Forex Spreads: Low Spread Scalping Strategies.
Forex scalping can be very exciting for traders. The promise of "free" cash with a good scalping strategy can make a trader's head spin and their fingers very trigger happy (by which traders start taking many trades). However, no Forex scalping strategy can be effective without understanding the size of the Forex spread and how to exploit the advantage of low spreads. This article will address questions such as 'What is a spread in Forex?', 'What is scalping in Forex?', and 'Why are low spreads important?'. We'll also cover two key strategies for scalping pairs that have their spreads lowered.
Table of Contents.
What is the Trading Spread in Forex? What is Scalping in Forex? Top Low Spread Scalping Strategies Key Considerations for Low Spread Trading Conclusion.
What is the Trading Spread in Forex?
In Forex trading, the 'spread' refers to the difference between the Buy (or Bid) and Sell (or Ask) price of a currency pair. For instance, if the EUR/USD Bid price is 1.16909, and the Ask price is 1.16919, the spread is 1 pip. If the Bid price is 1.16909 and the Ask price is 1.16949, the spread would be 4 pips. When trading Forex, a trader makes a profit based on the movement of the currency pair. However, the trade only becomes profitable once the currency price has crossed the spread.
So, if the currency pair has a 1 pip spread, in a Long trade, the value of the currency would need to increase by at least 2 pips before the trader would profit (1 pip for the spread, and an extra pip for the profit). The wider the spread, the longer it will take for any trade to become profitable. So if we compare EUR/USD with a 0.6 pip spread to a high-spread pair like AUD/NZD (which is typically 6-10 pip, though the typical spread at Admirals is just 3.1 pips),* the EUR/USD currency pair wouldn't need to move as far as the AUD/NZD currency paid in order for a trade to become profitable.
What is Scalping in Forex?
Scalping in the Forex market involves taking advantage of minor price changes in the market, by making many small trades over very short time periods - usually between 1 and 15 minutes. For a 1 minute trade, a trader would look to make a 5 pip profit, while a 5 minute scalp would aim for a 10 pip profit.
Because these trades are so small, the importance of choosing low-spread currency pairs is clear - if a spread is too large, there will be no profit left over once the trade ends. Because the focus is on such small trades, this is a very popular trading style for many traders, as it creates many opportunities within a single day.
Top Low Spread Scalping Strategies.
When it comes to taking advantage of low spreads, Forex scalping strategies provide many opportunities for traders. An FX currency pair may move 25 pips long or short for a minute, then pull back 10 pips the next minute, oscillate at this level for another 5 minutes, and make another strong 25 pip move over the next ten minutes.
This is usually a minor move in the Forex market, occurring over a matter of minutes, and this is what you, the scalper, are after. But first, let's discuss why it is so important to get educated on scalping. Of course, scalping wouldn't be nearly as popular if it didn't provide benefits, mainly:
The possibility to achieve a greater level of profit than you can by merely making positional trades. No waiting around for a strong trend to develop. Many trading opportunities. No pressure to analyse the overall market.
On the other hand, scalping also has some disadvantages, including:
A lower margin for mistakes. Too many 'good' trades leading to overconfidence. It can be exhausting at times. There is a risk of overtrading. A greater level of loss.
Strategy Number One – Extreme Scalping.
Bollinger Bands (20, 3). Exponential Moving Average (3), close MACD Histogram (6,17,8) Relative Strength Index (14) with 50 level.
Timeframe: 1 min.
Pairs traded: EUR/USD , GBP/USD , USD/JPY , USD/CAD.
Wait for the 3 EMA to cross up through from the 18 Bollinger Bands middle line Wait for the Relative Strength Index and MACD Histogram to line up above 0 on the MACD, and above 50 on RSI.
Wait for the 3 EMA to cross down through the 18 Bollinger Bands middle line Wait for the Relative Strength Index and MACD Histogram to line up below 0 on MACD and below 50 on RSI.
Place the stop-loss for long trade a few pips below lower band Place the stop-loss for sell a few pips above upper band.
Place profit target on opposite band Average target is 5-15 pips.
Strategy Number Two – Gold CFD Trading Strategy.
For this strategy it is strongly recommended to download and use the MT4 Supreme Edition, as it incorporates the Admiral Pivot indicator that is used in this strategy.
Exponential Moving Average (5), close Exponential Moving Average (10), close Stochastic Oscillator (8,3,3) Relative Strength Index (14) with 50 level.
Commodity CFD trading: GOLD.
The price should be at or very close to the Admiral Pivot support (S1, S2, S3) or slightly above the Pivot Point (PP) Wait for the 5 EMA to cross above 10 EMA The Stochastic should have recently crossed 20 from below The RSI should be above 50.
The price should be at or very close to the Admiral Pivot resistance (R1,R2,R3) or slightly below the Pivot Point (PP) Wait for the 5 EMA to cross below 10 EMA Stochastic should have recently crossed 80 from above The RSI should be below 50.
Place the stop-loss for long trade below previous support Place the stop-loss for sell trade above previous resistance.
Place the profit target close to the next pivot.
Source: MetaTrader 4 Gold. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
When taking long trades, it is always best to see that stochastics have just crossed above 20 from below. When taking short trades, it is always best to see that stochastics have just crossed below 80 from above. Using 'Profit Stop' is advised after a trade has gone into profits. Download MT4 Supreme edition Use 'VPS' (Volatility Protection Settings)
Trade Forex & CFDs With Admirals.
Professional trading has never been more accessible than right now! Admirals offers professional traders the ability to trade on the Forex market directly and via CFDs with 80+ currencies, including Forex majors, Forex minors, exotic pairs and more! Open your live trading account today by clicking the banner below!
Master trading basics with industry experts.
Key Considerations for Low Spread Trading.
When using low spreads as a part of their trading strategy, it's important for traders to keep the following factors in mind:
ATR Stop-loss vs stop grab Correlation Margin benefits Spread percentage.
ATR.
ATR is the indicator that measures the volatility of a financial instrument. It also projects high and low range based on its calculation. The higher the ATR, the higher the volatility. For instance, if the AUD/NZD moved 60 pips a day while the EUR/USD moved 90-120 pips a day, the EUR/USD would have a higher ATR.
When it comes to low-spread trading, while higher volatility can compensate for a wide spread, the ideal scenario is one where the volatility is high while the spread is low. To go back to the previous example, if the AUD/NZD moved 60 pips a day, and you paid a 6-pip spread, the total trading profit would be based on 54 pips. By contrast, if the EUR/USD moved 100 pips and had a one pip spread, the profit would be calculated based on 99 pips.
Stop-loss vs. stop grab.
Source: MetaTrader 4 GBP/USD. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
You also need to consider what happens when your stop-loss gets hit on those high spread pairs. You are paying a huge spread when your 'market order' stop-loss order hits the market. That might create a pattern that collects all stops above or below it. The more stops that are hit, the stronger the move of the price is going to be. This might even push the price to the next support or resistance level, creating a fake out, caused by a stop grabber.
Correlation.
Source: MetaTrader Supreme Edition - Correlation Matrix.
In financial terms, correlation is the numerical measure of the relationship between two variables. The range of the correlation coefficient is between -1 and +1. A correlation of +1 denotes that the two currency pairs will flow in the same direction. A correlation of -1 indicates that the two currency pairs will move in the opposite directions, 100% of the time. Meanwhile, a correlation of zero denotes that the relationship between the currency pairs is completely arbitrary.
So in the chart above, you can see that EUR/GBP and GBP/USD are negatively correlated (-98). This means that they move in a completely opposite direction. If you compare the current ATR of EUR/GBP(70) to ATR of GBP/USD(128), it is very easy to see which pair to trade. Moreover, the spread on EUR/GBP is 2.5 pips, while GBP/USD has a spread of 1.4 pips. Occasionally you'll see that brokers change the spread and allow you to trade with extremely low costs, so make sure to look out for them!
Margin benefits.
The trader's account should be in a better position to handle setups with larger drawdowns before problems with margins hit the radar. Traders are, therefore, less limited in terms of the number of trades. This can be particularly useful when the market accelerates in its price action, and it suddenly offers the trader more opportunities to trade.
Spread percentage.
The spread fluctuation might also depend on market factor, namely, liquidity. A market that is liquid means that it has many trades on a daily basis, and is composed of many active traders. The Forex market is extremely liquid because hundreds of banks and millions of individuals trade currencies on it every day. The spread is then divided by the average daily range of a currency pair. This gives us a percentage which tells us more precisely how much the spread costs. The lower the number, the better it is.
The spread can be considered an opportunity cost in the sense that it might reduce the amount of profit gained from the daily range calculated by ATR. The higher this opportunity cost, the more likely it is to convert to losing trades and, subsequently, real financial losses. In the table below are some examples using current average spreads* and ATR (the lower, the better).
* MT4 average spreads as of January 26 2022.
EUR/USD.
Typical Spread Value : 1.0 pips.
Spread as a percentage of ATR: 1.0/87 = 1.14 %
GBP/USD.
Typical Spread Value: 1.4 pips.
Spread as a percentage of ATR: 0.85 %
USD/JPY.
Typical Spread Value: 1.1pips.
Spread as a percentage of ATR: 0.72 %
USD/CAD.
Typical Spread Value: 1.0 pips.
Spread as a percentage of ATR: 0.8 %
GOLD.
Typical Spread Value: 18 pips.
Spread as a percentage of ATR: 1.23 %
GBP/NZD.
Typical Spread Value: 6.5 pips.
Spread as a percentage of ATR: 3.11 %
Source: An example of a MetaTrader 4 account.
Conclusion.
If we compare the first five instruments with the GBP/NZD currency pair at the bottom of the table further up, we can see a clear difference in the numbers, and therefore, it is easy to understand the effect of low spreads on opportunity costs, their benefits, and why they should be considered by professional traders.
The example in the screenshot above clearly shows that highly profitable gains are possible when using low spread scalping strategies. If you would like to attempt these strategies yourself, we would recommend that you use a Demo account first, in order to test them in a risk free environment, before transitioning to a live account and testing them in the real-life markets.
Trade Risk-Free With A Demo Account.
Did you know that it's possible to trade with virtual currency, using real-time market data and insights from professional trading experts, without putting any of your capital at risk? That's right. With an Admirals ' risk-free demo trading account, professional traders can test their trading strategies and perfect them without risking their money.
A demo account is the perfect place for a beginner trader to get comfortable with trading, or for seasoned traders to practice. Whatever the purpose may be, a demo account is a necessity for the modern trader. Open your FREE demo trading account today by clicking the banner below!
Trade with a risk-free demo account.
Practise trading with virtual funds.
About Admirals Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
An all-in-one solution for spending, investing, and managing your money.
More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.
Meet Admirals on.
Our Webinars.
Start the Trading Day with Theo Theodorou, a live trading webinar.
Theo Theodorou.
January 10, 2023 07:30.
Register Now.
Ultimate Price Action Trading Guide: Building a Price Action Trade Plan for 2023.
Paul Wallace.
January 11, 2023 14:00.
Register Now.
View more Webinars.
TOP ARTICLES.
January 09, 2023.
13 Min read.
This article will look at top Forex trading strategies for beginners by introducing some simple Forex trading strategies. We will guide you through three key Forex trading strategies for beginners to use today, namely - the Breakout strategy, the Moving Average Crossover strategy, and the Carry Trad.
January 06, 2023.
22 Min read.
'Mastering the time and price advantage' is one way to sum up the art of the Fibonacci Forex trading strategy. But first, it always helps to know some background of where this growingly popular trading method comes from. It all starts with Leonardo Pisano Bogollo, an Italian mathematician, who first.
January 05, 2023.
30 Min read.
You may have heard the term swing trading being used amongst traders, but do you know what it is? In our swing trading strategy guide, we will delve deeply into the topic, explaining exactly what swing trading is, highlighting popular swing trading indicators, presenting some effective swing trading.
Invest in Stocks & ETFs Demo Trading Account Trading Calculator Account Types Deposits & Withdrawals Fractional Shares Islamic Forex Account Documents & Policies Personal Offer.
MetaTrader 5 MetaTrader 4 MetaTrader WebTrader Admirals Mobile App MetaTrader Supreme Edition StereoTrader Virtual Private Server Parallels for MAC.
Forex Calendar Trading News Global Market Updates Premium Analytics Weekly Trading Podcast Fundamental Analysis Market Heat Map Market Sentiment Trading Central.
Affiliate Program Introducing Business Partner White Label partnership Refer a friend.
Why Admirals? Financial Security Secure your trading account Contact Admirals Company News Rebranding Admirals is green Careers.
Risk warning: Trading Forex (foreign exchange) or CFDs (contracts for difference) on margin carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Before using Admiral Markets UK Ltd, Admiral Markets Cyprus Ltd, Admiral Markets AS Jordan Ltd, Admirals AU Pty Ltd and Admirals SA (PTY) Ltd services, please acknowledge all of the risks associated with trading.
The content of this website must not be construed as personal advice. We recommend that you seek advice from an independent financial advisor.
All references on this site to ‘Admirals’ refer jointly to Admiral Markets UK Ltd, Admiral Markets Cyprus Ltd, Admiral Markets AS Jordan Ltd, Admirals AU Pty Ltd and Admirals SA (PTY) Ltd. Admirals’ investment firms are fully owned by Admirals Group AS.
Product offer may differ depending on the regulatory requirements of each Operating Company.
Admiral Markets UK Ltd is registered in England and Wales under Companies House – registration number 08171762. Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA) – registration number 595450. The registered office for Admiral Markets UK Ltd is: 37th Floor, One Canada Square, Canary Wharf, London, E14 5AB, United Kingdom.
Admiral Markets Cyprus Ltd is registered in Cyprus – with company registration number 310328 at the Department of the Registrar of Companies and Official Receiver. Admiral Markets Cyprus Ltd authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC), license number 201/13. The registered office for Admiral Markets Cyprus Ltd is: Dramas 2, 1st floor, 1077 Nicosia, Cyprus.
Admirals AU Pty Ltd Registered Office: Level 1, 17 Castlereagh Street, Sydney, NSW 2000, Australia. Admirals AU Pty Ltd (ABN 63 151 613 839) holds an Australian Financial Services Licence (AFSL) to carry on financial services business in Australia, limited to the financial services covered by its AFSL no. 410681.
Admiral Markets AS Jordan Ltd is authorised and regulated to conduct investment business by the Jordan Securities Commission (JSC) in the Hashemite Kingdom of Jordan, registration number 57026. The registered office of Admiral Markets AS Jordan Ltd is first floor, Time Centre Building, Eritrea Street, Um Uthaina, Amman, Jordan.
Admirals SA (Pty) Ltd is registered in South Africa with the Companies and Intellectual Property Commission (CIPC) – registration number - 2022 / 620981 / 07. Admirals SA (Pty) Ltd is an authorised financial services provider (FSP51311) registered at the Financial Sector Conduct Authority. The registered office for Admirals SA (Pty) Ltd is: Dock Road Junction, CNR Dock Road and Stanley Street, V&A Waterfront, Cape Town, Western Cape, 8001, South Africa.
Privacy Policy Client Complaints Handling Procedure.