There are several approaches to foreign exchange (forex) trading, each with pros and cons depending on your temperament and resources. One of the most popular is known as scalping, a low-risk, reliable but time-intensive way of gradually accumulating profits through multiple small, fast transactions.
Forex scalping involves opening and closing a position on trade within five minutes or less. Typically, a scalp’s duration may be measured in seconds rather than minutes. Speed is of the essence, as this means less market exposure and less risk.
By exploiting small, brief price movements, a scalper can make a modest profit. However, to turn this into a significant income, the same strategy must be repeated consistently, day in, day out. A scalper may make 100 or more trades per day, meaning that forex scalping needs to be approached like a start-up business in terms of time allocation and prioritizing the activities that will help you succeed.
Action not analysis
One attraction of scalping is that it doesn’t require the same level of technical and historical analysis as other forms of trading. This means you can learn how to scalp forex without spending hours studying the more complex charts, graphs, and tools used in other forms of trading. To an extent, the scalper is only interested in the specific bid-ask spread of the present transaction and the movements of a given asset in the next five minutes.
That said, no trader can afford to neglect technical indicators and analysis completely. The more you know, the better you can predict price movements, even if they are seemingly random fluctuations that ultimately mean nothing in terms of the overall trend. While you can’t afford to be slowed down by the analytical process, understanding why movements happen as they do will let you execute transactions quickly and effectively.
Simple moving average
One of the most widely used and essential indicators across most forms of trading is the simple moving average (SMA) indicator. It lets you build a trading strategy based on the average price of a given trade over a given time frame. It can contribute to identifying a trend but can also be helpful as a short-term indicator.
Price charts tend to be fractal, showing similar patterns at different scales. To a limited extent, movement over the next minute may mirror movements over the next hour. An SMA indicator can quickly help establish the likely direction the price may move in during the period in which you’re interested.
Exponential moving average
An exponential moving average (EMA) indicator is particularly well-suited to a scalping strategy as it responds faster to recent price changes than to older ones. These are, therefore, given more weight and significance as an EMA indicator skews more towards what’s happening now than what happened then. Signals are sourced from both crossovers and divergences compared to the historical average.
Moving average convergence divergence
The moving average convergence divergence (MACD) indicator displays the relationship between two moving averages of a property’s price. It uses exponential moving averages over different periods to come up with a calculation based on default signal lines and triggers. Like the following indicators, it uses an understanding of momentum to predict trends.
Parabolic stop and reverse
A parabolic stop and reverse indicator, also known as a parabolic SAR indicator, shows chart points ahead of the price during a downward trend and below or behind the price during an upward trend. This helps the trader see the future momentum of a security or asset over the short term, informing the decision of where to place a stop-loss order. This kind of indicator works best when the market is holding to clear, steady trends and predicts short-term movements of the type scalpers are interested in.
Scholastic oscillator
The scholastic oscillator or momentum indicator can seem forbiddingly complex from a distance, but it’s actually one of the more reliable indicators for short-term movements. Working on the principle that momentum precedes price, it generates signals of imminent movement that the scalper can immediately act upon. The closing price is assumed to be at the upper end of a trading day’s auction price.
Developing an effective scalping strategy
While these technical indicators are helpful, consistency is the most important quality you can bring to your forex scalping strategy. That is, once you have developed a system, stick to it. Put in the hours and follow the same formula each time. Sometimes you’ll lose money but sticking with a strategy will help you cover those losses more effectively than switching horses in midstream.
Patience, diligence, and self-discipline are essential, as well as the ability to remain calm under pressure and to work through periods of boredom. Don’t let your concentration waver, as attention to detail is crucial. A certain degree of automation can assist you, for instance, in terms of stop-loss orders, but avoid “off-the-shelf” automated trading systems that promise miracles for minimum effort.
Forex scalping requires long hours and focus, but it remains one of the lowest risk strategies currently in play. Profits are steady rather than spectacular but, when approached correctly, this method can reap satisfying rewards.
