Financial market players adopt various trading styles and strategies that match best with their disposition to achieve optimal results. While swing trading and position trading approaches focus on long-term profits, there exists another prominent strategy, called scalping, that targets multiple short-term gains in a single day. Scalping trading is one of the most popular trading methodologies where traders strive to procure several small profits by opening a number of quick “buy” and “sell” trades.
In this write-up, we have explained three effective scalping trading strategies that offer an average win percentage of 70% or above if applied precisely. Note that anyone advertising strategies with a 98% or 100% win ratio is most probably exaggerating facts because that is not how the financial ecosystem works.
Scalping meaning: What is scalping trading?
Scalping, or scalping trading, refers to a day trading strategy where traders open numerous trades per day to accumulate profits. Scalpers mostly work via leveraged trading to grasp miniature profits with limited capital in a short duration. Moreover, these traders usually prefer highly volatile instruments and utilize 1- to 5-minute chart frames for placing orders.
Also, in the scalping arena, keeping the ‘win ratio’ much higher is of utmost importance to sustain long-term profitability. Further, as trade opportunities have to be identified and entered in a matter of seconds or minutes, it is essential to remain keen & attentive, decide swiftly, and maintain precise timing.
Scalping trading strategy: 3 effective methods applicable on 5-minute charts
Before starting, note that it is better to keep things simple and not flood your chart with too many indicators. We have compiled these scalping trading strategies by utilizing only one or two time-tested indicators on 5-minute timeframe charts.
1. RSI divergence strategy
The RSI divergence technique is based on the Relative strength index divergence phenomena, where the RSI indicator shows signs of reversal before the price actually does. When implemented efficiently, this strategy can be a great indicator of upcoming price shifts allowing the scalpers to timely grab swift profits.
- In this scalping trading strategy, you first have to apply a 14-length RSI and set the chart’s timeframe to 5-minutes.
- Afterward, you have to wait for some strong one-direction price move (we suppose a bullish spike here), its short rebound, and see if the price then makes a higher peak than the previous one.
- If these conditions are satisfied, lastly, but most importantly, you have to analyze RSI and detect whether there exists any divergence with the price. The divergence after a bullish move signifies that the price is going to reverse and proceed some pips down, at least in the short-term perspective.
- In case of divergence, you can enter a bearish trade if there is a regular bearish divergence, while you can place a “buy” order if you spot a regular bullish divergence.
The Below EUR/USD chart displays an example of a bearish divergence scalping trading strategy. As you can see, the price shoot upwards, then shortly pulled backed, and finally formed a new high. At this instant, the RSI slanted downwards, showing signs of upcoming bearish pressure. Scalpers can grab the “sell” trade opportunity here to acquire 10 or 20 pips. Further, they can put a trailing stop loss if they bet on an extensive downward movement.
Remember that scalping is not about capitalizing on long-term price moves and abundant pips but securing instant price bursts.
Here is another example showing a “bullish” divergence scalping trading strategy manifested on a GBP/USD chart.
2. Moving average and MACD strategy
Moving average and MACD strategy is another effective scalping trading strategy that makes use of two indicators, namely exponential moving average and MACD.
- In this technique, you have to apply a 21-period EMA and MACD indicator on a 5-minute timeframe chart of a volatile currency pair.
- For a bullish trade, you have to wait for the price to cross above the 21EMA and the MACD histogram to shift upwards simultaneously. However, the setup is still valid even if the MACD had already turned green some minutes before the crossover.
- On fulfilling of conditions, you can place a “buy” trade and target around ten pips or put a trailing stop loss to grab more pips.
- The opposite of these exact conditions is applicable for bearish trades.
In the XAU/USD chart below, you can see two instances where the price moves above the 21EMA, and the MACD also shifts into the bullish territory at the same time. The trades were opened on the price crossovers, with two profit targets highlighted by reddish boxes in this example. Note that profit marks can vary according to the risk capacity and trading style of different scalpers.
3. Price action patterns strategy
As the name suggests, the price action scalping trading strategy relies on pure price action methodologies involving candlestick patterns. While chart patterns rarely materialize on larger time frames, they appear quite frequently on small time frames providing the scalpers a plethora of buy and sell opportunities.
- You can place short reversal trades on spotting patterns like head and shoulders, double or triple tops and bottoms, and diamond patterns, among others.
- You can place in-trend trades when the price shows flag, pennant, or wedge formations.
Further, it is more practical to complement your price action trades with some volume or momentum indicators to enhance the win rate.
The below EUR/USD chart shows the formation of a head and shoulder pattern after a short-term upwards trend, indicating a bearish trade opportunity. During scalping trading, it is prudent to only target a small number of pips to avoid losses from sudden price shifts.
The XAU/USD chart below shows another price action trading setup where the price keeps rejecting from a resistance zone after an upward spike. Traders can place a minimum of three sell trades here on the condition that they only aim for tight take-profit targets.
Scalping trading is a manageable and efficient method for traders with less patience but a highly diligent mind. We have explained three competent scalping approaches in this article but note that no trading system is successful 100% of the time. Moreover, although small time frame charts offer abundant trade opportunities, they are also more prone to generating false signals due to higher market noise. Hence, it is essential to work more rigorously and attentively with a solid trade plan during scalping trading to attain consistent results.