What is Forex Scalping?

When most people hear the term ‘scalping’, they probably either think of playing cowboys and indians or people trying to resell tickets to sporting events or concerts.

In terms of trading forex, though, a forex scalping system allows a trader to make quick profits by staying in a trade long enough to only beat the spread before selling his or her positions.

In other words, scalpers look for opportunities to jump into a market, make a buy, stay in the position for a few minutes, and then get out with a small profit. Doing this repeatedly over the long run can result in significant earnings, which is one popular trading strategy today.

Here, I’ll talk about scalping in forex – how it’s done, the benefits of this strategy, and the possible risks associated with this particular method.

The Basics of Scalping

Before we jump into the nitty-gritty of a scalping trade, it’s important to know the basic lingo and fundamentals of a typical quote.

In forex, as with stocks, there are several components to a price quote: the bid; the ask; and the spread.

The bid is the price at which you buy your currency. The ask is the price the market is willing to take for your currency (i.e. what you can sell it for). The difference between the bid and ask is the spread. The bid will virtually always be lower than the ask, which prevents you from just buying and selling immediately for a quick profit.

The goal of a scalper is to beat the spread – which results in profit – but not staying in a position so long that the trend turns against him or her. This is mostly accomplished by closely observing a currency pair and understanding the larger, economic factors in play that impact price.

Let’s say, for example, a scalper is watching EUR/USD. He or she is anticipating that the president of the European Central Bank, for example, will, in an impending announcement, reveal that the Eurozone’s gross domestic product shrank in the last quarter. That would naturally send the euro down against the dollar. To scalp, the trader could jump in right as the news hits, buy at say 1.3000, and stay in for a few minutes and sell at 1.3008.

Most scalpers stay in their positions for roughly 3-6 minutes, on average. Some stay in only for a minute at a time. Others take a longer approach. None of them, however, are willing to risk their profits by lingering in the market for very long.

Forex Scalping Systems

Is there a system you can establish for yourself or participate in that will help you with your forex scalping desires?

Yes – there are actually several. Now, when we say ‘system’, we can mean two things:

  1. A collection of rules, principles, and best practices;
  2. An actual system, i.e. a computer program.

Some who claim to have a system actually just have a set of guidelines they follow, while others use actual computer programs.

One popular computer program that claims to help you be able to find the tops and bottoms of a currency as it moves through the trading day is the MBFX System, created by Mostafa Belkhayate. This system uses a series of red, blue, and green lines superimposed on a candlestick forex chart over a certain timeframe that give you indications of whether you should buy or sell. I can’t speak for its effectiveness, having never tried it, but it is one that is mentioned quite often online.

Another on the market is the 4xlounge X Scalper 2.0 software, which promises live trading signals, trend bars, and other live data complete with indicators and trading signals. They offer free resources to learn scalping and the technology; the software itself, though, is something you have to pay to use.

You can also cobble together your own system with recommended strategies, such as:

  • Focus on certain, specific profit goals. Many scalpers use 5 pips (or five one-thousandths of a point) as their take-profit level.
  • Use pivot points, support, and resistance lines to help you better identify tops and bottoms in a chart.
  • MACD and stochastic oscillators can help identify when the market is trending. When either are in the middle, that is evidence of no trending forces in the market.
  • Use stop-loss orders to help save you from big losses.
  • Use one-minute timeframes for your data.
  • Calculate your risk/reward ratio for your moves. You don’t want anything below a 1:1. For example, if a trade would net $100 in profit, and you’d risk $100 (assuming you have a stop-loss order plus transaction costs), that’s a 1:1 ratio. If you can profit $100 but it could cost you $200, that’s a 2:1 ratio and is bad news. You want your reward to outweigh your risk, ideally.
  • A Center of Gravity (COG) indicator can help you determine if your pair is overbought or oversold. The theory is that each pair has a center of gravity, or the mark at which the pair’s value will eventually reach no matter how high or low it goes. If you trade positions that deviate dramatically from the COG, you could take advantage of the trading range and profit.

To really learn scalping, open up a demo trading account and try your hand at strategies that you find. There are a lot out there, and several trading systems that do the legwork for you. Try them all – the only thing you’re spending with a demo account is time.

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