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What is scalping?

 

Summary:

A scalper is a trader who attempts to make profits from small price changes in the market. This means that they tend to place lots of small bets throughout the day and constantly monitoring the price levels of each trade. If a strict exit strategy is implemented, a scalper can be very profitable by taking advantage of small changes in the price of a commodity that may not necessarily reflect the overall movement of the commodity’s price for the day.

Full Description:

What is Scalping?

Short term trading strategies are very popular among retail traders. Instead of waiting for days for a trade setup, short-term traders jump into and out of the market in seconds and trade only during the busiest and most liquid market hours. This means no overnight risk, and all profits and losses can easily be summarised by the end of the trading day.

Scalping is a short-term trading style which suits traders who don’t have the patience to trade higher timeframes. While scalpers aim for very small profits on each trade, the large number of trades they open during a day can easily return significant profits by the end of the day. However, you need to be aware that this is a very active trading style, and if you don’t have the discipline to stick in front of your screen for a few hours each day, you’ll be better off with a longer-term trading style such as day trading or swing trading.

Read: What is Selling in the Financial Markets?

Pros and Cons of Scalping

Just like any other trading style, scalping has its advantages and disadvantages. While opening a large number of trades comes with higher transaction costs, scalpers don’t have to follow fundamentals since they don’t play a significant role on very short timeframes. The following table summarises the most important pros and cons of scalping.

Advantages

Disadvantages

Many trading signals during the day on very short timeframes

The large number of trades increases transaction costs when compared to longer-term trading styles

No overnight risk – Profits and losses can be easily summarised by the end of the trading day

All trades need to be actively managed and traded during the most liquid market hours

Fundamentals don’t play an important role on very short timeframes – Scalpers can focus purely on technical analysis

Unexpected news can spark a significant market reaction and reverse a profitable scalping trade

 

The 1-Minute Forex Scalping Strategy

In the following lines, we’ll explain an easy scalping technique that is based on the 1-minute timeframe. This strategy combines the best of trend-following and mean-reversing rules and uses three popular technical indicators to identify potential long and short setups.

 

  • Scalping Forex Indicators

 

This 1-minute scalping strategy is based on two exponential moving averages which are used to identify the overall short-term trend, and on the Stochastics indicator which is used to spot overbought and oversold market conditions. The complete toolbox and indicator settings for the strategy are:

1) Two Exponential Moving Averages (EMA) with a setting of 50 periods and 100 periods. Since the strategy is based on the 1-minute timeframe, the EMAs are a 50-minutes EMA and a 100-minutes EMA. A cross of the faster (50-minutes) EMA above the slower (100-minutes) EMA signals a short-term uptrend, while a cross of the faster EMA below the slower EMA signals a short-term downtrend.

2) Stochastics indicator with a period-setting of 5,3,3. The Stochastics indicator is an oscillator which signals overbought market conditions when its value crosses above 80, and oversold market conditions when its value crosses below 20. A long entry is confirmed only when the Stochastics indicator is below overbought conditions, while a short entry is confirmed only when the indicator is above oversold conditions.

 

  • Rules for a Long Entry

 

To open a long entry based on the 1-minute Forex scalping strategy, we need to wait for the 50-period EMA to cross above the 100-period EMA, for the price to make a pullback to the 50-period EMA and for the Stochastics indicator to return from overbought market conditions. These rules are shown on the following chart.

Using Stochastics Indicator in Scalping

Waiting for the pullback of the price to the 50-period EMA is extremely important and emphasises the mean-reversing aspect of the strategy. Also, the initial up-move usually rockets the Stochastics indicator to overbought conditions, while the following pullback lowers the value of Stochastics and confirms a long signal.

 

  • Rules for a Short Entry

 

To open a short position with this strategy, we need to wait for the 50-periods EMA to cross below the 100-periods EMA (signalling a short-term downtrend), for the price to make a pullback to the 50-period EMA and for the Stochastics indicator to return from oversold (<20) market conditions. These set of rules are shown on the following chart.

What is Scalping? This Short Entry using the 50 Day DMA is One Strategy You Can Use

Final Words

Scalping Forex or any financial instrument for a living requires discipline and skills to analyse the market on very short timeframes. Be prepared for many hours in front of your charts if you want to master this trading style and call yourself a scalper. Try to trade only during the busiest market hours, as illiquid markets can lead to wider spreads and slippage which can eat into your profits. In addition, follow an economic calendar and mark important market news as they can trigger significant price moves on short-term timeframes.

Read Next: 7 Day Trading Styles and Techniques of the FX Market

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