Scalping Forex Strategy
Forex, also known as foreign exchange or FX, has become a buzzword in the trading industry. It is one of the world’s most widely traded markets. According to the 2016 Triennial Central Bank Survey, FX markets traded on average $5.1 trillion per day.
As more and more investors are entering the forex market, finding a distinctive trading style and strategy is critical to be successful. One option is a scalping forex strategy.
What is Forex Scalping?
Scalping in the foreign exchange market involves trading currencies. This trading style is a type of day trading based on making a profit buying and selling currencies but holding a position for a very short period of time and locking in small profits for each trade.
Because forex scalp traders only hold an asset for a short amount of time, within a few seconds, minutes, or at most a few hours, many trades are placed throughout the trading day. The forefront of a successful scalping forex strategy is the use of technical analysis charting tools. These tools reveal various buy or sell signals that a trained forex scalper can recognize and immediately act on.
Reasons for Scalping
Scalping is ideal for aggressive personalities with lightning fast reflexes. Scalp trading is best suited for investors who despise waiting for a trade to close. Scalpers hold positions for a brief time, which also means a lower risk for extreme losses.
Scalp trading is well-suited for new traders, where less knowledge of the market and established trading theories are required. These traders can employ a few specific forex scalping trading strategies to get started locking in some gains.
How to Choose the Best Scalping System
A forex scalping system supports the trader and his or her scalping forex strategy. Before you can build your strategy, you must decide on a forex scalping system. A successful forex scalper will consider the following sections. All of these sections will help you develop the best scalping system.
Multiple Time Frame Analysis
Although scalping requires precise charts, usually down to the minute, it is essential not to have tunnel vision when trading.
For example, a 1-hour chart may suggest that the price movement is likely bullish. However, your 5-minute charts may indicate that currently, there is a bearish sentiment. Without multiple time frames, you may enter the trade at an inopportune time, where you could have been able to lock in profits if you waited for a few minutes.
Alternatively, dangers lie if you focus too carefully on smaller time frames but fail to see the bigger picture of an upcoming reversal.
Built-In Trade Manager
A built-in trade manager is designed to help you manage your position and minimize the chances of human error.
Automatic Profit Target, Stop Loss Order, and Breakeven
When your trading system automatically executes orders when the market has reached the desired price, it helps eliminate emotions from our trading decisions. While some traders may rush to take any small amount of profit for fear of loss, others may hold onto an asset for too long due to greed. Finally, many fail to exit a trade at the appropriate stop loss and end up with more significant losses.
A built-in trade manager automatically exits a trade when you have reached a healthy predetermined risk to reward ratio, based on your customized trading strategy.
Built-In Spread and News Warning Filter
Since scalp trading profits are small, if the spread, or the difference between the asking and buying price, is too wide, it can significantly eat into your profits and leave you at a considerable disadvantage. An automatic spread warning filter will stop you from entering a trade when the spread is too high, saving you money when it is time to exit a seemingly profitable trade.
Additionally, while scalp traders may be extremely attentive to price charts, they may neglect world news events that may significantly impact an asset’s price movement. An integrated news filter would prevent you from entering trades right before a news announcement, such as a Federal Open Market Committee’s press conference.
Forex Scalping Trading Strategies
Several forex scalping trading strategies focus on particular timeframes, such as 1-minute and 5- minute timeframes.
1-Minute Scalping Forex Strategy
The 1-minute scalping forex strategy adheres to the trend-following and mean-reversing principle coupled with overbought and oversold market conditions. In a 1-minute timeframe, a trader wants to trade on the buying or selling momentum and watches the natural price pullback or mean-reversing for confirmation.
For this scalping forex strategy, you will need a 50-period exponential moving average or EMA and a 100-period EMA along with a Stochastics oscillator (5,3,3). This strategy works best during the market’s most volatile and liquid hours, such as when multiple global markets overlap in trading time.
The two EMAs are used to identify the overall trend. When the 50-period EMA crosses above the 100-period EMA, the trend is up. When it passes below, the trend is down.
The Stochastics oscillator helps identify overbought and oversold market conditions. When the indicator’s value crosses above 80, the asset is being overbought, which indicates that the price may soon fall. Alternatively, when the indicator’s value crosses below 20, the asset is being oversold, which means that the price may soon rise.
Long Position Entry
These are the steps to the 1-minute scalping forex strategy to enter a long position.
- Wait for the 50-period EMA to cross above the 100-period EMA. This crossing indicates a possible bullish trend.
- Wait for the price pullback and return to the EMA. This pullback is the mean-reversing confirmation of the 1-minute scalping forex strategy, which is vital to see before entering the trade.
- Wait for the Stochastics indicator to move below overbought conditions or drops below 80.
- With these conditions, it is now a buying opportunity.
Short Position Entry
To enter a short position is very similar to the long position entry. However, the EMAs are opposite and the Stochastics indicator should reveal oversold conditions.
- Watch for a possible bearish trend when the 50-period EMA crosses below the 100-period EMA.
- Anticipate the price pullback and return to the EMA.
- For a short position entry, the Stochastics indicator should show oversold conditions, or rises above 20.
- With these qualifications met, it is now a short position setup.
5-Minute Scalping Forex Strategy
Because the forex market involves global currency trading, the currency pairs you choose is ideally traded when particular global markets overlap trading sessions. This 5-minute scalping forex strategy uses Bollinger bands with EUR/USD and GBP/USD currency pairs during London and New York trading sessions.
Bollinger bands have three lines. The upper Bollinger band is used as an indicator to lock in profits in a bullish trend, while the lower Bollinger band operates as an indicator to take profit in a bearish trend. The middle line is a 20 moving average indicator for moving your stop loss to breakeven.
Long Position Entry
These are the steps to the 5-minute scalping forex strategy to enter a long position.
- The middle Bollinger band should be flat or starting to flatten out.
- The asset’s price hits the lower Bollinger band.
- When the candlestick closes, initiate a buy market order one pip above the high of the candlestick. Your stop loss order should be ten pips below the lower Bollinger band line.
- As soon as the price hits the upper Bollinger band line, exit the trade to lock in gains. You do not wait for the candlestick to close.
When the price rises and crosses the middle Bollinger line, move your stop loss to break even.
Short Position Entry
The steps to enter a short position using the 5-minute scalping forex strategy is essentially the opposite of the long position entry rules.
- The middle Bollinger band should still be flat or starting to level out.
- It is necessary for the asset’s price must touch the upper Bollinger band.
- As soon as the current candlestick closes, execute a sell market order one pip above the highest price of the candlestick. Subsequently, your stop loss order should be ten pips above the upper Bollinger band line.
- When the price touches the lower Bollinger band line, immediately close your position.
Similar to the long position entry, when the price crosses the middle Bollinger line, move your stop loss to break even.
In addition to your scalping system and forex scalping trading strategy, there are a few other things to consider.
How to Choose a Forex Broker for Scalping
As a scalper with low profits per trade, you would want a broker who can deal with short time frames and offer a small spread. Additionally, because scalping is exceptionally time-sensitive, make sure your broker is easy to access with a simple user interface. Consider testing your forex broker’s software and site before committing to one.
Stick to Your Scalping Forex Trading
Always remember that scalping means accepting shallow profit margins, possibly gaining less than one percent on a trade. However, with a sound scalping system, you can find a high win percentage strategy to grow your account in small amounts but quickly. Nonetheless, it is essential that you stick to your trading strategy, exit trades at the proper profit targets, and execute appropriate stop losses without allowing emotions to hinder your trading plan.
Whichever scalping forex strategy you choose, be sure that you understand it completely and exercise proper risk management. For a fast-paced trading service, subscribe to Stealth Profits Trader to learn more day trading strategies. New York Times bestselling author and expert analyst for Fox Business and CNBC D.R. Barton, Jr. can show you everything you need to cash out faster than you may have ever thought possible.