Abstract：The foreign exchange market is the largest and most liquid financial market globally, offering investors ample trading opportunities every day. Scalping is a common trading strategy in the forex market. It involves making multiple trades within a single day, aiming to quickly earn profits from small price movements.
What Is a Scalping Strategy？
Scalping is a common trading strategy in the forex market. It involves making multiple trades within a single day, aiming to quickly earn profits from small price movements. Scalping is a short-term forex trading method based on technical indicators, rather than holding positions for several hours, days, or weeks. When you develop strict discipline and quick decision-making abilities, scalping can allow you to accumulate substantial profits from small gains.
Who Is Suitable for Scalping？
No strategy in the investment field can guarantee profits for investors. Traders usually seek strategies that suit them best to achieve better results. Whether forex scalping is suitable for you largely depends on how much time you are willing to invest in trading.
If your trading style matches the following characteristics, scalping might be suitable for you:
- Scalping is time-intensive. Traders need to spend a significant amount of time monitoring the market, continuously analyzing and placing orders, and making timely decisions based on different market conditions.
- Experienced traders who can accurately judge current market trends and follow their trading systems and plans may find scalping suitable. However, novice traders without a mature trading system may find it difficult to predict short-term market movements and may incur significant losses by guessing the market direction incorrectly.
- Scalping is better suited for investors with a good mindset. When trading forex, we often use leverage, which can magnify both profits and losses. Investors need a good mindset to effectively use the scalping strategy.
- Most importantly, scalping is not suitable for all investors. Different strategies are suitable for different market cycles. Sometimes, swing trading might yield higher profits. Investors should adopt strategies that fit the market trend.
Which Broker Should You Choose for Scalping？
To engage in scalping, you must choose a compliant broker, as not all brokers allow scalping. Therefore, the first step for scalping investors is to find a broker that supports scalping strategies. Once you identify some forex brokers that allow scalping, you should select those regulated by authoritative bodies.
Different brokers offer varying levels of leverage; some platforms provide 50x leverage, while others offer up to 1000x leverage. Some brokers use high leverage to attract investors in their promotions, and as forex traders, we should be cautious about this.
A key factor affecting long-term returns is trading costs. Different brokers charge different fees and commissions, typically including spreads, transaction fees, and account management fees. Investors should carefully compare the fee structures of brokers to ensure they are reasonable and transparent, with no hidden fees.
Additionally, we should consider the professionalism of the broker's customer service team. Forex trading is a 24-hour activity, and when issues arise on the trading platform, we will undoubtedly want timely customer service.
How to Use Indicators for Scalping？
After investors choose a suitable foreign exchange dealer, they also need to find a trading strategy and system that suits them. Below are two of the most common scalping trading strategies for novice scalpers.
Use moving averages (MA)
Moving Average Theory is one of the most commonly used technical indicators among traders today. It helps traders confirm existing trends and potential future reversals, guiding investment decisions. The most commonly used indicators are the Exponential Moving Average (EMA) and the Simple Moving Average (SMA).
Below is a chart of the EUR/USD exchange rate. In the chart, the red line represents the EMA5, and the blue line represents the EMA9. Typically, when a shorter-period moving average crosses above a longer-period moving average,it indicates a likely short-term price increase. Thus, forex scalpers can buy at point 1.
Conversely, when a longer-period moving average crosses below a shorter-period moving average, it suggests a likely short-term price decrease. Therefore, forex scalpers can sell at point 2. Moving averages are an intuitive technical analysis tool and a strategy that investors must master.
Use RSI indicator
RSI, which stands for Relative Strength Index, was first applied in the futures market. Its primary function is to evaluate the strength of bullish and bearish forces and to measure the momentum of price changes in terms of speed and magnitude.
RSI ranges from 0 to 100. When the RSI value is greater than 70, the market is considered overbought, indicating a higher probability of a future downturn. When the RSI value is less than 30, the market is considered oversold, indicating a higher probability of a future upturn.
Below is a EUR/USD exchange rate chart. We can see that at point B, the price is lower than at point A, and at point D, the RSI value is higher than at point C. This indicates an RSI bullish divergence, which typically signals a potential short-term price increase. Therefore, scalpers should consider buying at this point.
Pros & Cons of Scalping Strategy
Conclusion
Scalping is an effective forex trading strategy, but we must not overlook the significant efforts and risks involved, despite its potential for high returns. Only with sufficient patience can investors achieve substantial returns from trading. The primary reasons for investor failure are an excessive pursuit of profits and a lack of discipline in stop-loss practices.
It is important to understand that high returns come from strictly adhering to trading strategies and managing risks effectively. Therefore, when selecting a trading strategy, it is crucial to choose one that matches your personality and actual trading abilities. Once you develop a professional and mature trading system, scalping can yield high returns. Only by maintaining enough patience can trading lead to substantial rewards.
FAQs
What is the suitable timeframe for forex scalping？
Scalping does not have a fixed timeframe and typically depends on the trader's preference. Commonly used timeframes in the market range from 1 to 15 minutes, with the majority of scalpers using 5-minute or even 1-minute intervals.
Which currency pairs are suitable for scalping？
Scalping involves making profits through high-frequency trading within a short period. Therefore, scalpers should choose currency pairs with high volatility and good liquidity, typically major currency pairs. Additionally, selecting currency pairs with lower trading costs can improve profitability.
Can scalping guarantee high returns？
Clearly, it cannot. No trading strategy can guarantee profits for investors. Different market conditions suit different trading strategies. Only by strictly adhering to their trading plans, frequently reviewing losses, and learning from their experiences can traders potentially achieve profits in the long run.
