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Scalping in Forex Trading

What Scalping Means in Forex Trading And How To Use It

If you've never heard the word scalping used in Forex terms before, it probably sounds quite strange to you. But if you put the term into context, it begins to make a lot of sense. This is, for the more advanced trader, exactly how to scalp forex.

What is scalping?

Forex is the most liquid and volatile market out there. Many traders bear through minor fluctuations to gain high pips on their trade, but others “scalp”. Scalping is done to squeeze every small opportunity out of the tiniest fluctuations in quotes. You scalp the gains from minor changes in a very small timeframe.

Thus, scalping creates many opportunities throughout just one day. You'll almost certainly get an entry signal, which makes it quite popular.

Traders who scalp Forex do not expect gains of more than 10 pips, and losses of more than 7 per trade. Scalping is done, however, with high volumes, and most traders who scalp are not following the common 2% risk management rule.

Scalping In practice

Traders generally tend to scalp currency pairs using a 1-15 minute timeframe. The 1 and 5-minute timeframes are the most common. Small gains are expected on these trades. 1 minute may give you a gain of 5 pips. 5 minutes may give you a gain of 10 pips.

Since you're working with a lot of fluctuations, you have to choose currency pairs that are extremely volatile. If you go for pairs with low volatility, you'll end up waiting minutes or hours for the price to change - defeating the purpose of scalping.

Another important rule when selecting pairs to trade is finding those that trade cheap, which will provide you with the lowest possible spread. The spread always lies between 10% and 30% of your income, and you want this to be as low as possible.

You need to develop a trading strategy based on technical indicators, then pick the right currency pair according to the factors above. When you see an entry signal, you go immediately for the trade, and once you see an exit signal or have made an adequate profit, you close your trade.

It is also important to manage Stop Loss (SL) and Take Profit (TP). Using SLs and TPs with scalping may not be a good idea. Time management is very important with scalping, and you cannot waste time executing your trades. Once you have opened a trade, you might choose to set an SL and TP, but most traders won’t. If you are fast enough, it is a good idea to do so.

The size of the spread is incredibly important, as the higher the spread, the more you'll have to expand on opening a position. This rises disproportionately, and not in your favor, so go for the small spreads.

Execution is also key. Dealing desks make scalping currencies especially difficult, as you could get your order refused by the broker. It’s even worse if the broker does not allow you to close your account when appropriate, which can kill your trade. Choose a broker that offers STP or ECN execution, and accommodates scalping.

These are the basics of how to scalp Forex, but there are many more factors to find out about. See Admiral Markets’ page, which explains everything you need to know.

 

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