Scalping Trading Strategy
A scalping trading strategy is a short-term strategy that aims to profit from small price movements within the market. Scalp trader executes trades fast and holds the position only for a period of a few seconds or minutes and will not hold positions overnight. Scalping Forex relies on a large number of trades and small profits from each trade. Therefore most scalping strategies are based on lower time frames 1-minute to the 15-minute.
The aim for a successful scalping trading strategy is through a large number of winners, rather than a few successful trades with large winning sizes. Therefore, a forex broker with the lowest spreads is a must. High spreads can easily eliminate significant portions of trader-winning trades. Choosing the lowest spreads currency pairs is also an important factor as well as volatility. EUR/USD would be the best choice, currency pair with the lowest spreads. USD/JPY, GBP/USD, EUR/GBP, EUR/JPY, and AUD/USD currency pairs are also suitable for scalping trading strategies. In terms of volatility AUD/JPY, GBP/AUD, GBP/NZD usually experience a greater degree of variation during trading days.
Scalping requires a very strict exit strategy. One large loss could eliminate many small gains traders could obtain. Therefore, forex scalpers are required to keep a constant eye on the market for any changes and to have an iron discipline. Possible entry points can appear and disappear very quickly so a trader must remain tied to his platform. Scalping is not necessarily an ideal strategy for individuals with day jobs and other activities as it is very demanding in terms of time. Scalping forex apart from trader full attention also requires great knowledge and experience. Expertise in Naked Chart Candlestick Patterns and Price Patterns would be highly beneficial.
Best scalping trading strategies based on standard indicators:
Technical indicators help traders to forecast market trends and patterns before they open a trade. Most of the time more than one indicator is needed. Generally, the best scalping indicators are combined together to work for a successful scalping strategy. The most common standard indicators scalpers use include simple moving average (SMA), Bollinger Bands as well as an exponential moving average (EMA), and stochastic indicators.
Stochastic oscillator strategy:
The stochastic oscillator scalping trading strategy combines three standard indicators: Stochastic Oscillator and two Simple Moving Averages (SMA), 50 & 200. A stochastic oscillator technical indicator measures the current value of a currency pair to its range over a recent period of time. By comparing the price to its recent range, the indicator attempts to reveal possible turning points and trend strength. Whereas SMA is the most common MA indicator, helps to identify the direction of a trend, without the interference of shorter-term price spikes. Find out more about standard indicators on Top 10 standard indicators for MetaTrader 4.
Scalping with the use of such an oscillator aims to capture moves in the trending market the reason for Simple Moving Average is crucial to identify the direction of a trend. In case SMA 50 remains above SMA 200 indicator indicates that the trend is bullish (uptrend), in contrast, SMA 50 remains below SMA 200 indicator indicates that the trend is bearish (downtrend). Traders always enter the market in the direction of the main trend.
Stochastic oscillator indicator with 14,5,3 setting signal entry points for a trade. When mainline K rises s above the 20 level signal an entry for a long (buy) position. In opposition when mainline K falls below the 80 level signal an entry for a short (sell) position.
Stochastic oscillator scalping strategy buy signals example :
(M5 chart, SMA 50 and 200, Stochastic oscillator 14,5,3)
Scalp Trading Using The Moving Average
This strategy includes the use of moving averages. It involves the use of three moving averages, two short-term MAs, and one long moving average.
For example, a three-minute trade that entails the use of 5 and 20-period moving averages (MA) for the short term, and for the longer term 200- period MA is used.
As the MA is increasing, traders watch out for the 5 period MA to cross above the 20 periods and then open positions on the path of the trend.
In the case where the longer-term MA is seen to be declining, a short position is opened when the price moves beneath the five-period MA.
Note that these trades move with the market trends. Just like in every scalping strategy, a tight stop loss and take profits needs to be set. Proper risk management must be employed, as this is vital to avoid big losses as this can affect the little profits generated.
Scalp Trading Using The Parabolic SAR Indicator
The parabolic SAR is a technical indicator used by traders to highlight the market trends, and also offer entry and exit levels. The term SAR represents stop and reversal. The technical tool is a string of dots positioned on top or underneath the price bars. The dot positioned below the price bars is bullish, while the dot positioned above the price bars is bearish.
Trend reversal is signaled when there is a notable change in the position of the dots.
For example, a short trade can be opened when the price shifts below the SAR dots, and also a long trade can be opened when the price lives above the SAR dots.
Traders should note that most times than not, traders face a lot of losing trades, but if carefully analyzed they will have a profitable trade.
Scalp Trading Using The RSI
Another strategy used by scalpers is to use RSI to pinpoint entry and exit points that match the current trend.
When the price is rising bullish, and the RSI drops to 30 moving above the line, it indicates an entry signal.
Contrary, if the RSI moves above 70 and starts to drop, a sell signal is given.
WHAT YOU NEED TO KNOW BEFORE SCALPING
As a scalper, there are numerous factors to take note of to become profitable in your niche.
A scalper needs to be extremely disciplined, and it is also very mandatory to be conscious of time. Unlike long-term trades that allow trades to take a break from constant monitoring of trades. A scalper must constantly be monitoring trades and looking out for trade opportunities.
This is because scalpers are carried out in short time frames, and entry points can arise and disappear so easily, so it is highly necessary to stay glued to your screen during your trading hours. For traders who can not constantly watch their trades should consider trading on longer time frames.
Scalping is not an easy strategy and requires a lot of technicalities to be carefully executed. One of the main reasons for its difficulty is that any trades need to be opened and closed to attain good profits at the end of the day. Statistics have shown that most traders tend to have more losses than profits at the end of a trading day. This is why most traders over time switch to long-term trades with higher profit margins.
Scalping needs a swift reaction to the movement of the market. Also, a trader needs to be able to trade without emotions. This is because when in a losing trade, a trader needs to make a quick decision to cut his or her losses and open new trades. Setting tight stop loss and sticking to it is one of the ultimate factors of becoming a successful scalper.
Trading with patience and discipline gets rewarded in the long run. As an experienced scalper, you have to possess all these qualities. However, there are a few traders who prefer to stick to the long-term trades rather than open short-term trades.
PROS AND CONS OF FOREX SCALPING STRATEGY
The good thing about scalping is that it enables a trader to place various trades in a day. Lots of traders prefer to be constantly encompassed in the forex market. Most scalpers who place short trades for a day find this part very thrilling and exciting.
Another good thing about scalping is the ability to constantly rate profits within minutes or seconds. Unlike other trading strategies which could take up to a month or weeks to generate profits from a trade. With a good stop loss and take profit order, scalpers can generate a good income from opening and closing trades within a short timeframe. For traders who would want to consider Forex trading as a steady source of income, this is a good strategy to follow.
Scalping allows trades to profit from minimized risk per trade. Scalpers only make use of a minor position size compared to the rest of their account balance. With the use of tight stop-loss orders, traders can only risk a little amount of equity during a trading session. This is a good method of avoiding over-trading.
Another advantage of the scalping strategy is the ability to make profits without having to wait for a long time. This is because scalpers do not require the market to move greatly. With long-term trades, you have to wait for the market to make a great swing, In other to attain high profits. With Scalping only a few pips are required to attain your profit goal.
Scalping has turned into a safe haven for new traders. This is because this strategy does not require any extensive knowledge or any extremely difficult technicality. With a good set stop loss and take profit orders, any harder can easily open and close trades within a short space of time.
Traders make quick profits, by swinging in and out of the market. This is because the forex market is highly profitable and therefore traders can easily open and close trades.
Scalping cannot be affected by major price swings. The position helps open for seconds or minutes and as such cannot be influenced by major price moves such as price reversals.
Scalping strategy has its numerous advantages, but however, it also has its disadvantages as well.
The biggest disadvantage of the scalping strategy is that it can be hard to indicate the future movement of the market in a short time frame. While it is easier to predict the future of the market for a long time free, indicating the future of the market in the next 10 minutes can be difficult. Many traders have stated that the use of technical indicators in scalping strategy is baseless and useless, as it only provides false signals.
It’s been stated that scalping involves the opening and closing of trades within a short period. However, to become profitable you need to constantly win 90% of all your trades as the loss incurred can easily erase the profits generated in a whole day. Unlike long-term trade which only requires a sizable position with profits generated after a long period. With scalping, a trader needs to constantly record successful trades to generate a high-profit margin.
Another disadvantage of the forex scalping strategy is that it requires huge capital. This is because most forex scalpers trade using leverage to generate high profits. So as a result, a sizable amount needs to be deposited in the account to handle the margin size required to open the trade. However, it is important to note that leverage maximizes profits just as much as it maximizes losses. Traders are advised to trade using minimal leverage.
Profits generated per trade are small, and it might become difficult for trade to reach its profit targets. A 5 pip profit on trade might be unsatisfactory for some traders.
The high volatility of the market might result in more profits in the scalping strategy or enormous losses. Just like every other forex trading strategy, the forex market is highly volatile and profits can easily be wiped due to high market volatility, or wild price movements. This could lead to major loss and equity being wiped, especially for traders using a high volume of leverage.
For instance, a trader might not set a tight stop loss, and the trade might experience a great price move, like a price reversal which could lead to a huge loss of funds. Thu is why traders are highly advised to properly learn how the forex market works before opening and trading a position.