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Scalping in Forex: Small Steps to Big Money

By Alexander
In Forex Basics
Dec 27th, 2011

Forex scalping is a trading method where the trader opens and closes a trade manually within minutes of each other in order to profit from the small price appreciations that occur when the market moves in his favor. In scalping, timing is everything, for a number of reasons.

A scalping trader has to be able to pick the right moment to get into the market and the right moment to exit. In whatever direction a currency pair is moving, there will be advances, pullbacks and further advance. There will be major movements and minor movements. A currency pair may move 100 pips over several hours, a pullback 70 pips for a few more hours, and then make a further advance of maybe 200 pips over three days. These are major moves but are for medium term traders, not scalping traders.

A currency pair may move 15 pips in a particular direction for one minute, then pull back seven pips over a period of seven minutes, oscillate at this level for another three minutes, and make another strong 20 pip move over the next ten minutes. This is a minor move in Forex, occurring over a matter of minutes, and this is what the scalper is after. The scalper needs to be able to make the right decision and enter the market in the direction of the strong minor moves, then exit just as the pullback starts.

The time frame that the scalper chooses will influence his profitability. Since the scalper is basically in and out of the market in a matter of minutes, the shorter time frames such as the 1-minute, 5-minute and 15-minute time frames should be used for scalp trading. The same rules of technical analysis used on bigger time frames should be applied here, and should be used to take trading decisions.

Now what are the pros and cons of scalping in Forex?

In previous article about pros and cons of each Forex time frame, I have written that each time frame could become the best for you.

Pros of Forex scalping. The main benefit of Forex scalping is that  the trader can make more money in a short while if most of trades are successful. A scalper who uses 1 Standard Lot in trading and who aims to make 20 trades a day with profits of 3 pips each time will gross in $600 USD a day in trading, or $12,000 USD a month. That is quite good for a trader, only if he is successful with his scalping strategies. I know a trader from my country that grew $300 USD to $32,000 USD this way. Again, some traders are only comfortable with “a bird in hand.” Closing out profits made in minutes, by using large trade volumes and small pip profit targets makes scalpers more comfortable. There are some traders who cannot stand the nervous wait. Furthermore, if you want to be a successful in scalping, you should know when to trade Forex and when not to trade for better trading results.

How about the cons of Forex scalping? Well, for one, scalping cannot be used by beginners; it is a very risky trading technique. Mistimed entries can lead to positions incurring huge losses; not surprising since scalping as a rule, demands a disregard of risk management for it to maximize profits. Secondly, scalping is subject to plenty of market noise due to the extremely short time frames used. When there is market noise, it becomes harder to make informed trading decisions. Thirdly, many market maker brokers do not allow scalping. Remember the $300-to-$32,000 USD guy I mentioned earlier? Well, his broker seized all that money and closed his account; what a nasty end to a scalping career. Furthermore, do not forget to check your broker before opening the real account. Don’t know how to check your broker? Please read my article regarding Forex broker scam.

Scalping is very sensitive to market noise. You should avoid trading during news releases and unstable market conditions.

I introduced FX Pulse in previous articles; this is a great free tool that will display upcoming news and trend directions on multiple time frames directly on the chart.  Do not miss Forex scalping signals – trade with FX Pulse. Download a full free copy of FX Pulse here and follow the news and trend direction.

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11 Responses to “Scalping in Forex: Small Steps to Big Money”

  1. You will probably hate the idea but I think a financial transactions tax is needed not to raise money so much as to quench this very volatility. I have written as such on TheMoneyPrinciple blog.

    My argument is however really directed at those markets in goods, particularly foodstuffs, where market volatility does a lot of damage. A sudden natural disaster where rice is grown can double the price over such a short period of time that there is no possibility of the market responding. So while we may grumble, local people starve. And when the price falls, local farmers starve as well. The time constants are just not the same.

    Much the same is true on stocks and shares – rumour or news drives a price down or up and the company just cannot respond in the same speed.

    As money can be created, destroyed and traded at the drop of a hat, there is probably little point in introducing an FTT for its original Tobinesqe reasons to quench exchange rate volatility because this is actually where the market works best. All you are really doing is smoothing out the bumps!

    My more recent idea has been to base an FTT on the volume traded with a (possibly exponential) decrease with the time the stock is held. Suppose the time constant to be an hour, this would not affect ordinary business at all where exchanges are made to settle bills maybe over days or longer but would affect traders who are just getting in and out of the market with high frequency trades.

    I understand these scalping principles. The procedure is based on the natural market frequencies which are analagous to sound. These frequencies are a function of the speed of response of traders and it is this volatility that gives traders the ability to get in and out of the market. The frequency will have changed a lot over the past 50 years, particularly when electronic trading was introduced. And automated online trading can lead to massive positive feedback which is fundamentally unstable.

    So there are markets where this very volatility is quite damaging and destabilising to the macro picture. I would still support an FTT for these markets.

    The level envisaged by the European Union and opposed in the UK – mainly because the US opposes it – is 0.1% or 10 pips. I would add a time delay constant to this so that if the trade is over more than a couple of days (purchase to sell), there would effectively be no tax at all. However if implemented in FX would probably destroy your business.

    Perhaps we can find a way round this conundrum. No market is perfect. My interest is in improving the way in which the market works so it is for the benefit of society. We certainly know that having no market is a disaster! I guess your interest is to make a profit but somewhere there should be a meeting of minds because profit with no society is pretty meaningless – where would you spend all your money?

    I would be interested in your views on this issue.

    Happy Christmas and New Year.


    • Alexander says:

      Thanks John,

      I’m glad that you also like automated Forex trading because it’s my passion for last 5 years. I see a big potential in an automated way of trading that can improve the situation on markets and make it more regulated.
      Because of low regulation of Forex market, the most of the market problems are caused. This is the top problem of Forex market, and it would be great if I can help to solve it.

      Happy Holidays,

  2. Thanks for this informative post 🙂

  3. Trading in the forex market can be simpler, earlier and profitable for the traders; however, some steps should always be followed to get sure benefits in the forex market with secure trading.

  4. Sebastian says:

    Thanks for the post. I have been doing automated stock trading for years. I am now looking to do automated forex trading.

  5. calum says:

    I would argue that by far the best opportunities for scalpers are during “liquidity events” such as news releases. The order flow thins out and you can see where the big players are positioning. Not to mention the unscheduled News that is constantly coming in over the wires. Unless you have a bloomberg/ reuters and a broker who provides Market Depth software for £600+ a month – forget trying this from home. Don’t try and beat the pros at their own game – trade longer term off of the Daily chart and profit from the enhanced directional bias on the longer time-frame as Alexander rightly points out. And forget systems – complete waste of time unless you have programmed them yourself.

    • Alexander says:

      I have programmed few Forex robots and they are quite profitable even now.
      In any case, thanks a lot for your comment and point of view.

  6. zubair says:

    hi alexander my name is zubair ahmed i need automated forex trading how it work and how to apply on trading platform please brief me thanks…

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