The vast majority of technical indicators have a lagging nature due to the mathematical formulas which take into account past performance. It’s understood that past performance does not guarantee future results as market conditions change quickly. That especially relates to ultra-short-term timeframes as 1- and 5-minute charts have too much noise due to price fluctuations. However, such a feature of price action might be used as an advantage for fast trading strategies based on a large number of entries with small targets. Forex Scalping Strategies becomes more popular not only among retail scalper but also large institutional investment funds and financial giants as short-term trading does not depend on trends applicable for larger time scales.
What is scalping in Forex?
Forex scalping is a trading strategy used by forex traders to Buy or Sell a currency pair.
Large movements are quite rare for the foreign exchange market as fundamental events influencing major shifts in investors sentiment do not happen too often. In most cases, the price action for all asset classes is driven by real-money accounts, and fluctuations are caused by periodic active sessions. Some scalper forex prefer taking advantage of short-term price action as it does not depend on long-term trends and speculators could benefit on both selling and buying an asset in one trading session. In that case, scalpers use a strategy of frequent entries and exits, opening positions for a short-period, and setting extremely tight stop-loss and take-profit orders. Instead of holding a trading position in the same way as swing traders do, scalping suggests a much larger number of deals in the same period. The main focus is to achieve high efficiency, or an acceptable number of profitable positions compared to losing ones, and maintain good enough profit-to-loss ratio, implementing risk management rules into an individual trading strategy.
Best timeframes for Forex Scalping signals
In most cases, the approach is focused on 5 minute forex scalping system as this is exactly the timeframe to analyse and work on. Some traders and technical analysis gurus develop algorithms to trade on a 1-minute chart, however that timeframe is full of false trading signals and it’s hard to find a perfect entry with an affordable depth of stop-losses in accordance with money management rules. Larger charts of 30-minutes and up are not considered as best timeframes for scalping.
How to forex scalping?
Scalping forex works well with any asset class including all currency pairs, stock indices, commodities and cryptocurrencies. The only difference traders should take into account is the liquidity of the underlying asset they choose, as well as its volatility. Some currency pairs, like exotics or cross-rates (USD/ZAR, USD/MXN, GBP/NZD) do not have such a trading volume as majors have. Therefore, stop-loss and take-profit orders should have a longer distance in pips from the entry price. At the same time, it’s harder to find the top or bottom of the market for volatile assets than slow-moving currency pairs like EUR/USD, USD/CHF, etc. Forex Scalping is always a combination of fast-paced action, a large number of positions, and a set of rules in terms of profit/loss ratio and overall efficiency. Although scalping is a fascinating process, the number of errors might overshadow the general profitability. The main goal is to make money but not open as many trades as possible.
How to interpret Price Action for Scalping
Traders should remember that charts show the same information for every market player, and the only difference is how every single speculator interprets them. Price action is based on the total absence of any technical indicators, while traders analyse pure charts. Standard price action models, such as Japanese Candlesticks Patterns could be used to understand the market’s intentions and make the right predictions. Technical analysis rules are the same for any asset on any timeframe, therefore, the same laws are applicable for scalping and swing trading. One of the most common conditions is that a rate returns back to a strong resistance level after breaching it from below and that resistance starts working as the support. One more crucial remark to remember is that trading decisions should be headed with the general trend momentum but not against it. Thus, long positions are preferable when the market is bullish on larger timeframes while shorts might bring more trading opportunities when the market is bearish.
Here are two examples of forex price action scalping patterns:
- By-trend breakthrough price action - any price chart is a reflection of buyers’ and seller’s activity. In case if bulls had several attempts to breach a certain quote level but failed to do so, the price will always have a pullback in the opposite direction as the bears will be trying to retaliate and push prices lower. However, once a resistance/support level is breached, sellers/buyers might retreat, shifting their orders. That might lead to an acceleration of the price action. Some traders take advantage of that by setting so-called breakthrough postponed buy-orders when the market moves north and sell-orders when the downtrend action is noticed.
- By-trend reversal or bounce - when a currency pair is in a strong trend, rates could fluctuate back after reaching some peak or bottom. That bounce is called retracement or correction, and at some point, it comes to an end as the general trend resumes. Thus, forex traders could open new trading positions after the exchange rate reached a certain depth of correction. It’s essential to maintain the same direction of the trend but not go against the momentum.
How to use Forex Scalping indicators on practice
Any scalping technique should be based on the general rules of an individual trading strategy. Every single decision must be made in accordance with predetermined rules and algorithms.
Several questions before opening a Trading Position:
- Does this deal come in line with my money management rules in terms of trading volume and lot size?
- Could a potential profit overweight possible losses?
- Where should I place the stop-loss order, and is it affordable?
- What distance the price could go in the right direction?
If you like Scalping trading strategy, you might also be interested in this Renko Strategy
Retracement towards breached resistance/support and continuation
Before entering the market on the 5-minute timeframe, traders should have a look at longer charts. For instance, there were several tests of a horizontal technical resistance line, and a couple of pullbacks happened before the level was breached. What happens next is the market comes back to the same level from above, reverses and continues the uptrend movement.
Here is a screenshot of the 1H chart of USD/CAD:
And below is a 5-minute chart with the same action:
Bearish reversal after pullback
After analysing H1 chart of GBP/USD a trader had noticed a strong pivot point at around 1.2520. That horizontal blue line acted as resistance and support several times before.
At some point, the market pulled back to the previous support, which acted as the resistance now, giving a great entry opportunity on the 5-minute timeframe for price forex scalping.