There are plenty of Forex trading strategies depending on the market situation, choice of technical indicators, and the timeframe involved. Scalping has proven to be a profitable strategy, entailing comparatively lower market risk than longer trades. However, the use of appropriate risk management tools is necessary even with scalping. Before we look at some effective scalping strategies, you should first know what scalping strategy is.
A brief introduction to scalping
In the Forex market, scalping entails trading a number of positions during a short period of time. Traders may gain small profits up to 10 pips at a time. It might look insignificant, but over the course of the day, these small profits could add up to a good sum. There are traders who enter and exit positions almost 100 times a day, to try and build up a significant amount over time.
Scalping entails trading a number of positions during a short period of time.
If you have the time and patience to keep on analysing the markets throughout the day, this strategy could be for you. There can be losses for sure, but the real aim is to keep their numbers lower than the gains. Scalpers are ideally people with quick decision-making abilities since there will be times when decisions will need to be made in a matter of seconds. For someone who is considering this method, a good amount of experience in the market is necessary. Another requirement would be a robust and stable automated trading system like MT4 or MT5, for fast trade execution.
Here are some of the best scalping strategies successful traders use.
The one-minute scalping strategy
This strategy includes trading positions with durations of one-minute each. Traders can enter a number of positions within just one hour. Firstly, the chart has to be set in the 1-minute timeframe. You can use a number of technical indicators in this method. We will be dealing with the Exponential Moving Average (EMA) in this example.
Ideally, the 50-period and 100-period EMA lines should be chosen for this method. Make them distinguishable from each other by customising their colours. Along with the EMA indicator, choose a stochastic oscillator that will provide entry signals.
When the 50-EMA line goes above the 100-EMA line, it usually signals a long position. Your entry price should be at the same level as the EMA suggestion. A stochastic indicator will come in handy here. Wait while it goes upwards and crosses the level 20. When all these conditions are met, enter into a long order. For short positions, the 50-EMA line needs to go below the 100-EMA line. The stochastic indicator should cross 80 in the downward movement. Again, the entry price should be close to the price levels of the EMA lines.
This strategy is good for the Forex markets, for almost all currency pairs. However, you need market volatility for this method to give the best results. Use this scalping strategy in the opening sessions or the closing sessions of markets, when volatility is higher. This is one of the common strategies used. You can also change your 1-minute chart to a 5-minute chart during this time.
Using Stochastics and Bollinger Bands
We will combine the use of both these indicators in this strategy. The Stochastic Oscillator will generate an oversold or overbought signal, while the Bollinger Bands will confirm it.
Suppose we use a Moving Average line on our chart. This MA line is at the middle of the indicator. When the price crosses this line, the Bollinger Band will generate a confirmation signal. We will hold each position as long as the price touches the opposite Bollinger Band level. Remember, if the Stochastic generates a bullish signal, but the price doesn’t cross the MA line, then this trade signal is false.
Normally, for a long position, the price will move upwards, towards the upper Bollinger Band, breaking the MA line. In that case, we will hold this position till the price remains on the upper band. As soon as the price starts moving downwards, towards the lower Bollinger Band and touches it, we will have a short signal confirmation. The price must break the MA line and touch the bands to confirm a position.
In this method, the Stochastic Oscillators and Bollinger Bands complement each other perfectly. Take care to identify the false signals though. This is again a scalping strategy that requires high volatility in the market.
Scalping support and resistance levels
If you are looking for a scalping strategy in a low-volatility market, then use support and resistance levels. Along with that, you need a trading range, so that you are able to put entries, exits, and stops easily. Low volatility is perfect for risk-averse traders. Simply scalp long at the lows and scalp shorts at the highs of the S&R levels. A tight trading range will provide multiple opportunities over the course of the day.
Things to take note of
What you are aiming for here is a higher win/loss ratio. Your risk per trade has to be small, so place your stop losses close to your entry points. Another aspect is the commissions per trade.
When you are taking so many positions in a day, the commissions could eat into your profits. Fortunately, OctaFX charges zero commission on its Micro and Pro trading accounts. The third aspect is to not get carried away on the number of trades made in a day. This will expose you to significant risk. It's about ending up with more winning trades than losing ones. Emotions have to be kept in check.