Scalping Strategy Explained
So here is the list of seven basic methods of scalping
- Choosing Pairs with Lowest Spreads
- Picking More Volatile Pairs
- Avoid Brokers with Dealing Desk
- Using Simple Moving Averages
- Utilizing Bollinger Bands
- Trading Support and Resistance
- Executing Trades Manually
To get a better idea of how scalping the Forex market works, let us go through them one by one.
Choosing Pairs with Lowest Spreads
As mentioned before, FX scalping strategies are not about making massive returns on one or two trades, it operates on small 5 to 15 pip gains. Therefore, large broker spreads can easily eat into those margins and take out significant portions of the trader’s payout.
Consequently, those who are considering how to scalp Forex might be more selective about the Brokers and currencies they wish to trade. For a practical example let us take a look at the Axiory Forex Spreads.
The company offers three types of accounts to customers, each having different spreads. For the sake of simplicity, we will consider the Standard trading account.
As we can see from the chart above, EUR/USD, as the most traded currency pair has the lowest spread of 1.2 pips. Traders can also open positions with some other pairs, including USD/JPY, GBP/USD, EUR/GBP, EUR/JPY and AUD/USD with less than 2 pip spreads.
Consequently, for those traders using Axiory trading platforms, those 6 currency pairs mentioned above are well suited for simple Forex scalping strategies.
Pairs in the middle of the chart, EUR/AUD for might not be the best option for the type of trades, but in some cases, they might be still useful.
On the other hand, some relatively less liquid pairs, for example, GBP/NZD has an average spread of 4.4 pips, so some traders might not find this to be the best vehicle for scalping trades. So for example, if a trader is aiming for 10 pip payouts in each trade, in case of EUR/USD he or she simply might need 11 or 12 pip gain to achieve that, but in case of GBP/NZD - that is 15 pips.
Obviously, in the long term trades, 3 pip variation might be insignificant, but in the Forex scalping system, this can make a noticeable difference.
Emerging market currencies, like Turkish Lira, Russian Ruble, and others might not be that useful for scalping as well. Because of low liquidity and high volatility, in percentage terms spreads on USD/RUB and USD/TRY, for example, are much higher than in Forex Majors.
Spreads are not the only useful criteria when choosing currency pairs for scalping. Another important factor is volatility. Since this style of trading seeks quick gains the market has to move faster to produce those results.
Picking More Volatile Pairs
Less volatile pairs are not that useful for this purpose since it might take much more time for the rates to move. Consequently, instead of 5 or 10-minute trade, the trader might have to wait for half an hour or more for the pair to reach the desired level.
AUD/JPY, GBP/AUD, GBP/NZD are some examples of the currency pairs with relatively higher volatility. Actually, Gold and Silver prices usually also experience a greater degree of variation during trading days.
Avoiding Brokers with Dealing Desk
It goes without saying that, when it comes to trading, finding a broker with a good reputation is always important. However, if one uses FX scalping techniques that becomes even more crucial. In this style of trading, every second counts.
Therefore the worst scenario for any trader would be if he or she opens positions, achieves 10 or 15 pip gains, but is prevented from closing positions because some Dealing desk rejects to execute orders. This can be especially harmful, if some major announcement or event is taking place, since a trader can lose a significant amount of money, because of that.
Fortunately, nowadays, there are many brokers with no dealing desk and conflicts of interest, who also offer competitive spreads on currency pairs.
Moving on to the technical indicators used in the methods of scalping, for many traders the Simple Moving Average (SMA) or Exponential Moving Average (EMA) can be a very helpful tool. Traders can use a 5,10, 50, or even 100 period SMA or EMA or higher depending on his or her preference.
Using Moving Averages
One way to go about this is to look at the direction of the moving averages and open positions in accordance with them. Obviously, longer-term trades might require much more analysis, but in 1 to 15-minute trades, it might produce some results. This might not be one of the best Forex scalping techniques, but it can work for many traders.
Bollinger bands can be a very handy Forex scalping indicator. A flat Bollinger Band line suggests that the market is settling down for a tight range trading. The basic strategy here is very simple: a trader can buy a currency pair if it moves close to the lower bound and sell pairs where the price is close to the upper band.
Utilizing Bollinger Bands
Clearly, this does not guarantee that all positions will succeed, however, this tactic might help traders to win the majority of the trades.
This might not be the best Forex scalping strategy, but it is very simple. It is similar to the previous method, mentioned above, however, instead of looking at the Bollinger charts, traders can just take a look at the support and resistance.
Trading Support and Resistance
Lucky finding out about those levels does not require complex analysis. Most Forex news websites publish 3 resistance (R1, R2, R3) and 3 support levels (S1, S2, S3). In most cases, R3 and S3 marks are considered stronger and more likely to hold the line, compared to other ones.
So essentially, a trader can take a look at the latest technical data from the Forex news websites, then buy currency pairs near support levels and sell pairs which trade near resistance.
Again, this might not be a viable option in case of long term trading, since sooner or later the market eventually breaks out. However, for such a short timeframe it helps traders to succeed.
The importance of placing Stop-Loss orders is underline in countless Forex manuals and webinars. However, when it comes to scalping, there might be an exception. The fact is that putting a Stop-Loss order in place usually requires some seconds, during which the price might change by several pips.
Executing Trades Manually
It might be also helpful to keep in mind that, when it comes to 1 to 15-minute trades, it is easy to always keep an eye on the platform for any major changes. However, if the time frame of the trade is larger, like days or even weeks, then it makes a lot of sense to keep Stop-Loss order in place.
Therefore many professional traders prefer to execute all of their scalping trades manually. This saves time and makes the process much simpler.