Forex Trading Basic

What is Scalping? What is Forex Scalping Strategy?

Forex Scalping Strategy

Forex Scalping Strategy: Forex scalping is a strategy that looks for consistent and steady equity growth from a number of small winning trades of short duration. It is very appealing. Because it requires insignificant amount of funds and provides huge opportunities. There are people who criticize it but most of them are greatly interested in it.

Forex Scalping Strategy: Defining Characteristics 

Here are the defining characteristics of a scalping system:

  1. High Winning Percentage
  2. Win size is small and consistent
  3. Frequent trading of shortduration

High Winning Percentage

The high winning percentage accuracy of 65% or more is the single most important characteristics of a good scalping strategy. This is very tough to achieve. One cannot turn any strategy into a scalper by just reducing the profit target to 1-5 pips, and increasing the stop loss to a 5-10 multiple of the target of profit. Most re-configured strategy turn into disasters because they are not accurate enough to begin in the first place. Usually a good candidate for a scalping strategy is one that can correctly time the initial entry price and direction again and again. Not many systems can achieve this. There are difficult odds of repeatedly getting the initial entry direction and timing right within a constantly vacillating market.

Win Size Is Small And Consistent

Secondly, the most distinguishing characteristic of a scalper is the conjoining of high winning percentage with small win sizes of 1-15 pips. A scalper seeks small pip sizes because that is the best way of ensuring high winning probability. The intent is to accumulate many small wins and taking the profit off the table as soon as it is available. This system flies in the face of the “let your profits run” mindset, which is profitable via having larger winning trades, even if the percentage accuracy is less than 50%.

What about loss size? Usually, the absolute stop loss is higher than the profit target because the trade needs room for the currency’s micro fluctuations.  Since the profit target is too short (1-15 pips), the absolute stop loss should not be less than 20 pips. Otherwise, the system will stop out too often and too soon. There is no system that can maintain a high accuracy on a 1:1 win/loss ratio. Cause the micro-fluctuations would flush out such small stops. Adaptive stops like trailing and breakeven are usually used to limit the downside risk. So, The ability to let go of a bad trade quickly is very important.

Frequent Trading Of Short Duration

Usually, Scalping trades that aim for accuracy of small pip sizes last a short period of time. These trades move in and out of the market within seconds or minutes. The trade setups are taken based on the shorter time frame bars (M1, M5 and M15) because the opportunity and length of the trade resides on these short time frames. As they are in and out of the market quickly on smaller time frames, traders can  enjoy more frequent trading opportunities. Scalpers and scalping strategies generally trade 1-20 times every day, sometimes even more.

Variable Defining Feature: High Leverage

Another feature of scalping strategy is the use of high leverage. Because of the smaller number of pips gained per trade, larger than usual leverages can help in boosting the profits on each trade, thus making the scalping strategy more appealing. It is often noted that the market can easily move against you on a high leverage. However, a scalper justifies his use of leverage by based on his winning accuracy: since the odds of winning are in his favor he will gain more leveraged wins than losses.

High leverage is not a defining feature because a better scalping system does not need high leverage to be successful. A scalping system can use high leverage to gain even higher returns. A good scalping strategy can achieve consistent results with small and frequent pip wins without much leverage. A reason to use less leverage for a scalping system would be the desires to maintain a better result with very little draw down.

Pros of Forex Scalping Strategy

  1. High percentage win rate.
  2. Less exposureto the market limits risk: The trader has less of a chance of running into an adverse event when he is in and out of trades on a small time frame. Forex can be very frustrating because trends can reverse so suddenly. A scalper is able to close the trade and take profit before the trend goes out.
  3. Very effective method of using capital with minimal risk per trade brcause It requires a relatively insignificant amount of funds.
  4. More frequent trading opportunities: The small moves in the market that scalpers exploit happen with more frequency and frequent wins can more quickly build up the account.
  5. Possibility of using higher leverage to increase account: Because of the possibility of win rate, higher leverage can be used to increase winning dollar size, which builds account even faster.

Cons of Forex Scalping Strategy

  1. Gain to loss ratio is very low: Because the profit per trade objective is so much low, one bad trade can easily eliminate the profits of the day or week. Example: if you make 3 pips, 5 times in a row, you are up 15. If you have a stop loss of 20, just one loss wipes out all of your previous five wins.
  2. Hard to find a good (working) risk/reward ratio: The easiest way to increase accuracy is to increase stop loss relative to profit target, but then that means that the risk is much higher than the reward for each given trade. Higher stop loss per trade can be dangerous for scalper if win rate drops off then the system suffers repeated losing trades.
  3. Human Exhaustion/Stress Factor: scalping is intense, accuracy and timing is vital, and the physical and mental speeds of humans accurately deciphering the markets and entering/exiting trades in seconds can be too much. That is why, many scalpers look to automate their strategy.
  4. Requires a high level of experience: the shorter time frames used require a good grasp of trading experience with sound technical analysisskills not suitable for beginning traders.
  5. Spreadcosts: means more for scalping than for others strategies. Spreads can eat much more of the profits.
  6. High leverage: if employed, can greatly increase the risk by magnifying the dollar value of losing trades and losing streaks.

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Please note that: because of the differences in trading conditions, all the forex strategies can not be applied to all broker platforms. So, Choosing Forex broker is a vital task. We would like to recommend you HYCM Broker. This broker has all the positive trading conditions necessary for any forex strategy to work. Read HYCM Broker Review to learn more.

READ MORE

Chapter 7

Forex Trading Strategies

Lesson 1profitable Forex trading strategies
Lesson 2Most popular trading strategies
Lesson 3Forex Scalping Strategy
Lesson 4Forex Trading Hedging Strategy
Lesson 5Forex Trading Trendline Analysis
Lesson 6Forex Trading Breakout Strategy
Lesson 7Pivot Point Reversal Strategy
Lesson 8Pivot Point Break Out Strategy
Lesson 9News Trading Strategies
Lesson 10Marker Sentiment Analysis
Lesson 11Pivot Points Trading Strategy

Go back to Main Page: Forex Trading For Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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