Scalping in the forex market is characterised by executing rapid and frequent trades within very short periods of time. This trading style requires fast decision-making, precise risk management, and keen market awareness to spot emerging opportunities. In this article, we describe some popular strategies in forex scalping and discuss their application.
The Scalping Method in Forex Trading
The core principle behind scalping is to make numerous small profits, exploiting short-term movements rather than waiting for significant price swings. When scalping, the focus is on very short timeframes and the strategies are designed on 1-, 5-, or 15-minute charts. Still, some traders start from longer-term charts to get the general context about the overall price direction and to identify support and resistance levels. Then, they switch to a shorter time frame chart to specify the actual strategy and determine entry/exit points.
Typically, scalpers target very tight spreads in the range of 5 to 10 pips and may hold positions for only seconds or minutes. At FXOpen, you can trade with spreads from 0 pips. Stop losses are also set tight somewhere between 3 and 8 pips, again in accordance with the trader’s risk tolerance.
What to Look For When Scalping the Forex Market
Due to the high trading frequency, scalping comes with increased transaction costs. Therefore, scalpers focus on major currency pairs because of their deep liquidity, tighter spreads, and lower fees.
Timing the trades depends on the specific currency pairs and the time zone in which they are most actively traded. Overlaps between the major trading sessions lead to increased trading activity. For example, the London session overlaps with both the Tokyo and New York sessions, leading to higher trading volumes and increased volatility for the pairs with European currencies and the US dollar. On the other hand, quiet periods for these pairs are typically observed during the Tokyo and Sydney sessions.
Choosing a reputable trading platform is another critical decision. Some of the key factors for successful scalping in the forex market are the level of security, the execution speed, spread size, and a user-friendly interface. Curious to explore new possibilities? You can open an FXOpen account and start your trading journey!
How to Craft the Most Profitable Scalping Strategies
Experienced scalpers prefer to trade when markets are trending in a particular direction, as choppy movements or sideways activity often cause technical analysis to produce a lot of false signals. Thus, most scalping strategies try to capitalise on the momentum in the prevailing direction to capture quick profits as the trend continues or exploit trend reversal moves.
SMA and Stochastic Oscillator Strategy
This scalping strategy uses a combination of the two best trading indicators for scalping: the Simple Moving Average (SMA) and the Stochastic Oscillator. In this particular example, we use the 25-period and 50-period SMAs and Stochastic Oscillator with settings of 5, 3 and 3.
For bullish/bearish trades, certain conditions should be met: the 25-period SMA should be above/below the 50-period SMA, and the price should be pulling back down/up toward the SMA lines. Also, the Stochastic Oscillator lines should be below the 20 (oversold)/above the 80 (overbought) level.
- Traders can consider opening a long/short position as soon as the Stochastic Oscillator lines cross above 20/below 80, respectively.
- Stop loss can be placed a few pips below/above the most recent swing low/above the most recent swing high for bullish/bearish traders, respectively. The number of pips is determined in accordance with the trader’s risk/reward preferences.
- Traders may consider closing trades when the Stochastic enters an opposite zone (overbought in a bullish trade and oversold in a bearish trade) or when the price reaches a significant resistance/support level.
Bollinger Bands Strategy for Scalping Forex Markets
This scalping strategy exploits price moves within a defined price range. It can be applied, for example, on a 5-minute chart.
- Long trade: The asset price crossing above the middle line on high volume can indicate potential upward momentum and signal a buying opportunity.
- Short Trade: Conversely, when the price crosses below the middle line on high volume, it suggests potential downward movement, signalling a selling opportunity.
- A stop-loss order can be placed slightly above the upper Bollinger Band in a short trade and slightly below the lower Bollinger Band in a long trade. Otherwise, the stop loss can be set slightly below/above the recent swing low/swing high for bullish and bearish positions, respectively.
- For long/short positions, traders typically set take-profit targets near the recent support/resistance levels. Also, traders may implement trailing stop-loss orders and close trades partially to collect more gains.
Parabolic SAR Scalping in Forex Markets
Another scalping strategy that exploits price reversals can be based on the Parabolic Stop and Reverse (SAR). The indicator provides potential entry and exit points based on trailing stops. On the chart, SAR looks like dots placed above or below the asset price. When the dots are below the price, it suggests a bullish trend, and when the dots are above the price, it indicates a bearish trend.
- Long trade: SAR dots switching from being above the price to below the price can indicate a potential reversal from a bearish to a bullish trend and, respectively, give a buy signal.
- Short trade: SAR dots switching from being below the price to above the price suggests a reversal from a bullish to a bearish market, implying a selling opportunity.
- A stop-loss order can be placed just beyond the most recent SAR dot in the direction of the trade. Rather than setting one stop loss below/above a long/short position, traders can use the Parabolic SAR dots as trailing stops that rise/descend gradually for a long/short position.
- Both long and short positions can be closed for locking in profits when the SAR dots start to reverse direction, indicating a potential trend change.
The best scalping trading strategies offer a unique approach to capitalising on short-term price movements in the market. Scalpers are traders who thrive in fast-paced environments, making quick decisions and aiming for small, frequent profits. This intense trading style requires a combination of technical analysis, precise risk management, and a profound understanding of market dynamics.
The strategies above should be modified to match a unique trader’s approach. Ready to test some scalping techniques? Try FXOpen’s free TickTrader platform and discover new opportunities!
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.