A scalper is a trader who attempts to make profits from small price changes in the market. This means that they tend to place lots of small bets throughout the day and constantly monitoring the price levels of each trade. If a strict exit strategy is implemented, a scalper can be very profitable by taking advantage of small changes in the price of a commodity that may not necessarily reflect the overall movement of the commodity’s price for the day.
What is Scalping?
Short term trading strategies are very popular among retail traders. Instead of waiting for days for a trade setup, short-term traders jump into and out of the market in seconds and trade only during the busiest and most liquid market hours. This means no overnight risk, and all profits and losses can easily be summarised by the end of the trading day.
Scalping is a short-term trading style which suits traders who don’t have the patience to trade higher timeframes. While scalpers aim for very small profits on each trade, the large number of trades they open during a day can easily return significant profits by the end of the day.
However, you need to be aware that this is a very active trading style, and if you don’t have the discipline to stick in front of your screen for a few hours each day, you’ll be better off with a longer-term trading style such as day trading or swing trading.
Pros and Cons of Scalping
Just like any other trading style, scalping has its advantages and disadvantages. While opening a large number of trades comes with higher transaction costs, scalpers don’t have to follow fundamentals since they don’t play a significant role on very short timeframes. The following table summarises the most important pros and cons of scalping.
The 1-Minute Forex Scalping Strategy
In the following lines, we’ll explain an easy scalping technique that is based on the 1-minute timeframe. This strategy combines the best of trend-following and mean-reversing rules and uses three popular technical indicators to identify potential long and short setups.
Scalping Forex Indicators
This 1-minute scalping strategy is based on two exponential moving averages which are used to identify the overall short-term trend, and on the Stochastics indicator which is used to spot overbought and oversold market conditions. The complete toolbox and indicator settings for the strategy are:
1) Two Exponential Moving Averages (EMA) with a setting of 50 periods and 100 periods. Since the strategy is based on the 1-minute timeframe, the EMAs are a 50-minutes EMA and a 100-minutes EMA. A cross of the faster (50-minutes) EMA above the slower (100-minutes) EMA signals a short-term uptrend, while a cross of the faster EMA below the slower EMA signals a short-term downtrend.
2) Stochastics indicator with a period-setting of 5,3,3. The Stochastics indicator is an oscillator which signals overbought market conditions when its value crosses above 80, and oversold market conditions when its value crosses below 20. A long entry is confirmed only when the Stochastics indicator is below overbought conditions, while a short entry is confirmed only when the indicator is above oversold conditions.
Rules for a Long Entry
To open a long entry based on the 1-minute Forex scalping strategy, we need to wait for the 50-period EMA to cross above the 100-period EMA, for the price to make a pullback to the 50-period EMA and for the Stochastics indicator to return from overbought market conditions. These rules are shown on the following chart.
Rules for a Short Entry
To open a short position with this strategy, we need to wait for the 50-periods EMA to cross below the 100-periods EMA (signalling a short-term downtrend), for the price to make a pullback to the 50-period EMA and for the Stochastics indicator to return from oversold (<20) market conditions. These set of rules are shown on the following chart.
Scalping Forex or any financial instrument for a living requires discipline and skills to analyse the market on very short timeframes. Be prepared for many hours in front of your charts if you want to master this trading style and call yourself a scalper. Try to trade only during the busiest market hours, as illiquid markets can lead to wider spreads and slippage which can eat into your profits. In addition, follow an economic calendar and mark important market news as they can trigger significant price moves on short-term timeframes.
Other Trading Basics
Learn the skills needed to trade the markets on our Trading for Beginners course.