The Scalping Technique Explained

Scalping is a very short-term trading style and despite its odd name, it's quite popular among professional traders. Scalping represents the shortest-term style of trading, even shorter than day trading, and got its name because it attempts to skim many small profits off of a large number of trades throughout the trading day. Scalpers believe that it's easier to catch and profit from small moves in stock prices rather than from large moves. 

Summary:

  • What is Scalping Technique
  • Scalping Strategies that Works
  • The Most Accurate Indicator for Scalping
  • Free, profitable EA for News Scalping
  • To be or not to be a Scalper?
     

What is Scalping Technique

Scalpers are usually technical analysis traders, as opposed to fundamentals traders. Technical analysis focuses on currency pair's past price movements, usually with the help of charts and other data analysis tools. Traders use historical price information to predict the asset's future movements and set up their trades. 

Fundamental analysis usually involves using a company's financial statements, discounted cash flow modeling, economic indicators and other tools to assess a company's intrinsic value. Scalpers may trade on news or events that drastically affect a company’s value or currency pair's prices immediately after its release on the forex factory economic calendar. In some cases, they may also use short term changes in fundamental ratios to scalp trades but typically they focus mostly on the technical charts.

Scalpers use technical analysis but within this style, they can be either discretionary or system traders. Discretionary scalpers will make each trading decision in real-time (albeit very quickly), whereas system scalpers follow a scalping technique without making any individual trading decisions. Scalpers primarily use the market's prices to make their trading decisions, but some scalpers also use one or more technical indicators, such as moving averages, channel bands, and other chart patterns.

Scalpers choose between hanging on the monitors all day long waiting for the signal to launch the trade or they can use constantly profitable Forex EAs or Forex Robots that will automatically execute trades based on previously predefined criteria.

Continue reading or play around with the ultimate Expert Advisor Builder and create automated scalping strategies with a few clicks, without writing codes.

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Scalping Timeframes

Scalping chart timeframes and the amount of time that each forex trade is active are the shortest of all of the trading styles. For example, a day trader might use a five-minute chart, and make four or five trades per trading day, with each trade being active for thirty minutes.

In contrast, a scalper might use a one-minute chart, where each price bar represents only five seconds of trading, and make anywhere from 20 to 100 or more trades per day, with each trade being active for a few seconds to a few minutes.

Scalping Techniques and Styles 

As with any other style of trading and forex trading systems, many different scalping techniques exist. The most well-known scalping technique is using the market's time and sales to determine when and where to make trades. Scalping using the time and sales is sometimes referred to as tape reading because the time and sales used to be displayed on the old-fashioned ticker-tape, known as the tape.

Some scalping techniques are similar to other trading styles in that they use bar or candlestick charts, and traders determine when and where to make trades using price patterns, support and resistance, and technical indicator signals.

Scalping Psychology

Scalping technique is most suitable for a specific type of trading personality. Scalpers must be very disciplined, especially in the case of system scalpers, as they must be capable of following their trading system precisely no matter what.

Scalpers must be able to make decisions without any hesitation, and without questioning their decisions once they have been made. However, scalpers must also be flexible enough to recognize when a trade is not proceeding as expected or hoped and take action to rectify the situation by exiting the trade.
 

Profitable Scalping Strategy

If you like fast-paced market movements and want to get into and out of a trade as fast as possible, then this 1-minute scalping strategy might be very interesting for you. Instead of waiting for days for a trade setup to occur on the daily chart, Forex scalping allows you to make multiple trades in a single day whenever the strategy provides a buy or sell signal. In addition, all trades are closed by the end of the day, meaning you won’t have any risk of holding trades overnight and you’ll be able to precisely calculate your net profit or loss by the end of each day. In our Forex scalping guide, we’ll cover what scalping is and how to scalp trade Forex.

This 1-minute Forex scalping strategy is based on a simple trend-following and mean-reversing principle, combined with overbought/oversold market conditions. While this may sound complicated at first, I assure you it’s not. We’ll shortly cover a few examples to show you how it’s done.

In general, we want to trade the buying or selling momentum on the 1-minute timeframe, with additional confirmation coming from pullbacks (the mean-reversing part). To do so, we need to employ a few technical indicators that will generate the trading signals for us.

The tools you need to scalp trade Forex on the 1-minute chart

For this strategy to work, we’ll use the following scalping indicators:

In addition to the two scalping indicators above, you also need to pay attention to the market hours during which you trade. This strategy works best during volatile and liquid forex market hours, such as the New York – London overlap. Trading during these hours ensures enough volatility to make profits and lowers the transaction costs on the trades due to the high liquidity.

The two moving averages are utilized to identify the overall trend on the 1-minute chart. Exponential moving averages tend to work better than simple moving averages in this regard, as they tend to adjust more quickly to most recent price movements. Basically, when the faster 50-period EMA crosses above the slower 100-period EMA, the trend is up. And when the faster 50-period EMA crosses below the slower 100-period EMA, the trend is down. We want to trade only in the direction of the trend.

The Stochastics indicator is an oscillator which is used to identify overbought and oversold market conditions. The indicator’s reading can only be between 0 and 100, with overbought conditions arising when the indicator’s value crosses above 80, and oversold conditions arising when the indicator’s value crosses below 20. Overbought conditions signal that the price may fall soon, while oversold conditions indicate that the price might rise soon.

Rules for a long entry

Now that we explained the main tools that we’re going to use, it’s time to see how to use the strategy in scalping the Forex market. Basically, there are a few conditions that need to be met in order to enter with a long position.

  • Wait for 50-period EMA to cross above the 100-period EMA – The 50-period EMA is the faster moving average of the two, meaning it will react to recent price action quicker than the slower 100-period EMA. When the faster MA crosses above the slower MA, this indicates that the overall trend on the chart turns bullish and provides as with the first confirmation for a long entry.
  • Wait for the price to make a pullback to the 50-period EMA – This step is especially important in our strategy. It ensures that we don’t enter immediately after the MA-crossover, as profit-taking activities from other traders may reverse the price and leave us with a losing position. In addition, price movements that spike up or down on large trading momentum tend to be unsustainable in their direction, leading to a countertrend price movement. This is the mean-reversing part of our strategy – we wait for the price to reverse to the moving average before entering our position.
  • Wait for the Stochastics indicator to move below overbought conditions – Now the Stochastics indicator comes into play. The fast-slow MA-crossover typically happens on high trading momentum, which pushes the Stochastics indicator into overbought market conditions (indicator reading above 80). Buying when the Stochastics is above 80 isn’t a wise decision, as overbought market conditions signal that the price may reverse soon. This is another reason why we have to wait for the price to make a pullback to the MA, as the pullback will usually decrease the value of the Stochastics below 80.

Once all three conditions are met, we can scalp the market with a buy position as shown on the chart below.


source: MetaTrader 5 AM Broker
 

On the chart, you can see a typical buy setup using the rules explained above. As the 50-period EMA crossed above the 100-period EMA, the Stochastics indicator became overbought (>80). The following pullback of the price to the EMA pushes the Stochastics back below 80, and revealing a BUY trading opportunity.

Rules for a short entry

Similar rules apply when entering with a short position, only here we need to confirm a downtrend instead of an uptrend in the case of long entries. For a short entry, the following rules apply:

  • Wait for the 50-period EMA to cross below the 100-period EMA – This rule ensures that a downtrend is intact. We only want to enter short during downtrends.
  • Wait for the price to make a pullback to the EMA – Similar to a long position, the price has to make a pullback to the EMA which prevents us from trading immediately on the fast-slow MA crossover. Trading on high momentums can be risky as the price tends to reverse soon after a breakout.
  • Wait for the Stochastics indicator to move above oversold market conditions – The pullback of the price will usually push the Stochastics indicator to normal trading conditions. Entering with a short position when markets are oversold can increase your risk significantly, which is why we need to wait for the Stochastics to move above 20.

The following chart shows all the mentioned rules for a short position in play.


source: MetaTrader 5 AM Broker

Once the 50-period EMA crosses below the 100-period EMA, we have to wait for the price to return to the EMA. The Stochastics will meanwhile rebound from oversold market conditions, confirming that our short entry is ready to be placed. As can be seen on the chart, the price a significant move lower following the pullback and our entry.


The most Accurate Scalping Indicator

Of the hundreds of scalping indicators out there, the Double Bollinger Bands are hands down our favorite . . . they provide a wealth of actionable information. They tell us whether a currency pair is in a trend or range, the direction of the trend, and when the trend has exhausted. More importantly, Double Bollinger Bands (DBBs) also identify entry points and proper places to put a stop.

That sounds like the most accurate scalping indicator. Just how useful are DBBs, standard Bollinger Bands with a brilliant modification?

>> Read more about Double Bollinger Band, the most accurate indicator for scalping


FREE Scalping EA that Works

Forex Factory News Trader is a MetaTrader 5 news scalping EA developed to help Forex traders with news trading opportunities that arise during important macroeconomic releases of the forexfactory economic calendar.

The Forex EA can be used to trade news volatility strategies. It is important to understand that Forex Factory News Trader is not a fully automatic solution — a trader has to set the date and time of the news release and also to decide on the appropriate stop-loss and take-profit.

However, ATR-based stop-loss and take-profit settings are available too. This Forex EA or Forex Robot supports flexible position sizing in addition to the usual fixed position size. It is available and compatible with MetaTrader 5 AM Broker with ECN Technology. The reasons will be explained inside the article.

>> Read more and download the best news Scalping EA (+10% a month) 


To Be or Not To Be a Scalper?

In this article, we answered the question on what scalping is in Forex and explained a simple, yet powerful, 1-minute Forex scalping strategy. Scalping Forex strategies cater to traders who don’t have the patience to wait for a trade setup on the 4-hour or daily chart and want fast-paced trading during the day. Nevertheless, Forex scalping is not an easy technique as it takes the market experience to identify the uptrends and downtrends on the lower timeframes, which host a large amount of market noise. If you want to learn Forex scalping, practice first on a demo account until you get completely familiar with the trading strategy.

Our 1-minute Forex scalping strategy is based on three tools: a fast-moving average, a slow-moving average, and a Stochastics indicator that is used to signal overbought, and oversold market conditions. In this regard, it includes trend-following and mean-reverting techniques to get the most out of the market. Still, to increase your chances of winning trades and lower your transaction costs, aim to use this strategy only during the New York – London market overlap.

If you are a position trader that uses daily charts and makes your trading decisions over the course of an entire evening, you probably won't make a good scalper. However, if the thought of waiting several days for your next trade drives you insane and you prefer quick trades, then perhaps scalping would be suitable for you.

Scalping can appear easy because a scalper might make an entire day's profit within a few minutes. However, in reality, ​scalping can be quite challenging because there is very little room for error. If you do decide to try scalping, make sure that you do so by using a trading simulator, until you are consistently profitable and no longer make any beginning mistakes, such as not exiting your trades when they move against you.

Understanding what is scalping technique and how does it work is important, but if you need some help MetaTrader 5 AM Broker provides the best scalping indicators a forex trader need. Additional, use an Expert Advisor Builder to generate backtested, profitable scalping EAs.

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Categories:  Forex