Easy scalping strategies
Scalping may look like a scary word to a regular mind. Traders, in their turn, find a lot of hidden opportunities behind its meaning. In trading, you don’t have to do anything with a human scalp. Instead, you make “slices” of points on small changes in the price. In literature, scalping is defined as a short-term trading style that helps to take advantage out small price changes as often as possible within a day. Experts identify scalping as a risky trading approach, which requires keeping an eye on the charts for the whole day. Therefore, a scalper must have steel nerves and follow the market carefully. It's essential to know the tips on risk management and place entry and stop loss levels correctly. A self-confident newbie in scalping may turn into a loser if they does not have an algorithm for entering the market. Today, we will help you with this struggle and share some effective scalping strategies.
The usefulness of scalping strategies
How helpful are forex scalping strategies? First of all, most of them have strict entry and exit rules, money management requirements, trading instruments, and timeframes. Therefore, if the strategy is tested and a trader follows the algorithm accurately, they has a high chance to succeed. Second, scalping helps to get quick results within a short period. If a trader feels they lacks patience for trading on higher timeframes, scalping is their thing. Third, scalping helps to minimize overnight risks since all trades should be closed within a day. Finally, scalping trains traders' nerves! If they have experience in scalping, they will learn how to stay highly focused on their capital. This way, they will remain cold-blooded even when something isn’t going right.
How does scalping in trading work?
There are three essential elements any scalping strategy requires. They are technical analysis, trading speed, and consistent trading. The fundamental conception in scalping is to trade liquid assets with tight spreads several times during one day. The trader pays their full attention to the charts and catches small moves in the market. As small changes in the price happen regularly, scalpers never rest while making their trading decisions.
Traders have different approaches to scalping trade, not just “buy low, sell high ." One of the most famous is called impulse trading. When traders follow an impulse, they wait for the trigger to move an asset. This can be political or economic news and other events that can shake the market. Scalpers constantly monitor potential market drivers and check the economic calendar in advance. The main goal of a trader is to catch a significant movement in the market and close the position after the momentum fades.
The second type of scalping is based on the market depth that shows the imbalance between demand and supply. Unlike other scalping methods, this one doesn’t require the usage of charts or indicators. A scalper only needs to monitor the bid and ask prices in the market depth window. By analyzing the number of orders, they predicts the approximate speed of change in the balance between supply and demand and forecasts the direction of a price. It’s worth mentioning that this trading style is suitable for stock trading, not Forex. As the Forex market is highly liquid, it is almost impossible to gather all the data about the orders.
Sometimes a scalper combines impulse trading with market depth analysis. The drawback of this system is that it is more time-consuming.
Range trading is another approach to scalping when a scalper follows the price within a pre-determined range.
There is also an approach that is widely used among crypto traders. It is called arbitrage. Traders benefit from price differences by purchasing and selling the same asset in different marketplaces.
Various sources also classify scalping by the speed of trade. There are high-frequency scalping, mid-term scalping, and conservative scalping.
High-frequency scalping is usually executed through trading robots or expert advisors, as the positions are held for no longer than a minute. Medium-term scalping is referred to active trading strategies with 5-10 minutes per trade, while conservative scalping is referred to 30 minutes per trade.
As it was mentioned before, scalping is a risky trading style. Is it more difficult than day trading? Let's compare two trading styles!
Scalping vs. day trading strategy
Scalping and day trading have some common features. Both trading styles require a trader to close the positions within a day. However, a day trader usually trades on H1-H4 timeframes with an average speed. A day trader also tries to keep up with the long-term trend and balance their risks. Usually, day traders hold a small number of daily trades.
On the other hand, scalpers mainly focus on the M1-M15 timeframes and deal with higher risks and larger trade sizes. They can open tens or hundreds of trades within a day.
|
| Scalping | Day Trading |
| Account type | ECN, Standard | Standard, Micro, Cent |
| Timeframe | M1-M30 | H1-H4 |
| Speed | 10-100 trades/day | 1-5 trades/day |
| Risk | High | Medium |
| Trade size | Large | According to risk |
To sum up, let’s look at the scalper’s checklist.
Scalper checklist:
- trades on small timeframes (M1, M5, M15);
- likes risks and are ready to devote all your time to trading;
- trades during the volatile/busy market;
- likes to have large position sizes to get more return from short-term trades.
If you answered "yes" to more than two points, you are a true scalper! As for those who answered "yes" just once – you are probably considering this approach for now. Nevertheless, the forex trading strategies we will explain below are accessible and understandable. We believe anyone of you may try them out and see how effective they are.
1 strategy - 5-Minute Scalping Strategy
Key elements:
- Timeframes: H1, M5.
- Currency pairs: liquid ones with tight spreads (EURUSD, GBPUSD, USDCHF, USDJPY).
- Indicators: 8- and 21- EMAs.
Algorithm of a “buy” scenario
- First, we need to confirm that the trend is going up. To do that, we open the H1 chart and insert 8- and 21- EMA. To do that, open Metatrader and click on "Insert" – "Indicators" – "Trend" – "Moving Average."
- For a “buy” scenario, we need to see an uptrend. To confirm this trend, 8-period EMA should be above 21-period EMA. Moving averages should not cross with each other.
- Now we go to M5.
- We wait for the candlestick to touch the 8-period EMA by its bottom. This is our trigger.
- We need to find the highest candlestick amid those five which appeared before the trigger bar.
- A buy order is placed at the high of this candlestick. Stop loss equals the low of the trigger bar.
- We place the first take profit at the same distance as the one between entry and stop loss. If the trend remains strong on H1 and we are confident enough, we can double our reward and close the position at a distance twice bigger than the one between entry and stop loss.
Let's look at the example on the USDJPY chart. On H1, we can see that the price is moving within an uptrend. The 8-period exponential moving average was moving above the 21-period one.
We switched to M5 and waited for the candlestick to test the 8-period EMA by its lower shadow. When the trigger candlestick occurred, we counted five candlesticks from the trigger one and chose the one with the highest high. We opened a buy position at 150.286. We placed a "buy stop" order at the high of the highest candlestick. The stop loss is placed at the low of the trigger bar at 150.271, while take profit levels go to:
149.783-149.748=0.035
TP1 = 149.783+0.035=149.818
TP2 = 149.818+0.035=149.853
On the chart below, you can see how the trade went.
Algorithm of a “Sell” scenario
On the other hand, let’s look at the steps for opening a short position.
- On H1, the 8-period EMA should be below the 21-period EMA. It confirms a downtrend. Remember, as with a “buy” scenario moving averages should not cross each other.
- We turn our attention to the M5 chart.
- We wait for the candlestick to touch the 8-period EMA by its high. This is our trigger.
- We need to find the lowest candlestick amid those five which appeared before the trigger bar.
- A sell order is placed at the low of this candlestick. Stop loss is set at the high of the trigger bar.
- The first take profit equals the size of our stop loss. The second one is twice bigger than the distance between the entry and the stop loss.
On the H1 chart of EURUSD, we noticed that the pair was moving within a downtrend. The 8-period EMA was moving below the 21-period EMA.
We opened the M5 chart and waited for the trigger bar. After it appeared, we counted five candlesticks from the trigger one and chose the one with the lowest low. This is our sell order which goes at 0.97525. Stop loss is placed at the high of the trigger bar at 0.97661. The take profit levels are calculated as follows:
0.97661-0.97525=0.00136
TP1 = 0.97661-0.00136=0.97389
TP2 = 0.97389-0.00136=0.97253
Let’s look at the sell trade.
Everything worked perfectly!
2 strategy – Gold scalping
The second strategy is for those who love trading gold and want to learn how to scalp precious metal. Keep in mind that it requires your full attention to the chart.
Key elements:
- Timeframes: M1
- Assets: gold, silver
- Indicators: Williams’ Percent Range: Fast (9) and Slow (54) With -30 and -70 periods
Algorithm of a “buy” scenario
You need to buy when both slow and fast oscillators break above -30. Close your position when the fast oscillator (9) leaves the zone. Stop loss goes several points below the support level nearby.
Algorithm of a “sell” scenario
When you consider opening a short position, you need to sell when both slow and fast oscillators break below -70 and close when the fast one leaves the zone. Stop loss is placed several points above the resistance level nearby.
Below you can see an example of a long order. We opened a position when both slow and fast oscillators were above the -30 level at 1621.16 and closed at 1625.59, when the fast oscillator crossed the -30 level to the downside. The 1619 level marks our stop loss.
Pros and cons of scalping
As with any trading style, scalping has advantages and disadvantages. That's great if you understand them: this way, you will be entirely concerned about the risks you may face.
Scalping pros
- Profitability.
- Opportunities to leverage from small changes in the price.
- Flexibility in decision-making.
- Low market risk.
- Non-directional strategy.
- It can easily be automated.
Scalping cons
- High transaction costs.
- Requires big leverage.
- Time-consuming.
- It is necessary to make a lot of transactions per day.
Questions about Scalping in Trading
Is Scalping in Trading Legal?
Scalping in trading is entirely legal. However, some brokers may not allow it because placing a high volume of trades in a short period may pressure broker systems. Some jurisdictions prohibit scalping, so this is another crucial point for scalpers choosing a broker. FBS has access to the ECN (Electronic Communication Network) platform through the ECN account. FBS welcomes scalpers and is ready to provide fast transaction speed, lower fees, no trading limits to maximum open positions and pending orders, and many liquidity providers. The ECN mechanism is transparent and provides brokers with comprehensive price information, which helps prevent manipulation.
Is Scalping in Trading Profitable?
Scalping may bring decent results if a trader strictly follows the trading strategy algorithm and ensures that your profit covers your costs. It's vital to backtest the trading strategy you want to use for scalping before trying it out in a real market environment.
How to Start Scalping in Trading?
To start scalping trading with FBS, a trader must follow four simple steps. First, they needs to choose an account. For scalping, it is recommended to select the ECN account that is available on the MT4 platform. After that, a trader needs to choose the right scalping trading strategy for him or to build their trading system. The 5-minute scalping strategy is good if a trader wants to test scalping. In the third step, it is crucial to calculate the size of a trade. Finally, a trader must choose instruments, set timeframes, and check for the news, which can affect their setup. Good luck!