When it comes to trading the markets, there are many different types of trading.
There is long-term trading, where you hold on to trades for months and possibly even years.
There’s also swing trading, where your trades can be for days, weeks and even months.
Then there’s intraday trading, or commonly known as day trading, where you get in and out of your trades before the market closes and you never hold your positions overnight.
But there’s one more type of trading that’s much more intense than intraday trading…
And that is Scalping.
Do you like staring at the charts hours upon hours each day?
Do you also like to frequently get in and out trades?
And do you like to have a high win-rate?
If so, then scalping might just be for you.
In this post, I’ll get into what scalping really is…
Whether scalping is right for you…
And finally, a very simple but effective price action setup for scalping the Forex market.
What is Scalping?
Scalping is the act of getting in and out of the market with the objective of taking small profits over and over again during the trading day.
These profits can be achieved in hours, minutes and sometimes, even in seconds.
The difference between scalping and intraday trading is that scalping focuses on making small profits on each trade…
Whereas intraday trading is just getting in and out of your trades before the market closes.
You could be holding on to your trade to take bigger profits, or you could also be scalping.
So scalping is considered an intraday trading activity.
One of the things associated with scalping is a high win-rate.
That means you win more than 50% of the time.
And each time you win, you want it to ideally be at least equal to the risk you’re taking, or more.
So for example, if you’re risking $100 on a trade, you want to have a target profit of at least $100 or more.
And if you’re winning more than 50% of the time, you will be profitable in the long run.
But of course, your total profits should exceed the cost of any commissions incurred.
When I was a prop trader trading at the equities desk, scalping was our bread and butter way of trading.
Each trade we would only be aiming to make 1 tick.
A tick is the smallest increment that the market can make.
So for example in most stocks, 1 tick could be 1 cent.
But in cheaper priced stocks like penny stocks, 1 tick could be half a cent.
So as prop traders, we would be scalping this 1 tick over and over again throughout the trading day.
We could easily make 30+ trades in a day.
And each trade can last anywhere from seconds to hours.
Now, you might be thinking how much can you make from just 1 tick?
Well, 1 tick can mean just $1 or can mean $1,000 or more.
It comes down to the size of your trade.
If you trade just 100 shares, then 1 tick (which equals to 1 cent) would just be worth $1.
But if you trade 100,000 shares, then 1 tick would be worth $1,000.
And you can make (or lose) that amount in a matter of minutes, or even seconds.
Imagine if you’re able to make just 5 profitable 1-tick trades in a day with a size of 50,000 shares per trade…
That would be a total of $2,500 you make in a day.
And yes, there are traders at the prop firm doing that day in and day out.
See the potential of scalping the markets yet?
But before you get excited and decide you want to become a scalper, there are things you need to know about scalping…
Should You Be Scalping?
While scalping can be lucrative, there are 3 factors you want to take into consideration before getting into it as a retail trader:
- Time Availability
- Forex Brokers
- Spreads & Commissions
The first thing you want to take into consideration is do you have the time to do scalping?
With scalping, you need to have lots of screen time.
And by that, I mean that you need to be staring at the charts all day long.
That’s because when you are scalping, you are trading smaller timeframes like the 30-minute, 15-minute, and even 5-minute charts.
With smaller timeframes, you will get more trade setups.
If you have a full-time job, then it might be difficult for you to scalp.
But, if you’re in a timezone where the London session and US session opens after you finish work, then scalping could be viable for you…
Provided you are not already tired after work, and still able to stare at the screen non-stop for hours.
The next consideration for scalping is Forex brokers.
While the Forex market is a great place to grow your wealth and even make a fortune, the marketplace is unfortunately not regulated.
That means there is no centralized regulated exchange where all trades are recorded.
When you trade equities, there is the stock exchange and this exchange governs all trades that are executed.
When you trade futures, there is also the futures exchange.
The centralized regulated exchange is so that the price you see on your chart is the same regardless of which broker you’re using.
For example, if you’re trading the US stock market, it doesn’t matter if you’re using Ameritrade or Interactive Brokers…
The prices will be the same.
But in Forex, because there’s no centralized exchange, each Forex broker can essentially quote their own prices based on the interbank feed they get.
But generally, most brokers will pretty much have the same quote so that’s not a big concern.
The concern comes down to stop hunting.
Stop hunting is when your broker either manipulates the price or spread to hit your Stop Loss.
And because of this, you got out for a loss even when the market didn’t trade at your Stop Loss level.
This happens most when the market is near your Stop Loss order.
And this is a concern when scalping because with scalping you have a very tight Stop Loss.
And by tight Stop Loss, I mean anything under 10 pips.
So if your Stop Loss is just 5 pips and you have a spread of 1 pip on the currency pair you’re trading on…
Then it’s not going to take much for your broker to print a price that hit your Stop Loss.
That’s how the term “bucket shop” came about.
There are many Forex brokers that implement shady practices.
Hence it’s very important to choose the right broker, especially if you want to do scalping.
Because even if you have a profitable scalping strategy, but you have a shady broker…
Then no matter how good your trading strategy is, you just won’t be profitable in the long run.
Fortunately, there are good Forex brokers around so you have to choose wisely.
Spreads & Commissions
The other consideration is spreads and commissions.
When I was a prop trader, the commissions were so dirt-cheap that we could scratch 10 – 20 trades and the commission incurred could be covered with one profitable trade.
By “scratch”, I mean getting in and out at the same price for a breakeven trade.
When scalping, we scratch our trades a lot when we see the price action isn’t going our way.
So just by making one profitable trade of 1 tick, we could cover 10 – 20 scratch trades.
And prop firms can get such cheap commissions because of the volume of their trades.
As retail traders, it won’t be possible.
But here’s the good news when trading the Forex market…
You won’t be scalping for 1-pip each time.
And you there’s no need to get extremely low commissions if you scalp the right way.
The standard commissions charged by most Forex brokers are good enough when you have the right parameters for scalping the Forex market.
How to Viably Scalp the Forex Market
Now that we understand the concerns of scalping the Forex market…
And given that you have the time to stare at the charts to scalp the market…
There’s just one rule to make scalping the Forex market viable…
And that is that the spread plus commissions must be less than 10% of your Stop Loss distance.
I call this the Cost-to-Risk Ratio.
The spread plus commissions are your trading cost and I consider this a negative edge.
And we want the negative edge to be as small as possible.
Here’s what I mean…
Let’s take for example there’s a setup that just appeared and you want to enter into a scalp trade.
But before you do, you want to assess whether it’s viable to get into the trade.
Here are the details of the trade…
From the setup, you’ve determined that the Stop Loss is 10 pips away from your entry.
The spread is at 1 pip, and the commission is $3.50 per side on 1 Standard lot (100,000 units).
To make things simple, we will use 1 Standard Lot for the trade.
Since you are trading 1 Standard Lot, the 1-pip spread is worth $10.
With a commission of $3.50 per side, your total commission is $7, which equals to a 0.7 pip value.
So your total cost is 1.7 pips (spread plus commissions).
Now we take your total cost divided by the Stop Loss distance and we get a Cost-to-Risk Ratio of:
1.7 / 10 = 17%
That means the spread plus commissions incurred is 17% of the Stop Loss distance.
And this does not meet our requirement of a maximum of 10% Cost-to-Risk Ratio.
Now, you might be wondering why I decided that the spread plus commissions must be a maximum of 10% of the Stop Loss distance as the criteria for scalping…
And the answer is that I want to reduce my negative edge as much as possible.
Trading the Forex market is already a very challenging and tough endeavor.
Scalping makes it even tougher because the costs now take a bigger percentage of your trade parameters as your Stop Loss is tighter.
You certainly don’t want to make it more challenging by stacking more odds against you.
So by capping the total cost incurred to a maximum of 10% of your Stop Loss distance, it reduces the negative edge against you.
And by keeping your total cost a small portion of your risk, you get to keep more of your profits.
But of course, if you have a trading system that has a huge win rate like 90% and an average win amount of 3R and an average loss amount of just 1R, then you don’t need to be too concerned about the Cost-to-Risk Ratio.
And if you really have such a trading system, you should sell all your assets and put it all in the Forex market because you will become filthy rich.
Alright, with all that said, let’s get into the price action setup that you can use to scalp the Forex market.
Price Action Scalping Setup: Pin Bar Pullbacks
This scalping strategy can be used in the Stock market, Futures market and Forex market.
But for this post, I’ll be sharing trade examples from the Forex market.
So for this scalping strategy, we will be using 2 indicators:
- 20 EMA
- 50 EMA
We only look for Long trades when the 20 EMA is above the 50 EMA…
And we only look for Short trades when the 20 EMA is below the 50 EMA.
Long Entry Criteria:
- Wait for the market to be above both EMAs and the 20 EMA is above the 50 EMA.
- The market has broken above the previous swing high and formed a higher high.
- Wait for the market to make a pullback to either of the EMAs.
- Look for a Bullish Pin Bar to form on either of the EMAs.
- Wait for the next bar to close above the Bullish Pin Bar.
- Once the market has closed above the Bullish Pin Bar, place a Buy Order at the nearest 5-pip level below the close.
- Place Stop Loss at the nearest 5-pip level below the low of the Bullish Pin Bar.
- Place Take Profit at 1R or 1.5R.
Let’s take a look at a trade example on the 30-min AUDUSD chart.
On the right-hand side of the chart above, you can see that the market went above the previous swing high and formed a higher high.
At that point, the 20 EMA had also crossed over the 50 EMA.
So we are only looking for a Long trade.
The market did pull back close to the 20 EMA but did not pierce through the 20 EMA and went higher.
For our trades, we want the market to pierce through either of the EMAs and then form the Bullish Pin Bar as that would be a sign of dynamic support from the EMA.
The market eventually did come back down to pierce the 20 EMA and formed a Bullish Pin Bar.
At this point, we don’t want to go Long yet.
We want to wait for a close above the Bullish Pin Bar as our confirmation to go Long.
In the chart above, the next bar that formed after the Bullish Pin Bar is an interesting one.
It broke above the high of the Bullish Pin Bar as much as 10+ pips…
And then came back down to close just above the high of our Bullish Pin Bar to form a Bearish Pin Bar.
Some people consider this an opposing signal.
So what do we do?
We still take the trade according to our trade setup.
Because we know that in the long run, our probability will play out.
So we just have to be disciplined and take the trades according to our setups.
At this point, we want to place a Buy order to go Long at the nearest 5-pip level.
But because the close of the bar is at 0.6879, we place a Buy Stop Order to go Long at 0.6880.
Then we place our Stop Loss at the nearest 5-pip level below the Bullish Pin Bar, which is at 0.6870 for a 10-pip Stop Loss.
And then we place our Take Profit level 15 pips away at 0.6895 for 1.5R.
The reason I like to place at the nearest 5-pip level is that it makes it easier and faster to calculate my position sizing.
And that allows me to place my orders quicker.
Sometimes, if you place your order too late because you’re still trying to calculate your Stop Loss distance and your position sizing, the market might have already moved and you’d miss your entry.
So by placing your orders at the nearest 5-pip level, you’d be able to quickly calculate your position size and place your trades quickly.
Once we have placed our orders, it will look like this:
Shortly after the trade is placed, we got filled and the market hit our Take Profit level for 1.5R in the next 3 bars.
And since each bar is 30-minutes long, the whole trade took just under 1.5 hours.
Now that we know our Long entry criteria, let’s get into our Short entry criteria.
Short Entry Criteria:
- Wait for the market to be below both EMAs and the 20 EMA is below the 50 EMA.
- The market has broken below the previous swing low and formed a lower low.
- Wait for the market to make a pullback to either of the EMAs.
- Look for a Bearish Pin Bar to form on either of the EMAs.
- Wait for the next bar to close below the Bearish Pin Bar.
- Once the market has closed below the Bearish Pin Bar, place a Sell Order at the nearest 5-pip level above the close.
- Place Stop Loss at the nearest 5-pip level above the high of the Bullish Pin Bar.
- Place Take Profit at 1R or 1.5R.
Let’s take a look at a trade example on the 15-Min EURUSD chart.
On the right-hand side of the chart, you can see that the market has broken below the low of the previous swing low and formed a lower low.
At the same time, the 20 EMA has crossed below the 50 EMA.
So we are only looking for a Short trade.
Then the market pulled back to the 20 EMA and formed an Inside Bar.
Now, an Inside Bar can also be a trade entry, but because the market did not break below the Inside Bar, there’s no entry.
Instead, the market went above the Inside Bar, found resistance at the 50 EMA and formed a Bearish Pin Bar.
Coincidentally, this is also a support-turned-resistance level.
This level was where the market had previously bounced off as a support level and has now become a resistance level.
When there is more than one reason for the market to react a certain way, it’s called confluence.
In this case, the Bearish Pin Bar was formed because of that resistance level as well as the 50 EMA serving as a dynamic resistance.
Hence, this is considered a strong bearish signal.
Now that the Bearish Pin Bar has been formed, we wait for the market to close below it before we place our orders.
In the next bar, the market closed below the Bearish Pin Bar.
This is our signal to go Short and so we place our Sell Order at the nearest 5-pip level at 1.1185.
Since the high of the Bearish Pin Bar is at 1.1190, we want to place our Stop Loss above this level to the nearest 5-pip level.
In this case, our Stop Loss will be at 1.1195 which is 10 pips away from our entry.
We don’t want to place our Stop Loss too close to the high of the Bearish Pin Bar, and so placing it at 1.1195 gives a decent buffer from a possible stop-hunt by the broker.
We then place our Take Profit level 1.5R away at 1.1170.
In just 3 bars later, we got filled at 1.1185 and we’re now in a Short position.
Then in just the next bar after getting filled, the market went down very quickly and hit our Take Profit level at 1.1170 for 1.5R.
Since we got into our Short trade and got our Take Profit level hit in just 2 bars, that means this trade took less than 30 minutes in total.
In less than 30 minutes, we are in and out of the market for a profit.
That is scalping in the Forex market.
Scalping the Forex market can be very rewarding when done right.
However, to do so, you would need the time to stare at the charts for hours at a time.
Furthermore, not every currency pair is suitable for scalping because of the spread and commission.
But if you have the time and energy to constantly be in front of the charts…
And you’re disciplined enough to only trade certain currency pairs that give you a Cost-to-Risk Ratio of less than 10%, then you’d certainly have a good shot at making scalping work for you.
Now that you have read this post and what it takes to scalp the market, will you give it go?
Or will you stick to swing trading the Forex market where you’re able to rig the odds even more in your favor?
Let me know in the comments below.
I’d love to hear what you think!
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