Forex Scalping – a beginner’s guide

12:19, 18 June 2017

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dollar,yen,euro doodle

Scalping is a subset of day trading. Forex scalping is taking advantage of mini currency movements for profit. These small trades are measured in ‘pips’ (more on pips later). A session may last a few seconds. Or a few minutes.

Scalping doesn’t rely on the closing price – intraday trading. The scalper’s friend is momentum: sharper price moves and news, political and economic. Faster action.

The dollar, yen and euro promise the most potential. They’re the heavyweight currencies that influence change.

Leverage

Scalping generally relies on leverage. That is deploying a larger sum of money than your initial investment to magnify returns (though leverage potentially magnifies losses too).

This is high risk, so you need to build up your experience gradually. A lot of mechanics – decimal points, fractions and profit-loss ratios – are at work.

Keep in mind: the successful scalper is trying to work out patterns or trends. They’re not interested in longer term market direction – only the here and now.

Tell me more

Scalpers pick a currency ‘pair’ – for example, the US dollar and Japanese yen (USD/JPY). Or perhaps the euro-dollar (EUR/USD).

Down trend currency pairs Euro and dollar US. Red Trading graphScalpers pick a currency ‘pair’ – for example, the euro-dollar (EUR/USD): PavelSm/Shutterstock.com

These currency pair movements are often in a certain range – before breaking out, typically, from a piece of market news. A recent time period – the last day or hour – is more useful than a six-month time frame. Scalping can be sometimes called ‘five-minute’ trades.

To make super-quick trades or ‘scalps’ the scalper may study ‘a range of different charts indicating trading intensity, momentum, and price and high-and-low points, to name but a few. They’re part of the scalper’s technical analysis toolkit.

The goal?

Scalpers make small amounts of profit from the bid-ask spread (the price of a spread is always listed). These super-rapid price fluctuations, up or down, are measured in pips. A pip is the smallest movement, up or down, any currency makes – more on that later.

Successful scalpers don’t look for big gains or profits. Consistent success is always down to small profit/loss ratios.

Did someone say pip?

Yes. It stands for price interest point. These are tiny factions of a currency unit.

A currency ‘pair’ is the language used to describe how one currency responds against another – such as the EUR/USD. The currency on the left is the base currency. The currency to the right is the quote currency. A EUR/USD of 1.255 means one euro buys 1.255 dollars.

In forex trading major currencies is quoted to the fourth decimal place. For example, you might see a EUR/USD forex rate of 1.0700 (one euro buys one dollar and seven cents).

That last fourth point is the pip. A currency pair can move by 100 pips or more in a day.

The Japanese yen is quoted to two decimal places, such as USD/JPY 110.14 (one US dollar buys 110.14 yen). In that currency pair, the pip is the second decimal point.

You might also hear about ticks, which give an indication of how much trading there is in that currency pair. While a pip represents the smallest value by which a currency can move, a tick is the smallest interval of time between two trades. Lots of ticks indicates lots of trading. The most active currency pairs in peak times will see multiple ticks in the span of one second.

yen on top of trading chartThe Japanese yen is quoted to two decimal places: Semisatch/Shutterstock.com

Keep going

Let’s get back to the EUR/USD briefly. Say the price change of the EUR/USD rises from 1.0700 to 1.0701. That means the fourth decimal point has climbed one pip. Or 1/100th of 1% increase.

If we were to look at the USD/JPY rate, a rate change from 110.14 to 110.20 is a six-pip move up. 

Because per-pip commission costs are charged to open and close a position, a scalper wants to make at least 5-10 pips from a trade, often more.

Scalpers always want a small pip spread to keep costs low.

Pips and prices matter…lots

Let’s get into the numbers. We start by dividing one pip to the fourth decimal place by the quoted exchange rate. How would this look with a EUR/USD currency pair valued at 1.1050 (one euro = 1.10 dollars)?

We work out a pip value by taking 0.0001 (the fourth decimal point). We divide it by 1.1050 – the value of the EUR/USD pair in this example. We get 0.0000905. Money-making doesn’t look promising, does it?

Don’t despair. We apply that nanoscopic 0.0000905 value to – sharp intake of breath –100,000. That’s the ‘lot’ size. A lot is the standard historical transaction size for base currencies when you trade forex.

Putting it together

So… the value of one pip here would be €9.04. On a seven-point (pip) gain you would clear €63.34 (after transaction costs). Repeat 12 times a day and you would make €760.18 in profit. (On a five-point gain rather less: €45.24 per pip x 12 = €542.98.)

Scalping is high-intensity repeat work.

If you wanted to convert this pip value from euro to dollars you’d multiply it by the exchange rate (pip value 9.04 x 1.1050 = $9.98). Note: lot sizes are chunky for a reason. Pips are tiny. You need a big wedge of currency to compare a meaningful pip gain or loss.

Always measure your performance in pips rather than money. That’s because you’re comparing like with like, however big your trading position.

Costs and risk

Hand man doing finances and calculate on deskOne loss can wipe out any gains: wutzkohphoto/Shutterstock.com

The spread or commission to a broker may be several pips. Shorter time frames may mean higher costs – commission, spread, etc. If your profit is only a few pips, scalping is much less profitable.

If you have losses, your leverage will work the other way and – note – amplify them. One loss can wipe out any gains. But because you’re only ‘in’ the market briefly, the risk of losing money is contained.

Stop losses help limit losses also. However, a strictly mechanical scalping approach – trade size, leverage, entry and exit – will help your performance more than any other factor.

Lot sizes can also come in mini (10,000) and micro (1,000) amounts. These also keep your losses down.

The forex market is 24/7. It is for the more experienced – it is not for beginners.

Last thoughts

            •           Only Scalp with money you can afford to shrug off. Begin small

            •           Always use real-time share price movement tools

            •           Scalping is high stress and commissions and costs can eat away at your per-pip profits

            •           Focus on just one currency pair. That way you become more expert

            •           Discipline and not trading too much is vital. Overtrading is dangerous. Never scalp when you’re feeling emotional

            •           Practise with a demo account, then practise more…and more again…

Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

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