4Xlounge Round Table – Forex Scalping (A Quick Guide)

4Xlounge Round Table Trading Signals

I started trading the spot forex market in early 2001. Since then, one trading style has remained popular; scalping. I have never understood why, but that has not stopped forex scalping’s popularity among traders. Forex scalping has never been my favorite form of trading. The risk/reward layout does not make sense. However, after increased pressure from our Pro Members, we (4Xlounge) began to develop some scalping tools and systems. We released our first version of X Scalper in 2008. Now we offer more than a dozen dedicated scalping tools and systems. The interest in scalping continues. Let’s take a closer look and find out why?

Scalping Psychology 101

Most traders are lured to the forex with the promise of “getting rich quick”. This of course is not true. Most of us learned the “truth about forex trading lesson” the hard way (i.e. by losing a lot of money, very fast a la 4X Made Easy). Learning how to read trends, chart patterns, fundamental data and other indicators takes time. Most traders are not willing to take the time to learn. Enter forex scalping. Why? Because on the surface, scalping “feels” like a fast and easy way to make a lot of money. This of course is also, not true, but… for the new forex trader, scalping seems to provide a softer learning curve. I’m not 100% sure why, but based on the comments provided by our new Pro Members, it seems to be true. Is scalping the easiest form of trading “for new traders” to learn? Let’s take a look.

Risk / Reward

I usually get a sick feeling in the pit of my stomach whenever someone asks me about scalping. Risk management is one of the biggest reasons for failure among forex traders and scalping is the worst example. I could take 2 or 3 paragraphs explaining why, but the bottom line is; scalpers need a higher percentage of winning trades to turn a profit. Most scalpers need about 70% winners just to break even (based on their scalping style and setup). In comparison, swing traders only have to be right about 35% of the time to break even and position traders about 25%. There is very little wiggle room for scalpers.

There is a thin silver lining for scalpers; size. A scalper should use a 15 pip (or smaller) protective stop. Assuming they are using a proper lot size, it would take more than 330 losing trades (in a row!) to wipe out their account. To be honest, I’m not sure if that is even possible. This is probably why scalping works so well for new traders. Scalping allows new traders the ability to completely hammer their account and stay in the game at the same time (a.k.a. time to learn). If the ole saying “losing is the best way to learn” is true? Then forex scalping provides the most “learning” per dollar invested.

Learning Curve + Rate

Forex Scalping can generate 100′s of trades per week (even per day). More trades = more learning. A typical forex swing trader might find 10 trades in a good week. A scalper can find 10 trades in a few hours. Each trade is a mini lesson wrapped in pain, frustration, sweat and eventually knowledge. If you listen carefully, you can hear some of the veteran traders laughing right now. They are not laughing at you. They are laughing at the “pain, frustration, sweat…”. It really is true, but it is how we learn as traders and we will not become successful until we learn. Since we all have to learn, the important question to ask is; “do we want each lesson to cost 15 pips or 50+ pips?”. I believe that scalping provides the same level of learning at a lower cost and higher repetition. That’s a win – win for scalpers.

Scalpers Paradise

Forex scalpers have a virtual buffet of choices. There is definitely more than one way to scalp a few pips. In fact, based on our Pro Membership surveys, you would be hard pressed to find 2 traders that scalp exactly the same way. They might use the same tools and even follow the same rules, but their over-all style will vary from trader to trader. Bottom line; forex traders have options when it comes to scalping. I can honestly say (at the time of this posting) that 4Xlounge offers more scalping tools and systems than any other forex service. You can read more about our 4Xlounge Scalping Tools (here).

Trend or Counter Trend?

There are 2 basic types of forex scalping; trend scalping and counter trend scalping. We (4Xlounge) have excellent tools for both types of scalping. In fact, we have several tools and systems for each type of scalping. Here is the short list:

The Scalping Trend

First, let’s talk about what we mean by “trend”. In the context of scalping, the term “trend” basically means “the direction of the short term noise or price action” (a.k.a the scalping trend). The “scalping trend” is not the long term trend. That said, it is important to mention that many of our Pro Members prefer to scalp in the direction of the long term trend (i.e. 4 hour charts or greater). However, some of these Pro Members are still “counter trend” scalping when they enter their trades. Sounds confusing, but it’s really not. Let’s take a closer look.

We will use the USDCAD for our example. I will use a 5 minute chart to show the scalping trends over a 5 hour period. There are a total of 6 possible scalping trades during this 5 hour period. Put that into perspective; that’s 6 trades in 5 hours and that’s only one currency pair. Scalping can generate 100′s of trades per day.

4Xlounge Scalping Guide 1

4Xlounge Scalping Guide 2

4Xlounge Scalping Guide 3

4Xlounge Scalping Guide 4

4Xlounge Scalping Guide 5

4Xlounge Scalping Guide 6

Conclusion

While I may be a little hesitant to promote scalping, it does seem to provide an excellent option for entry level traders. As long as proper money and risk management rules are followed, scalping is a viable option for all traders.

Play It Safe!

As always, do NOT increase your risk. Keep your leverage at recommended levels and follow the rules of entry for each system. Do not bet the farm on any single trade. Never risk more than 2% per trade. Remember, slow and steady gains will win the race. High risk = high loss and eventual margin call. If you have any questions, post them on our forum and I will be happy to answer them.