Forex scalping is the process of buying and selling currencies over a short period of time to make many small profits, often over the course of a day.
This guide will give you an introduction to the quick-fire world of forex scalping.
WHAT IS FOREX SCALPING?
Forex scalping is a trading strategy that makes the most of the small, day-to-day fluctuations in the foreign exchange markets. By making small trades and exiting them within the space of a couple of minutes, a day of scalping can add up to a small profit.
Scalping can be most profitable in periods of high volatility and substantial market moves. For example, when the government releases significant data like budgets or employment reports.
HOW DO YOU SCALP?
You scalp by selecting a pair of currencies with similar buying and selling prices. Forex scalpers react quickly to fluctuations in the exchange rate, and take their profits just as fast. In short, you buy today and you sell today.
The best currency pairings to scalp are usually USD to EUR, USD to JPY and USD to GBP. This is because they generally have the highest trade volumes. By paying attention to trends and signals in a particular pair of currencies, you can start to judge when it’s best to ‘take’ (the profit) or ‘exit’ (the trade).
CREATE A FOREX SCALPING TRADING PLAN
Before you start scalping, you should create a trading plan. This starts with selecting a pair of currencies that you want to trade. You then need to identify the signals you’ll use to indicate when it’s the best time to take or exit that particular currency pair.
A common type of indicator you can use is ‘moving averages’. A moving average is an average price of a currency over a period of time. There are several types of moving average indicator, but the most popular and the best one to begin with is the ‘Simple Moving Average’ (SMA).
When you spot that the average price of one currency has started to increase or decrease before the other currency’s has, it’s a good time to either take or exit depending on the direction of the movement.
As moving average indicators are prone to lags, it’s best to combine this information with another indicator. An example is the ‘parabolic SAR’, sometimes known as the ‘stop and reversal’ indicator.
The parabolic SAR tracks the price of a currency more closely. The indicator on a graph appears as a series of dots. As the prices start to rise, the dot will appear below the line indicating a good time to take, and vice versa.
These are just two of the indicators you can use to help you get to grips with your currency pair.
FOREX SCALPING TIPS
Here are a few more tips and things to look out for when you’re forex scalping.
Trade at the busiest times of the day: The most liquid times of day are the best times to trade, and these are from 2:00 a.m. to 4:00 a.m. and from 8:00 a.m. to 12:00 noon, Eastern Time.
News reports can throw you off: Traders become more nervous around major news stories, and the currency market can become more volatile. Make sure you’re aware of key dates in the financial calendar so you can be prepared for market volatility.
Focus on one pair at first: When you’re learning how to scalp, it’s important to focus on one pair at a time.
Forex scalping can be profitable if you’re quick enough to react. If you attempt the technique, make sure you identify errors and get out of losing trades as quickly as possible.
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