors to earn substantial profits, but it also carries a significant level of risk. To navigate this market successfully, it is essential to have a solid understanding of its fundamental concepts and tools. Investopedia is one of the most reputable online sources that provides comprehensive educational resources for forex traders. In this guide, we will explore how Investopedia can help beginners understand and excel in forex trading.
Investopedia is a renowned financial education website that offers a wide range of resources, including articles, tutorials, videos, and quizzes, to help individuals learn about various aspects of forex trading. The website covers everything from basic concepts to advanced trading strategies. Let’s delve deeper into some of the key areas that Investopedia covers.
1. Forex Basics:
Investopedia starts with the fundamentals, explaining what forex trading is, how it works, and why it is a viable investment option. It introduces key terms and concepts like currency pairs, bid/ask prices, and pips. The website also provides a comprehensive overview of the major currency pairs and their characteristics, helping beginners understand the dynamics of different currency relationships.
2. Technical Analysis:
Investopedia emphasizes the importance of technical analysis in forex trading. It introduces various technical indicators, chart patterns, and candlestick formations that traders use to identify potential trading opportunities. The articles and tutorials on Investopedia explain these concepts in a clear and concise manner, making it easier for beginners to grasp the essentials of technical analysis.
3. Fundamental Analysis:
In addition to technical analysis, Investopedia emphasizes the significance of fundamental analysis in forex trading. It helps traders understand how economic indicators, monetary policies, and geopolitical events impact currency values. The website covers topics like interest rates, inflation, GDP, and central bank policies, providing traders with valuable insights into the fundamental factors that drive currency movements.
4. Risk Management:
Investopedia emphasizes the importance of risk management in forex trading. It offers guidance on setting stop-loss orders, managing leverage, and calculating position sizes. The website also provides articles on risk-reward ratios and money management techniques, ensuring that traders understand how to protect their capital and minimize losses.
5. Trading Strategies:
Investopedia offers a wide range of articles and tutorials on various forex trading strategies. It covers popular approaches like trend following, range trading, and breakout trading. The website also explores advanced strategies like carry trading and scalping. The articles provide step-by-step guidance, explaining how to implement these strategies effectively.
6. Trading Psychology:
Investopedia recognizes the psychological aspects of trading and offers valuable insights into managing emotions and developing a disciplined mindset. It covers topics such as fear, greed, and discipline, guiding traders on how to overcome common psychological pitfalls that can hinder their trading success.
Investopedia’s educational resources are not limited to articles and tutorials. The website also offers a forex simulator, where beginners can practice trading in a risk-free environment. The simulator allows traders to execute trades, test strategies, and analyze performance without risking real money. This feature is particularly beneficial for novice traders who want to gain hands-on experience before entering the live forex market.
In conclusion, Investopedia is an invaluable resource for anyone looking to understand and excel in forex trading. Its comprehensive educational materials cover all aspects of forex trading, from the basics to advanced strategies. By leveraging Investopedia’s resources, beginners can develop a solid foundation in forex trading and increase their chances of success in this dynamic and lucrative market.
https://www.ig.com/en/trading-strategies/a-beginners–guide-to-a-forex-scalping-strategy-210304https://www.forex.academy/understanding-forex-trading-a-guide-to-investopedia/
