Scalping is a trading strategy with a lot of action and involves a number of entries and exits into and from the market taking profits a few pips at a time. These profits are typically anywhere between 1 and 10 pips at a time and the timeframe for each trade ranges from a few seconds to a few minutes. Because of this short duration, scalpers prefer to use 1 minute and 5 minute charts. They normally operate during the overlap of the major regions such as Asia close/Europe open and Europe close/ U.S. open. Scalping is most suitable for traders who can concentrate on watching the charts for several hours at a time and who enjoy the challenge of thinking on their feet and reacting quickly to changes in market conditions.
Because of the multiple entries and exits, they use some basic principles. Spread is important to them which is why they tend to avoid currency pairs and concentrate on the major pairs which offer the tightest spreads but the maximum liquidity. They tend to avoid trading during and just after major news announcements because the markets tend to be volatile and the sometimes irrational swings in prices could destroy otherwise profitable positions. Finally, because they operated on such minute profit margins, high leverage is frequently employed to multiply the profits. In fact, because of the trading frequency and the necessity to watch the markets, scalping lends itself particularly well to the use of automated trading programs and Forex robots.
The principle advantages of scalping as a strategy are as follows:
Control of risk: because the trader spends so little time actively in the market for each position, the risk of stop losses being triggered by adverse price movements is greatly reduced.
Taking advantage of market moves: scalpers love small price moves and these happen much more frequently than large ones. Very often, even a large move starts with a smaller move. More frequent small moves mean better odds for the scalper and more chances of trading profitably.
Sustained profitability: scalpers are not dependent on major moves in order to trade profitably on a sustained basis so that they can trade profitably at all times.
Advanced Bollinger Scalping Strategy
This is a strategy that utilizes Bollinger Bands and Exponential Moving Averages and can be used with any currency pair and for any timeframe between 1 minute and 15 minutes but works best with a 5 minute chart. Bollinger Bands is a technical indicator originally devised by John Bollinger. The settings by default are a moving average of 20 periods and a standard deviation of 2. This particular strategy uses one Bollinger Bands with a moving average of 21 periods and a standard deviation of 2 and a second Bollinger Bands with the same moving average but a standard deviation of 3. The basic strategy consists of looking for the points at which the price touches either the higher or the lower layers between the standard deviation of 2 and the standard deviation of 3. The use of the 200 Exponential Moving Average will help you to keep track of the trend and if the price is above the EMA, you will look for a long entry position and, if the price is below, you will establish a short entry position.
The signal would be a candle which touches or preferably closes inside the zone between the 2 standard deviations and the confirmation of the signal will be a candle of the opposite color showing a reversal. If these conditions are met, the position should be opened when the third candle opens itself. The stop loss level should be set just above or below the first two candles depending on whether the price is above or below the 200 EMA. The first target will be determined at the 21 period Bollinger Bands and the second target could be determined by the higher or lower line of the Bollinger Bands with the standard deviation of 2. The whole transaction will look something like this
Scalping strategy using Relative Strength Index and Candlesticks
Yet another strategy which can be used for currency pairs with relatively low volatility and tight spreads consists of a combination of candlesticks because of the availability of signals showing reversals and the RSI which was that the approaching end of overbought or oversold market conditions. The candlestick pattern recommended for use is the Shooting Star which signals the move of control from the bulls to the bears. The pattern should appear at the high end of a trend and the colors are not important. It works best with a timeframe of five minutes and an RSI of 14 periods.
In the first instance, look for a Shooting Star after a strong price movement and an RSI which shows that the market is overbought. If you receive the signal from the RSI and confirmation from the candlestick, you should place a sell order at the opening of the next candle with the stop loss level above the upper shadow of the shooting star and a take profit position equal to half of the previous rally. The position would look something like this:
In the second instance, look for the same pattern after an upward trend move and the RSI to signal a divergence. These signals may not appear clearly on a 5 minute chart so reset the time frame to 1 minute. Divergence signals are usually much clearer than overbought signals so you should place a sell order when the next candle opens. The stop loss should be set higher than the upper shadow of the Shooting Star and take profit set at half of the previous move.