Within the forex trading sphere, various strategies add different colors to the landscape. One such strategy is scalping, known for its fast-paced and nimble approach.
It is a unique trading technique that thrives on speed, precision, and high-volume trading. Stipulated on real-time technical analysis, scalping is essentially a rapid-fire trading method that leverages a multitude of small transactions to accrue profits. Unlike conventional trading strategies where positions are maintained over extended periods — ranging from several hours to days or even weeks — scalping aims to seal the deal within a matter of minutes or seconds, all for a gain of a few pips.
Generally, the underlying philosophy of a scalper is not to expect profits and losses exceeding 5 to 10 pips per trade, inclusive of the spread. Consequently, scalping’s profitability hinges on high volumes, with a multitude of these small gains collectively contributing to a significant profit.
In this article, we will discuss some effective scalping strategies specifically tailored for beginners venturing into the fast-paced trading domain.
21-EMA and MACD scalping strategy
The 21 EMA and MACD strategy provides a robust framework for scalping in the forex market, offering a data-driven approach to spot short-term trading opportunities.
This strategy relies on the interplay of two primary technical indicators: the 21-period Exponential Moving Average (EMA) and the Moving Average Convergence Divergence (MACD) on a 5-minute interval chart, preferably used with a highly volatile currency pair.
The 21-period EMA acts as a guide to the short-term trend, while the MACD, which consists of a histogram, provides the momentum’s direction and strength. By monitoring these two, traders can identify entry and exit points for their trades.
- To implement this strategy in a bullish market, traders must wait for the price to rise above the 21 EMA line. Simultaneously, the MACD histogram should indicate a cross-over toward the upward trend, confirming the bullish movement. However, note that the strategy still holds if the MACD had already signaled a bullish trend before the EMA cross-over.
- Once these conditions are met, traders can open a “buy” position with a profit target of approximately 5 to 10 pips. Alternatively, they can use a trailing stop loss to secure more potential gains.
- Similarly, the strategy also applies in reverse during a bearish market scenario. In this case, traders should wait for the price to drop below the 21 EMA while the MACD histogram shifts downwards. They can then open a “sell” trade under the same principle as a bullish scenario.
A look at the XAU/USD 5-minute chart below exemplifies this strategy in action. In this example, we have applied the 21-period EMA and MACD indicators. When the price crosses above the 21 EMA and the MACD histogram crosses over to the bullish territory, it signals a ‘buy’ opportunity. Traders can take advantage of multiple instances where the price bounces from the 21 EMA. Participants should adjust their profit and stop-loss targets based on their risk tolerance and personal trading style.
The situation is reversed in a bearish scenario. When the price crosses beneath the 21 EMA and the MACD histogram indicates a bearish trend, it presents a potential ‘sell’ signal.
EMA cross-over and stochastic RSI strategy
The EMA cross-over and Stochastic RSI strategy is another compelling approach to forex scalping. This strategy is particularly beneficial with major currency pairs due to their lower spreads, but it can be applied to any pair. You may find this strategy most effective during high volatility periods, such as during the overlap of London-Tokyo sessions and London-New York sessions.
Understanding the strategy’s functionality is essential to implementing it successfully. Consider an example of XAUUSD pair with the strategy indicators applied to the chart. Here, a 50-period EMA (depicted in blue) and a 100-period EMA (depicted in purple) are used.
As the 50-period EMA crosses above the 100-period EMA, it is your signal to prepare for a long order. Before opening the “buy” position, confirm that the price is near the EMA indicators and that the Stochastic is above the 20 level. To mitigate risk, it is wise to place a stop-loss at 2-3 pips below the last low point of the specific swing.
Conversely, in contrast to a bullish scenario, a bearish order entry point can be recognized under the opposite conditions.
Traders must look for the blue 50-period EMA to drop below the purple 100-period EMA while the price remains close to these lines. The Stochastic RSI should then cross below the 80 level, signaling the ideal moment to open a short position.
Ultimately, this EMA Cross-over and Stochastic strategy is a systematic, effective approach to forex scalping. However, remember that successful trading involves careful observation, patience, and a disciplined approach to risk management.
Tips for forex scalping:
While we have covered various scalping approaches in the article, it is vital to bear in mind these essential pointers to boost your scalping success rate:
- As a scalper, premeditate your trades. Determine entry, exit, and stop-loss levels prior to executing any trade.
- Speed is of the essence in scalping. You will need to execute your trades quickly and efficiently, so a reliable trading platform with swift execution speeds is crucial.
- Scalping typically involves trading highly liquid markets. This is because you need to be able to enter and exit positions rapidly and at a significant volume.
- Look for instruments with low spreads. The profit from scalping is often slim, so high spreads can significantly cut into your earnings. To put another way, low spreads allow for faster profitability with small price movements and ensure more accurate trade execution for successful short-term trading.
- The best time for scalping is typically when the market is most active, such as the opening hours of major sessions. Astute scalpers adeptly exploit the surge in volume and liquidity observed during the London and New York trading sessions.
- Scalpers predominantly lean towards the 1-minute and 5-minute timeframes due to their wide acceptance and efficacy in executing scalping strategies, whereas the 15-minute timeframe remains relatively underutilized.
Read more:
