Most novice traders have undoubtedly come across and attempted to scalp the forex market at some stage or another but likely failed, which begs the question: is scalping profitable?
Scalping can be a very attractive trading style to get involved in, but it requires a lot of technical know-how, focus, discipline and strong risk management skills.
In this article, we will discuss if scalping really is profitable, how scalpers make money, how to exploit volatile markets, and how to properly use leverage.
Is Scalping Forex Profitable?
Scalpers generally seek to profit from small price movements in the forex market and can open and close many trades during the course of a day. Most scalping strategies operate on small timeframes such as the one-minute or five-minute, and trades generally last anywhere from a few seconds to a few minutes.
Successful scalpers make money by aiming for small gains with the purpose of accumulating their profits over the long term, which can easily turn into large gains. Consistency, intense focus and discipline are essential skills that scalpers need to have to stay profitable over the long term.
Not all traders have the right emotional makeup for scalping and might be better off pursuing other trading styles, but for those who have nerves of steel and laser-sharp focus, scalping can be profitable.
How Do Scalpers Make Money?
To make money with scalping, traders can use a wide range of technical analysis methods to spot the best opportunities. Strategies that use price patterns, candlestick patterns or Fibonacci levels in conjunction with indicators and leverage often work the best for this short-term style of trading.
Another important consideration that scalpers need to make is choosing the right forex pairs that offer the smallest spreads and most liquidity. These forex pairs include the major forex pairs such as the EUR/USD, GBP/USD, USD/JPY and USD/CHF.
Choosing the right broker that is suited for scalping is often overlooked by beginner traders. Brokers that offer the lowest spreads, a wide variety of technical tools, fast trade execution, and excellent client support are the best suited for scalping and making money in the forex market.
Scalping economic news events can also offer great trading opportunities when large price movements occur during volatile trading conditions. Trading range breakouts – for example, during an important news event – is a popular strategy among scalpers.
Some of the most common indicators that are best suited for scalping include the simple moving average (SMA), the exponential moving average (EMA), and the relative strength index (RSI), to name a few.
Image for illustration purposes only
One way that scalpers can make money is to attach three simple moving average (SMA) indicators to their charts using periods of 5, 8 and 13 as their inputs. The SMA indicator works well in trending environments, and scalpers can use this indicator to enter positions when the 5, 8 and 13 period lines cross each other and line up with the direction of the main trend.
The chart example above shows a period where a downtrend developed on the five-minute chart of the EUR/USD. Multiple scalping opportunities to sell the EUR/USD forex pair occurred when the SMA lines crossed each other and lined up with the downtrend (red boxes and arrows).
Exploiting Volatile Markets
Volatile trading conditions generally occur during important economic news events that may have an impact on a certain currency pair. Volatility can present the ideal trading conditions for scalpers who trade these news events, granted that they know how to control their risk.
Image for illustration purposes only
The major forex pairs remain the best currency pairs to scalp, simply because they offer the tightest spreads and generally respond in a predictable way to important economic news events.
The chart image above shows a clearly defined range in the EUR/USD, prior to an important interest rate decision. This specific news event led to a strong and volatile breakout to the upside, which offered a great range breakout scalping opportunity.
With this example, scalpers may have used the volume indicator to help them confirm that buyers were in clear control during the breakout and aimed for a target that offered a 2:1 risk-reward ratio.
Volatility can benefit a scalper, but traders who wish to trade volatile market events should have intimate knowledge of the currency pair they are trading and know how the affected forex pair might behave.
Leverage allows a trader to control larger amounts of money than they actually have in their trading account. This can greatly benefit scalpers and magnify their profit potential. Leverage can also be seen as a double-edged sword, meaning that although a scalper can make more money faster, they can also magnify their losses if a trade goes against them.
How much leverage a scalper should use is a topic of debate among traders, but the best advice that can be given to a novice scalper is to keep leverage as low as possible, especially for the first two to three months of trading.
More experienced scalpers may opt for higher levels of leverage because they tend to be well acquainted and comfortable with their scalping strategies.
With scalping, a set stop loss is used to protect a trader from large losses. This allows scalpers to often use larger leverage ratios compared to other trading styles. That being said, it is crucial that scalpers employ a strategy that is based on strict risk management rules and that the trader has the discipline to not break them.
In short, a higher level of leverage (up to 20 or 50:1) can be used by a scalper as long as they always use stop-loss orders and aim for a favourable risk-reward ratio with each trade.
Another important consideration when using leverage is to lower the leverage ratio significantly during volatile market events to avoid potential gaps in the bid-ask spread.
Is forex scalping profitable? This is a common question and is generally asked by traders who have tried this style unsuccessfully. There are, however, successful scalpers who have the ability to compound small returns, consistently, and over a long period of time.
Successfully scalping the forex market and making money over the long term does, however, require a solid trading strategy, a broker that offers tight spreads with fast execution speeds, discipline, focus and good risk management skills.
Forextraders' Broker of the Month
ForexTime (FXTM) is an award-winning platform that certainly has the feeling of being set up by people who know what they are doing. The firm demonstrates an understanding of what helps traders make better returns, and its success can be measured by the fact that it's doubled the number of clients it supports in recent years. The fact that the broker has grown to have more than two million accounts suggests it is getting things right for clients.