The coronavirus pandemic has caused high market volatility in foreign exchange (forex). Although some traders prefer stable currencies, others see this as a chance to magnify their profits by reading and manipulating the highs and lows of the exchange market.
In such a volatile market, one good trading method to consider is scalping. Scalping in forex involves looking for many trades in real-time, holding them for a short period, then closing for a small profit each time.
The logic behind forex scalping is that it’s easy to increase your pips (i.e., percentage in point or the smallest price move that an exchange rate can make) in multiple trades. Your profits grow with each successful trade you make. This is the safer option compared to banking on a single trade, waiting on it, then having it suffer from the market fluctuations.
Scalpers like to try and get at least five pips from each trade to make a profit, then repeat the process multiple times a day. At the end of the day, you’ll be able to calculate your net profit and loss, then strategise for tomorrow.
Forex scalping still has its risks, like all styles of trading. Although your profits can accumulate quickly, your losses can double just as fast. Even if you’re investing just small amounts per trade, you can still lose a substantial amount if most of your trades are unsuccessful.
Fair Forex shares the basics of setting up for scalping and several techniques to help you reduce the risks of your trading.
Setting Up for Scalping
Before you make a trade, the first step is to build a trading plan. A thoroughly researched, solid trading plan will help you design effective strategies, set realistic profit goals and establish risk levels. It’s critical that you stick to the plan to make wise decisions, but it should also be adjusted according to market conditions.
On top of the trading plan, most scalpers set a daily loss limit and stop trading once they go over the amount. This prevents them from risking more than they should.
Another important factor in forex scalping is the broker. Low-spread brokers are the best for scalping. A low spread means that the difference between the bid and ask price is small, which can give you high liquidity. A small spread is preferred since you’re only gaining a few pips per trade.
Apart from the broker, you also need to be very familiar with the trading platform they offer. Different brokers use different platforms. Ask them what they use, then open a practice account to explore the platform until you’re comfortable.
You need a time frame system as well since you’re executing trades multiple times a day. Scalping doesn’t give you much time to analyse your trades and moves, so you need a chart or system to help you make decisions.
Once you’re all set up, it’s time to decide which strategy to use. The most common styles are trend trading, countertrend trading, and statistical trading. One strategy that has been become popular recently is one-minute scalping.
This strategy is a good starting point for forex beginners, but it does demand time and concentration. If you can’t dedicate a few hours for scalping, then this isn’t for you.
One-minute scalping works for any currency pair, but it’s more effective for major ones because they have the lowest spreads. Set your time frame to one minute and watch for the following indicators:
- Stochastic indicator with periods of 5, 3 and 3
- Exponential Moving Average (EMA) with periods of 100 and 50
When the 50 EMA indicator passes EMA 100, prepare for a long trade (i.e., purchasing to sell). If the price you want is close to the EMA indicator and the Stochastic surpasses 20, make the trade.
For short trades (i.e., selling then repurchasing), the 50 EMA indicator must be below EMA 100 and the Stochastic level is below 80.
Trend trading is another simple strategy for beginners. This strategy follows the direction of the trend, attempting to make profit from the asset’s momentum. Trend refers to the movement of the asset’s selling price, whether downwards or upwards. Make short trades for downtrends and long trades for uptrends.
Countertrend trading is more difficult for scalping since it’s typically used as a medium-term strategy where you hold onto assets for several days or weeks. The plan is to make trades when you expect the trend to reverse or when the pricing movement pauses. If you’re using this strategy for scalping, you won’t have enough time to watch the trend progress.
When executed well, countertrend trading can provide big profits. Some scalpers believe that by buying into downtrends instead of selling, the payoff can be huge when the trend reverses.
Keep in mind: no matter how calculated your decisions are and how much planning you make, forex scalping is a risk. Beginners, especially, would benefit greatly from expert support and advice, helping them avoid disastrous losses.
Fair Low-Spread Forex Brokers
Fair Forex has built a reputation as a dependable low-spread forex broker because we help traders succeed in the exchange market. Our team shares valuable trading skills and financial success indicators that help you make wise decisions, increasing your profitability.
Contact us for more details about the foreign exchange market or inquiries about our services.