Scalping System – A Strategy For Trading

scalping strategyScalping is a very simple strategy that is used in other markets besides the Forex market. A large number of trades are entered into within a short period of time in connection with very tight stop-losses. The trader’s goal is to make as many small profits as possible, which are maximized by the large number of trades.
It should be noted that not all brokers allow the use of the scalping strategy. Brokers have the problem with scalping that they cannot hedge fast enough and therefore losses are incurred if the trader wins.

Which broker is recommended for scalping trading?

  • Of course the choice of your trading style depends on the choice of broker. Someone who likes to trade long term will “not care” if a position is opened as fast as possible or if it takes 2 seconds. With scalping this factor “time” plays an important role. For a scalper, there is nothing worse than having to wait until the position is opened or confirmed.
  • Fortunately, there are also brokers for this trading style who specialize in executing market orders quickly – so-called ECN brokers.

Advantages of the scalping strategy:

  • Whoever masters scalping can make quick profits.
  • No complicated technical or fundamental analysis required.

Disadvantages of the scalping strategy:

  • not possible with all brokers
  • Spreads destroy part of the profits
  • trading is very time-consuming
  • extensive market monitoring required
  • Risk/profit ratio is often low

Application of the scalping strategy

  1. For scalping, very volatile currencies are best suited. Good examples are UR/USD, EUR/JPY, GBP/USD and USD/JPY.
  2. It is best to use the M1 or an even smaller timeframe. However, in order not to lose the overview, you should also keep an eye on the M5 and M15 timeframe.
  3. The best time for the scalping strategy is during the European/US/Asian session.
  4. Before the first trade is set, you should study the market for 5 to 15 minutes.
  5. Set the Stop Loss for a maximum of 10 pips

If the profit is 1 to 1.5 times the spread, the position is closed. However, you cannot usually place the take profit so close to the entry. Therefore, you must close the position manually when the take profit is reached.

Importance of Forex Indicators in Scalping

Forex indicators are already integrated in many trading programs and allow efficient trading even when scalping. However, traders should inform themselves in advance which indicators are really suitable for a scalping strategy. There is a multitude of Forex indicators that are very similar and their common use does not make sense. In return, some Forex indicators require other indicators with different data. For example, there are momentum, price and volume indicators.

Where do the Forex indicators come from?

The development of Forex indicators began in the 1970s with the conversion of stock market trading to computers. Certain oscillators such as the MACD or Stochastics can only be calculated and displayed with appropriate software. Other indicators such as Fibonacci numbers or moving averages are much older. In addition, the Forex indicators only became interesting for private traders when the currency market opened up. For large investors, the indicators did not play a special role. From 1980 onwards there were two major developments in Forex trading. On the one hand there was a change to computer programs and on the other hand there was a softening of the exchange rates. Thus Forex indicators became more and more interesting for traders and at the same time could be provided technically.

Types and effect of Forex indicators

In MetaTrader 4 alone there are about 200 Forex indicators integrated. Therefore it is hardly possible to list them all. Therefore in the following some examples of different variants of indicators, which have different effects and are important for a scalping strategy.

  • Moving Average: The moving average is not only one of the most important indicators in Forex trading and is used as a trend following price indicator. It contains the statement that the price continuation will probably take place nearby.
  • Trading with RSI: The Relative Strength Index (RSI) is also one of the Forex indicators. This very helpful oscillator indicates an overbought or oversold market condition. After that, a trend change is very likely to occur. Especially in Forex trading this is very often the case.
  • Stochastics: With a fast and slow stochastic, overbought and oversold market situations can also be detected. One of the advantages is a very simple structure of the %K and %D lines.
  • MACD: This Forex indicator shows the convergence or divergence of a moving average. It is generally considered the most important indicator for Forex trading. One of its special advantages is a visualization of the changing momentum.
  • In practice, there are numerous other Forex indicators that can be important for the scalping strategy. For example, the volume indicator ADL (Accumulation Distribution Line) from Chaikin, the momentum indicator RoC (Rate of Change) or the trend indicator TRIX. Before you apply a scalping strategy in practice, you should try out several indicators to find out who you can best deal with.

Examples of how the scalping strategy can affect you

Open a long position in EUR/USD. The spread is 2 and the stop loss is 10 pips. After 30 seconds the position will reach the 3 pips target profit level. Now close it manually to take the 3 pip profit.

You open a short position in the GBP/USD currency pair. The spread is 3 and the stop loss is 10 pips. In this case the target profit is 4.5 pips. Assuming that the position runs against you and is closed by the stop loss, you would have made a loss of 10 pips.

Examples of a simple scalping strategy

The following scalping strategies are relatively simple and can be used by less experienced traders. The implementation is mostly problem-free, but of course there are several points to consider.

Breakout Scalping Strategy

Breakout means translated as “escape”. The market can generally break out of three areas. This is done either from a defined range or from a significant high or low. The following figures illustrate the respective breakout scenario.

Breakout from a Range

In the following, the market situation of a bullish flag formation in an upward trend is presented. A possible scalping strategy would be to open a long position when the lower trend line is touched. However, it is clear that the price will eventually leave this limit. As soon as this happens, a good momentum is in prospect. For example, a scalping trade would occur if the price has left the limit by at least 10 pips.

Breakout from a significant high or low

The following picture shows how the last low is undercut by the price, which also leads to strong momentum. And a momentum is always a great thing for Scalper. In the current illustration it is a 15 minute chart. The problem is that there are often false outbreaks.
If you look at the same situation in a 5 minute chart, it becomes clear that the price is coming back to the trend line.

Here it comes to a so-called pullback. With this scalping strategy, it makes sense to wait until the last high or low has been over or undercut by the price. Then wait for the pullback and position yourself in the direction of the breakout.

The Bollinger Bands & Stochstic Strategy

The “Bollinger Bands & Stochstic Strategy” is also a very easy to implement scalping strategy. On the positive side, it provides very good entry signals.

Recommended settings:

  • Timeframe: 5 minutes
  • Take Profit: 10 pips
  • Stop Loss: According to your own wishes

The following indicators are required:

  • Bollinger Bands (20.0.2)
  • Stochastic (5,3,3)

If the candle closes outside the Bollinger Band and the Stochastic is above the 80’s or below the 20’s zone, the entry signal is generated.

Short Signal: Candle closes outside the upper Bollinger Band and Stochastic signal above the 80 level.
Long Signal: Candle closes outside the lower Bollinger Band and Stochastic Signal below the 20 level.

Sounds pretty simple, right? Is it in practice also

Forex Arbitrage Scalping Strategy

Forex arbitrage is the difference between the prices of different market participants and different currency pairs. In practice, these differences are very small, but they allow for attractive profits on large positions. It is always important that the orders are executed as quickly and accurately as possible via an ECN broker.

Advantages for arbitrageurs and the market

Arbitrageurs are market participants who work with Forex arbitrage and make risk-free profits. There is nothing wrong with this, as the market also benefits from such behavior. The use of forex arbitrage ensures efficient price formation in the markets. However, this only works if extremely fast orders are placed through an ECN broker.

The following conditions apply to private investors:

  • Trading with lots, preferably with several lots of one currency
  • Order processing with an ECN broker directly in the order book
  • This is what a Forex arbitrage could look like:
  • Exchange rates EUR/USD = 1.20, EUR/GBP = 0.70, GBP/USD = 1.65
  • Purchase of 120,000 dollars for 100,000 euros
  • Sale of the 120,000 dollars against 72,727 British pounds
  • Purchase of 103,898 euros for the 72,727 pounds
  • Profit = 3,898 Euro

In the above example, the profit is relatively high at 3,898 euros. In practice, however, these are usually much lower and often only range in the per mille range. This is why the arbitrage strategy is primarily suitable for traders with particularly strong capital.

Risk management with the scalping strategy

One of the most important points in the scalping strategy is effective risk management. Under no circumstances should stop losses be waived. Due to the low profit margins it is necessary to set the stop loss as narrowly as possible. This is the only way to achieve an acceptable balance between risk and profit. The consequence of this is, of course, that the tightly set stop loss can lead to loss trades. However, this risk must be accepted, as losses can hardly be made up for with a wide stop loss.

Not suitable for every trader

With the scalping strategy, it can also happen that a series of losses occurs, which is of course quite nerve-wracking for traders. Anyone trading with a real money account should therefore have the appropriate nerves of steel and have his emotions well under control. In addition, the scalping strategy requires a good knowledge of chart analysis and fast trading. It is important to perform a profound analysis in the shortest possible time. A corresponding trading experience as well as the quick recognition of certain chart patterns is therefore essential for a successful scalping strategy. For beginners, trading with a scalping strategy is therefore only suitable to a limited extent.

Which markets are particularly suitable for a scalping strategy?

Markets with a high volume are particularly suitable for the scalping strategy. These can be shares in the form of American blue chips such as Apple or indices such as DAX and Mini S&P. In practice, however, 80 percent of professional traders move in the foreign exchange market. Here, trades of 50 lots (5,000,000 euros) can be made at a stroke without any problems and without the market moving at all.

With a daily trading volume of four trillion US dollars, individual players hardly have the opportunity to influence it. For this reason, exchange rates are always very fair, as they cannot influence only one market participant in one direction or the other. With shares or indices, on the other hand, this would be quite possible.

A high spread reduces the profit

As already mentioned, the choice of broker is a decisive factor for a successful scalping strategy. Among other things, it is important that the spreads are as low as possible. The small number of gained pips would be quickly eaten up by a high spread. Small spreads are usually offered by the majors, i.e. the very frequently traded currency pairs. Therefore, the scalping of exotic currencies is not recommended due to the significantly higher spreads here.
The quality and speed of order execution is also crucial. After entering the chart, it must be possible to place the order very quickly. A good Internet connection is therefore also very important for scalping.

Test the scalping strategy – trade now with the scalping system:

To be successful with the scalping strategy a certain amount of experience is required. Therefore it is advisable to test it first with a free demo account. Use our broker comparison to find the best Forex broker for a scalping strategy. I have had good scalping experience in Forex trading with Broker XM, Broker IronFX, provider Markets.com and the Social Trader etoro.

Here you can download experience reports as a presentation to find the best broker for Forex, Stocks, CFD, Binary Options and Commodities in Germany.

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