Even if you're a complete beginner in trading,
you must have come across the term "scalping" at some point. The main goal of scalping is
to make a profit through buying or selling an asset for a very short period of time,
and closing it for a small profit. However, you should be aware that this trading style
will demand a certain amount of time and concentration and if you aren’t able to dedicate a few
hours a day to this, then this 1-minute scalping strategy might not be the best fit for you.
Now, for this strategy we’ll rely on exponential moving averages. A single moving average gives
you the general trend of price movement.
However, a lot of traders typically use two or more
moving averages to gain a better feel for main direction and to trigger more precise
entries or exits in the market. That’s why we’ll use a trio of moving averages to monitor
the short, medium, and long term trend of a market, and will allow us to estimate the
trend’s intensity from multiple timeframes. So here we have a 1-min chart of EUR JPY,
which displays three exponential moving averages: the 50, 100, and 150-period averages. The
50-period EMA gives me the short term trend, the 100- and 150-period EMA’s give me the
medium and long term trends. Of course, this is my preference. I prefer to use longer term
EMAs, to try to eliminate the inevitable market noise. Any number of period combinations can
be used, depending on the types of setups you are looking for and the timeframes you
are trading. So, feel free to use other moving averages, you don’t have to use the exact
setup.
Looking back at this chart, notice how price
pushed above the three EMA’s and traded steadily higher, the price staying above the
50-period EMA the entire time. The fact that all three EMA’s were trending higher at
around forty-five degree angles during the advance was very bullish. This is the image
we’ll search on our chart, meaning all three moving averages in agreement, in line, almost
parallel, with strong trend consensus. Right here, the price eventually broke below the
50-period EMA, which signaled short-term weakness, but bounced off the 100-period EMA before
resuming the uptrend, thereby confirming the medium and long term strength. Until the price
breaks below the 150-period EMA, the bullish trend will remain intact. After we identified the main direction, we
need to wait for a pullback. So, we’ll search for a pullback trade, to pinpoint undervalued
and overvalued entries into established trends. So our goal is to find opportunities when
price is considered overvalued or undervalued, as this presents excellent opportunities to
“buy low during uptrends, and sell high during downtrend”.
The idea of the pull-back trade is to buy the market at a discount during an uptrend,
and sell the market at a premium during a down trend.
The goal of the pull-back trade is to take advantage of situations when price is in an
established trend, either bullish or bearish, and all three moving averages are indicating
the same direction.
Any pull-back to the first or second EMA offers a buying (or selling)
opportunity back in the direction of the established trend.
This setup is effective because it forces you to buy below value and sell above value,
while keeping you disciplined to the existing trend. Now, how to enter a trade?
So the first step, the most important one, is to identify the current trend of the market.
I know I’m repeating myself, but i want this to be crystal clear. All three EMA’s
must be trending in agreement in a bullish or bearish manner. Ideally, you want to see
all three EMA’s trending at a 45-degree angle, which identifies a strong trend. However,
any slope ranging from 30- to 60-degrees will work just fine. The second step involves waiting
for the market to pull back to test either the 50- or 100-period EMA.
Price can close
beyond the 50-period EMA, but you generally do not want price to close beyond the 100-period
EMA, or to be near the 150 EMA. Once price tests either of the moving averages, we need
price confirmation. The entry is triggered when price closes back in the direction of
the current trend, beyond the 50-period EMA. How to manage the trade. There are many exit
tactics that can be used for the pull-back trade. Before you select the type of exit
strategy, you should first remember you are scalping. The room for error is extremely
small. Let me repeat that: margin for error is very small when you trade with high leverage
while looking for a small profit. With that in mind, here is what I do when I’m scalping:
• I move my stops to breakeven as soon as possible. You want to diminish your risk.
You will get stopped out a lot at breakeven, but from my experience it’s better to have
5 trades in a row with zero profit, than 5 losing trades.
That’s the ugly face of scalping,
it’s very unpredictable and any price swing can hit your stop loss. That’s why I look
to play the breakeven trade when I’m 5-6 pips in profit. You will be frustrated when
you’ll have 5 pips in profit, move your stop to breakeven, and then the market will
hit your stop loss and will continue in your initial direction. It will happen. But this
will protect you in the long run. If you have a bigger risk aversion, here are
other tactics you could use: • a traditional trailing profit stop.
• a fixed profit target • exit at the next support and resistance
levels, or at a fib extension, if you trade with fib numbers. This chart illustrates a perfect example of
choosing a currency pair during an established trend. Notice that all three EMA’s are trending
lower at 45-degree angles, which is important because this is a measurement of trend intensity.
Trading in the direction of an established trend increases your chances for a profitable
outcome. Now that direction has been established, we look for price to break above the 50-day
EMA in order to set the stage for a “sell” scenario.
Once price dips above the first
EMA, we look for price to close back below the 50-period average in order to trigger
a long position, which occurred several times in this chart. Also remember that you can
use any period moving average you like to manage your trades! You could back test different
settings, and adapt the period of the EMAs to fit your style.
Once in the trade, i immediately set my loss stop below the low of the pull-back i am trading.
Therefore, your stop loss would be beneath the low of the bar that tested the 50 or 100
period EMA. Here are other examples of scalping trades
on EUR/JPY, DAX Index and Dow Jones Index, my favorite instruments to scalp: So, what’s the psychology behind this trading
technique? Well, we try to take advantage of novice traders, shorting the market below
50 EMA.
Think about it. We are practically waiting for the price to close below the 50
EMA. But other traders, when they see the price closing below the 50 EMA, they immediately
short the market. They don’t care about the general trend, they see the price below
50 EMA and enter short. That’s why we wait for the price to return above the 50 EMA.
We want to have trapped traders below us, to fuel our long positions. Where are the
stops of the traders shorting below the 50 EMA? You guessed it, above the 50 EMA. When
the price returns above the moving average, our scalping trade gets an extra boost from
the stop of trapped traders. Now, here are some important observations:
Scalping can easily turn to gambling. Excited traders on a winning streak will abandon their
own rules in pursuit of fast money.
If it happens once, it can easily happen again.
Being impulsive is one of the most undesirable traits for forex scalping. That’s why, try
to improve your discipline and self-control before attempting scalping.
Second, scalping is one of those trading methods that are often performed with bad risk reward
ratio. Trader will often risk 100 pips just for the possibility of gaining 1 or 2. Market
provides plenty of opportunity to enter high probability setups that can make this reward
sustainable. Unfortunately this trading style also means that days and weeks of profit can
be wiped out with relative ease. Few bad trades in a row can therefore produce substantial
losses. That’s why when I’m scalping I’m not risking more than 0.5% of my total balance.
Not 5%, 0.5%.so, if you have 5.000 dollars in your account, for example, if you scalp,
risk at most 25 dollars per trade. My third recommendation, lower you lot sizes.
Small lots help you keep losses down until your trading improves and is consistently
profitable. The smaller the forex lot size, the lower the risk.
Also, don’t neglect the trading costs. Scalping requires frequent trading almost by definition.
Frequent trading also means frequent and substantial position entry costs.
Small difference in
spread between a great broker and good broker may be the difference between a consistently
winning strategy and a consistently losing system.
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