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 isto 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 stylewill demand a certain amount of time and concentration and if you aren’t able to dedicate a fewhours 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 givesyou the general trend of price movement.
However, a lot of traders typically use two or moremoving averages to gain a better feel for main direction and to trigger more preciseentries or exits in the market.
That’s why we’ll use a trio of moving averages to monitorthe short, medium, and long term trend of a market, and will allow us to estimate thetrend’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.
The50-period EMA gives me the short term trend, the 100- and 150-period EMA’s give me themedium and long term trends.
Of course, this is my preference.
I prefer to use longer termEMAs, to try to eliminate the inevitable market noise.
Any number of period combinations canbe used, depending on the types of setups you are looking for and the timeframes youare trading.
So, feel free to use other moving averages, you don’t have to use the exactsetup.
Looking back at this chart, notice how pricepushed above the three EMA’s and traded steadily higher, the price staying above the50-period EMA the entire time.
The fact that all three EMA’s were trending higher ataround forty-five degree angles during the advance was very bullish.
This is the imagewe’ll search on our chart, meaning all three moving averages in agreement, in line, almostparallel, with strong trend consensus.
Right here, the price eventually broke below the50-period EMA, which signaled short-term weakness, but bounced off the 100-period EMA beforeresuming the uptrend, thereby confirming the medium and long term strength.
Until the pricebreaks below the 150-period EMA, the bullish trend will remain intact.
After we identified the main direction, weneed to wait for a pullback.
So, we’ll search for a pullback trade, to pinpoint undervaluedand overvalued entries into established trends.
So our goal is to find opportunities whenprice 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 anestablished trend, either bullish or bearish, and all three moving averages are indicatingthe 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’smust be trending in agreement in a bullish or bearish manner.
Ideally, you want to seeall 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 waitingfor the market to pull back to test either the 50- or 100-period EMA.
Price can closebeyond the 50-period EMA, but you generally do not want price to close beyond the 100-periodEMA, or to be near the 150 EMA.
Once price tests either of the moving averages, we needprice confirmation.
The entry is triggered when price closes back in the direction ofthe current trend, beyond the 50-period EMA.
How to manage the trade.
There are many exittactics that can be used for the pull-back trade.
Before you select the type of exitstrategy, you should first remember you are scalping.
The room for error is extremelysmall.
Let me repeat that: margin for error is very small when you trade with high leveragewhile 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 have5 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 lookto play the breakeven trade when I’m 5-6 pips in profit.
You will be frustrated whenyou’ll have 5 pips in profit, move your stop to breakeven, and then the market willhit your stop loss and will continue in your initial direction.
It will happen.
But thiswill protect you in the long run.
If you have a bigger risk aversion, here areother tactics you could use: • a traditional trailing profit stop.
• a fixed profit target • exit at the next support and resistancelevels, or at a fib extension, if you trade with fib numbers.
This chart illustrates a perfect example ofchoosing a currency pair during an established trend.
Notice that all three EMA’s are trendinglower 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 profitableoutcome.
Now that direction has been established, we look for price to break above the 50-dayEMA in order to set the stage for a “sell” scenario.
Once price dips above the firstEMA, we look for price to close back below the 50-period average in order to triggera long position, which occurred several times in this chart.
Also remember that you canuse any period moving average you like to manage your trades! You could back test differentsettings, 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 100period EMA.
Here are other examples of scalping tradeson EUR/JPY, DAX Index and Dow Jones Index, my favorite instruments to scalp: So, what’s the psychology behind this tradingtechnique? Well, we try to take advantage of novice traders, shorting the market below50 EMA.
Think about it.
We are practically waiting for the price to close below the 50EMA.
But other traders, when they see the price closing below the 50 EMA, they immediatelyshort the market.
They don’t care about the general trend, they see the price below50 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 thestops of the traders shorting below the 50 EMA? You guessed it, above the 50 EMA.
Whenthe price returns above the moving average, our scalping trade gets an extra boost fromthe stop of trapped traders.
Now, here are some important observations:Scalping can easily turn to gambling.
Excited traders on a winning streak will abandon theirown 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, tryto improve your discipline and self-control before attempting scalping.
Second, scalping is one of those trading methods that are often performed with bad risk rewardratio.
Trader will often risk 100 pips just for the possibility of gaining 1 or 2.
Marketprovides plenty of opportunity to enter high probability setups that can make this rewardsustainable.
Unfortunately this trading style also means that days and weeks of profit canbe wiped out with relative ease.
Few bad trades in a row can therefore produce substantiallosses.
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 consistentlyprofitable.
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 inspread between a great broker and good broker may be the difference between a consistentlywinning strategy and a consistently losing system.
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Until next time.
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