Scalping trading strategy
By Vladyslav Yudashkin Updated November 21, 2022
Beginner traders often prefer to make a lot of deals in the hope to compensate the quality of trade by the number of contracts. Such a method is not always very efficient. However, the use of good scalping strategies compensate for the lack of experience and gives an opportunity to earn on Forex and cryptocurrency even for a beginner.
Scalping is a style of trading that involves opening multiple positions with duration ranging from a few seconds to several hours. It is also sometimes referred to as intraday trading strategies, though this is not entirely accurate. One quick trade can bring you anywhere from a few pips to several tens of pips of profit. The small profit volume is compensated by the huge number of such deals. In cases when a short-term user opens one position by the trend, a scalper can open several positions managing to “catch” some corrective movements. As a result, scalping supporters can generate big profits at the same time.
There are many variants of scalping used in currency trading. There are complex variants based on a combination of fundamental and technical analysis as well as more simple methods.
The main advantage of scalping strategies is the opportunity to take the maximum profit from each quotation movement. Fast deals on M1-M5 gives the opportunity to trade even on pullbacks. A 1 or 5 minute trading strategy can help traders to monitor the market and make a very detailed analysis. This style of trading is complex in spite of its apparent simplicity. Even a trader using a simple scalping strategy needs a lot of experience. That is why we recommend beginners to use calmer strategies such as mid-term and intraday trading.
The disadvantage of scalping is a heavy psychological burden on the trader. The necessity of opening many short-term positions is very stressful because every market entry is connected with high risks. Not every trader will worry about five Stop Losses in a row. For scalpers this phenomenon is quite common. It is important to keep composure and sangfroid, and not to break the rules of chosen trading strategy. It is much more difficult for a scalper to do so than for traders with more conservative approaches.
Remember that margin trading is a high-risk activity. Strictly follow money management rules. Always use a Stop Loss, and correctly calculate the lot size of a single trade. Adhering to these simple rules, you will not “lose” your deposit in a few days of active trading at least. Over time you will learn to stably and confidently earn high profits.
Best Scalping Trading Strategies
All scalping strategies correspond to basic principles of this strategy.
The size of the profit should cover the spread. If the spread is 2 pips, the order can be closed by increasing the rate by 3-5 pips. The choice of the increase depends solely on the trader’s decision. As a rule, scalpers use the figure of 5 points.
It is best to use a 1 minute scalping strategy (M1). Minute charts are more suitable for scalping because they show the quotes fluctuation quicker. Traders choose very small time frames, for example, 5 minute scalping strategy is also among the most popular.
It is necessary to use the maximum leverage. Large leverage is an effective tool for increasing the trader’s possibilities if he has a small deposit. For example, if we have 1:500 leverage, then $20 is enough to open a 0.1 lot position.
It is obligatory to draw graphical models such as the support line, the resistance line and the trend line. If necessary (on the 15- and 60-minute charts) to assess the following moment: whether there was a trend breakout, and what character of this breakout – false or true.
If you have entered the market and do not see the market development in the necessary direction, then 40-50 minutes after opening a position it is necessary to close the contract, because it is obvious that the market is waiting for some uncertain information which may change the market behavior model in an undesirable direction for you. In this situation it is optimal to make a decision related to the exit from the market, and after the market behavior becomes clearer, you should choose an entry point and open a contract.
Four simple scalping trading strategies
The main tool of a scalper, which allows to get stable profit, is his best scalping strategy tested in practice. It is possible to obtain occasional profits several times, but without a clear plan a trader is doomed to failure in the long term. Therefore, it is necessary first of all to check and make sure of the reliability of the chosen strategy on a small deposit.
Among professional traders scalping methods are not very popular because many traders consider scalping as a trend characterized by senseless risk and absence of clear and profitable forex scalping strategy of entering and exiting the market. To some extent these conclusions are true, to some extent they are not (it will be discussed below). There are many strategies based on scalping. Different currency pairs and timeframes are considered. However, the priority is invariable – to catch the profit in time.
Let us analyze the main positive and negative features of forex scalping strategy so as to understand its fundamental characteristics.
Relative Strength Index (RSI) Strategy
While the moving average is a lagging indicator which is used for trend trading, the RSI is often used as a leading indicator. Because of this it is often used to indicate a trend reversal.
RSI is also based on a statistical formula. It takes into account such indicators as the opening and closing of the previous trading days for a certain period (usually 14). The indicators are smoothed by means of averaging. If there are more growing days in a period than there were falling days, then the indicator will grow. If there are more down days than up days, it will fall.
The Relative Strength Index is the most popular indicator for determining whether an exchange-traded asset, including currency pairs, is overbought or oversold. It is usually displayed as a separate line chart parallel to the price chart. RSI values move between 0 and 100. Readings above 70 suggest that the currency pair is overbought, and below 30 it is oversold.
The RSI indicator is often used as an auxiliary tool (as a filter). If it is in the overbought zone, it is not advisable to open a long position, even if other indicators give that signal. Likewise, if it is in the oversold zone, it is not a good idea to go short, as a correction is highly likely in such cases.
Trading on RSI Divergence. Most of the time the RSI indicator follows the price chart, but divergences periodically appear on the chart. A divergence is a situation when the price chart has reached a new maximum or minimum, while the RSI indicator is moving in the opposite direction. The occurrence of such a situation often means that the strength of the trend is nearing its end and there is a significant probability of a reversal. Traders can use the divergence as a signal for an interesting counter-trend strategy. If we take a currency pair, the daily time frame, we will see that sometimes when the price maximum/minimum is updated, the RSI chart already moves in the opposite direction. That is what we call a divergence. In our case, the divergence is an accurate indicator of a reversal.
Important: stop loss setups for counter-trend strategies are a very important consideration. Sometimes in the dynamics it is hard to tell if the situation is a divergence, or if we are dealing with a normal chart fluctuation. It is better to insure yourself by placing stop orders, which minimize the risks in case of an error.
The main feature of the use of RSI is that overbought and oversold is in itself a signal with low accuracy. The currency pair can be in the redeemed/resold state for days. Therefore, this indicator is better to be used as an auxiliary filter or to detect divergence.
Volume & Price Action Strategy
The postulates of technical analysis dictate that the price takes into account the whole market situation and most of all depends on volume. And the volume in its turn changes depending on the price position. In similar market situations, traders behave in a similar way, so this strategy has a lot of historical evidence.
The end of the trend is characterized by low volumes, the same situation is observed during a trend reversal or a trend stop. But it should always be remembered that after such a deceleration, the scalper should expect a short-term price change. These conditions are ideal for the scalper, but they require patience.
To implement this strategy, a trader needs to find a time point when the market is within a certain range. When the volume increases sharply along with the price action, it is important to have time to buy at the price that is formed before the trend rises. Then it is necessary to wait for the highest price of the asset and then make a decision to sell.
But you should always remember not to take into account only the volume, it is important to take into account other factors. It will be appropriate to use this strategy in combination with others to confirm the data.
Moving Averages Strategy
It represents the arithmetic average of the price over a certain period of time. Each average has a period (usually between 5 and 200). For example, a 50-day moving average means that the indicator shows the arithmetic average of the price over 50 days. A 20-hour moving average means, respectively, that the indicator averages the price over 20 hours.
How is it possible to trade on moving averages? If we take a chart of a currency pair with a 15m time frame, each candlestick on the chart represents an interval of 15 minutes (we will use intraday trading which is sometimes called forex 15 min scalping strategy ). We will need two moving averages (Simple Moving Average) with periods of 50 and 20. A simple moving average with a time frame of 50 will be slow in our case, and a simple moving average with a time frame of 20 will be fast. If the fast moving average crosses the slow one from the bottom upwards, we are opening a long position in the currency pair, if it crosses from the bottom upwards we are opening a short position. The slow moving average must indicate either the position opening direction or be horizontal to the chart plane.
The moving averages can give good signals for opening a position, but for setting Stop-Loss and Take-Profit, we will have to use additional methods. Below we apply the previous candlestick’s low in the consolidation around 0.642 as a stop-loss and close the false-break resistance level as a take-profit.
Such strategies perform well in a trending market and are easy to use. But it is worth considering the disadvantages as well. They have a lagging indicator (so it is better to use in combination with other analysis tools), and on a sideways market moving averages are inefficient and give many false signals.
Price Channel Trading Strategy
Trend-following strategy is very popular. It is easy and often very effective. The advantages of this strategy also include clear guidelines for stop-orders and profit taking.
A price channel is a sequence of support and resistance lines connected to each other. If the channel is descending, each successive low will be lower than the previous one. If the channel is ascending, each successive maximum will be higher than the preceding one. In a sideways channel the highs and lows are approximately equal.
According to one of the basic concepts of technical analysis, it is always easier for the price to go in the direction of the trend than to change it. This feature is actively used by both professional forex traders and beginners.
Let us take the hourly chart of EUR/USD as an example. Even visually, we can easily determine whether the channel is descending or ascending. In the case of a descending channel, every time the upper limit of the channel is approached, there are sell signals. The trader can use a strategy to open a short position when the price reaches the upper border of the channel. He also has an opportunity to simply open a short position and wait for the channel to be broken. In the case of the ascending channel, it is vice versa.
What Is A Scalping Trading Strategy?
Scalping is one of the intraday trading strategies, the essence of which is to make a profit as a result of small fluctuations in the price of an instrument over a small period of time. Traders are still attracted to scalping trading strategy by the ability to profit from dozens or even hundreds of orders per day, with positions being held for several seconds to several minutes.
Unlike other strategies, scalping requires much more time and attention. It is necessary to constantly monitor the market during the day, find entry points and make transactions quickly. Scalping has its potential to bring high profit but it requires a practically tested trading system and psycho-emotional stability.
Is Using A Scalping Trading Strategy Profitable?
Scalping has many advantages that set it apart from other trading strategies. This type is distinguished by an increased potential profitability of strategy, both during one trading day and in a long term period. There is also no need to wait for the next trend to form on the market. It is possible to scalp in any situation: up-trend, counter-trend or flat. It is also possible to conduct more simplified analysis. The short-term tendency is analyzed with the help of technical analysis and indicators, the fundamental factors are taken into consideration selectively. And it is necessary to pay attention that scalping is suitable for trading on small deposits. Thanks to the leverage, even on a small account it is possible to open substantial positions and gain profit. And many traders say that doing their best 5 minute scalping strategy can lead them to a successful trading career.
But it is always necessary to consider the increased risk associated with the use of high leverage. When using leverage, even small market movements against the trader can cause serious losses; that is why it is necessary to use risk control rules in order not to lose the deposit. In addition, scalping requires much time and constant psycho-emotional tension during the trading day. When choosing and monitoring 1 minute trading strategy scalper makes a lot of deals and it requires constant monitoring of the market. Such active trading absorbs much energy and may lead to trader’s “burnout”.
What Is The Best Scalping Trading Strategy?
The best forex scalping strategy is the one that fits the scalper by all parameters. To find the best strategy, it is necessary to try and study a lot. The scalper can choose a pure strategy, it is better to take a set of several tools for the accuracy of information. Very often the combined trading strategies show the best result on the currency market (for trading gold scalping strategy is also applicable). For example, a trader may use several indicators, price channels and patterns at the same time. The reason for opening a deal will then be a situation where some signals confirm others.
For example, when the RSI indicator is in a strong overbought zone and there is a head and shoulders pattern on top, it is a more reliable signal to open a position. Also, a trader can use signals of fundamental and technical analysis at the same time. For example, if the economic model shows that the currency pair should turn around, the trader can wait until his forecast is not reflected on the chart. In this case, he will open a position only after receiving a signal from the indicators or a reversal pattern.