Scalping Forex Strategy guideline (PDF)

Scalping Strategy for Forex Trading or Scalp trading is a popular day trading strategy that has been around for a long time. This short-term exchanging technique involves making small profits from price changes. It is used mostly within the foreign exchange and commodity markets. As these assets are known to fluctuate regularly. In this course, we will introduce the forex scalping strategy and learn how to implement it using different technical tools.

Scalping strategy

What is forex scalping trading strategy ? 

Scalping  is a trading Strategy based consists of profiting from small price changes by buying and selling assets for a quick and small profit. However, Scalping strategy exposes currency and crypto traders to less risk and offers greater trading opportunities. The scalping concept relies on the idea that smaller moves are easier to get and more frequent than larger ones. Traders who employ this forex strategy are called scalpers. Scalpers can place a few to 100 or more trades in one day and always try to make as many small profits as possible.

How does scalp trading works?

The scalping strategy is a short-term technique as forex traders seek to make intraday profits. It involves buying and selling many times a day and earning profit from differences in prices. In other words, buying an asset at a lower price and selling it when it goes up. The holding periods can range from seconds to minutes and sometimes up to several hours. The key to scalping is to discover highly liquid assets that promise frequent changes in price on the same day. Because it is hard to scalp when the asset is illiquid. Liquidity also ensures getting the best price when entering and exiting the forex market.

Generally, Scalpers make decisions based on the following factors:

  • Watch and trade volatile assets each day.
  • Buy at breakouts and see if there is an instant rise after entry.
  • Sell quickly if there is no upward movement
  • Once the price goes up and they have a small profit, they sell half and adjust exit to their entry point on the remaining position.
  • Place multiple trades until they achieve their daily goal.
Scalp trading

1 Minute scalping strategy example

1 minute scalping strategy is a situation where an investor employs a one minute chart to make analyses and execute trades. However, in a 1 minute chart, each candle available describes one minute period. This means that you will see the candles move in real-time. Moreover, you can use the 1 minute scalping strategy with any currency pair and it is preferably using it in high volatility markets. You have to employ technical indicators when trading this strategy. Therefore you can use 50-period and 100-period exponential moving average (EMA) and stochastic oscillator (5,3,3).

5 Minutes scalping strategy example

5 minute scalping strategy or we call it 5 minute mom, as its name suggests this strategy helps traders to catch momentum bursts in very short-term (five-minute) charts. However, the 5 minute scalping strategy employs two technical indicators: 20-period exponential moving average (EMA) and moving average convergence divergence (MACD). It employs the EMA rather than the simple moving average (SMA) because the EMA sets additional weight on recent price movements. In fact, we use the EMA to determine the trend and the MACD to measure the momentum. The mixture of these two indicators creates a great strategy for scalping.

Moreover, the notion of the 5 minute scalping strategy is to wait for a reversal to occur and enter a trade only when this reversal is followed by a momentum that must be big enough to make a large extension burst. Besides, to exit a trade traders must do that in two separate segments. The first one is to make a profit and make sure that you will never turn in a loss. And the second one is to maximize your profit with no risk because at this point the stop loss has been moved to breakeven.

Scalping strategy using technical indicators

Investors often use technical analysis tools to help them identify certain movements and patterns before they place their trades. Generally, the best scalping indicators work together for a successful scalping strategy. The most common scalp trading tools include MAs, oscillators, B-Bands, and the relative strength index.

  • Scalping strategy based MAs

MA is one of the most common tools in technical analysis to reveal the price tendency. Forex traders often use a short-term MA to pinpoint the recent differences in price movements. Conversely, a long-term MA to identify the direction pattern of the price, whether it is increasing or decreasing.

Scalping strategy using MAs

The example above is a one-minute EUR/USD chart. The graph shows a 20-period MA for the short-term (red line), and a 200-period MA for the longer term (blue line). the long-term MA is rising, so the forex trader observes the 20-period MA then takes positions in the direction of the price movement. These are marked with the white arrow.

  • Scalping based oscillators

This oscillator compares particular closing prices of an asset to a range of its prices over a recent period of time. Using this forex strategy in scalping aims to capture trending moves in the FX market.

In the overhead chart, the price is moving higher, and the lows in the stochastics (marked with white arrows) offer entry points for long trades. It is when the green %K line crosses above the dotted yellow %D line. Traders exit their position when the oscillator reaches the upper limit of its range, or when the bearish crossover appears (the %K line crosses below %D).

Conversely, in a downward trending market, currency traders should take short positions. They will look for bearish crossovers in the direction of the trend (the green %K line crosses below the dotted yellow %D).

  • Scalping based BBands

It is another tool that determines entry and exit levels for a trade. Scalpers use the BBands to determine whether the asset is in an overbought or oversold condition. Traders can also use this scalping strategy to evaluate forex and commodity markets volatility. In fact, this can be very beneficial for Scalpers, as the best time frame for scalp trading BBands is about 1-5 minutes.

When BBands is almost flat and the price touches the lower band, it is a buy signal. Then close the trade at the upper envelope.
Conversely, when the price touches the upper band and the BBand is almost flat, it is a sell signal. Then close the trade at the lower envelope.

  • Scalping based Relative Strength Index

RS index is a helpful tool to assess the overbought and oversold conditions in the price of an asset. Scalpers may employ it in their scalping strategy to find entry grades that follow the price direction. In the chart below, the price is steadily rising, with the two MAs going higher. A possible entry point is created when the relative strength index falls to the 30 grade and then moves above it.

Scalping strategy

Contrarily, when the strength oscillator moves to 70 and then begins to decrease within a downtrend, a possible exit area is created.

Conclusion

Scalping is one of the most used scalp trading strategies. It requires self-discipline and willingness. The ability to respond quickly to forex currencies movements is essential in such a strategy. In order to implement a successful scalping strategy, commodity traders need to be conscious of the risks and have an efficient exit strategy.

Key takeaways

  • Scalping is a trading strategy that consists of making many small and quick profits by trading assets in large transaction volumes.
  • Scalping is a short-term strategy. Traders of commodities take several positions that last only seconds or minutes and sometimes hours.
  • Scalpers should look for liquid assets to ensure getting the best price when entering and exiting the forex market.
  • the scalping strategy requires discipline. Once a set profit or loss has been reached, the scalper needs to exit the trade.
  • Using technical analysis tools can help identify market movements before placing trades.
  • Generally, scalpers use a set of technical tools to implement a successful scalping strategy.