Forex scalping is a popular trading style adopted by traders who thrive on fast paced trading. It is focused on placing several trades a day, holding positions for very short periods and capitalises on the smallest price fluctuations between currencies.
As with everything when it comes to trading, there are several scalping strategies, each will have a particular appeal to an individual trader.
This article focuses on a popular 1 minute Forex scalping strategy that involves combining two moving average indicators to determine current market sentiment, alongside an easy to read Stochastic oscillator to provide simple trading signals.
In This Article:
- What Is Forex Scalping
- Components Of The 1 Minute Forex Scalping Strategy
- Implementing The Strategy
- Things To Consider
- Summary
What Is Forex Scalping
Before we are able to discuss the intricacies of the 1 minute Forex scalping strategy, it is important to understand what is involved with scalping.
When discussing Forex scalping we are referring to the trading strategy that involves placing many trades per day, possibly hundreds. Each trade targets a small pip gain over a very short period of time, usually as short as a few minutes, the aim is to accumulate as many small gains as possible over a single trading session. Most traders will look to make somewhere in the region of a 10 pip gain and limit exposure to a 6-7 pip loss.
With the level of volatility in the Forex markets, particularly following an announcement, these small gains can easily be missed. In order to trade with a scalping strategy, the individual trader will be required to identify a trading opportunity and action the trade extremely quickly. To assist with this, it is necessary for a well written trading strategy to be in place that dictates which market conditions must be met prior to entering a trade.
The trading signals that are to be used within the strategy will also need to be clear to avoid ambiguity when assessing if a trading opportunity has presented itself, this is why this particular 1 minute Forex scalping strategy is popular.
Components Of The 1 Minute Forex Scalping Strategy
This particular 1 minute scalping strategy is popular with traders due to its simplicity and clear trading signals. To implement this strategy two variations of the Moving Average indicator and the Stochastic oscillator will be used to provide information regarding price momentum and current market sentiment.
Let's quickly explain the components of the strategy so that we understand the information being relayed:
Moving Average Indicator
A moving average is a simple calculation that is designed to smooth out price action over a fixed period of time. There are a range of long term and shorter term moving average indicators, but this does not mean that long term is to be used over a higher time frame, or a shorter term on a smaller time frame. When talking about long and short term, it is in reference to how many candlestick time periods are included within the calculation, therefore a 50-period moving average can be used on weekly charts and 5min charts alike.
This strategy uses information provided by two Moving Averages over 20 and 50 time periods.
» For more information see our guide overview to using the moving average indicator.
Stochastic Oscillator
The Stochastic Oscillator can provide extremely useful information on the momentum of a price movement. It is a simple line graph that is displayed generally at the bottom of a technical chart so that it can be cross referenced to current price activity. The Oscillator measures price gains and losses and provides readings from 1 - 100. Anything above 80 is considered as overbought and under 20 is oversold.
Implementing The Strategy
Now that we understand the various elements of the 1 minute Forex scalping strategy, lets have a look at it in practice:
On the above EUR/GBP 1 minute technical chart we have the two moving average indicators. The 20 period is shown in dark blue and the 50 period in light blue. The important thing to remember is that the 20 period is truer reflection of current market sentiment as it is averaging the most recent price action, it therefore reacts quicker than the 50 period to changes in sentiment.
When the 20 period moving average indicator is trading above the 50 period, this tells the trader that price momentum is bullish and only long positions should be traded. When trading below, it is bearish and short positions should be sought.
On the left of the technical chart we can see that the market is bullish, the key is to now identify when to enter a long position. We have indicated entry points by the green arrows. These correspond the the Stochastic Oscillator showing oversold signals. Immediately following each of the entry points, there is a small pip gain followed by a retracement to another entry point when the currency pair is oversold again.
Move to the right of the chart and we can see that the 20 period moving average crosses beneath the 50 period indicator, telling us that market sentiment has moved to a bearish move and short positions need to be looked for.
Combing this information with the Stochastic Oscillator we have identified four trading opportunities that occurred when the overbought signal was triggered.
This demonstrated clearly the concept of Forex scalping, quick entry, small gains and quick exit and get ready for the next opportunity!
Things To Consider
Now this may all seem very straight forward, but the 1 minute Forex scalping strategy does come with some vital considerations:
High Levels Of Leverage
Forex scalping is centred around capitalising on very small fluctuations in price, to make the trade worthwhile, the size of the position taken has to be much larger than would otherwise be needed if another trading style was adopted. Traders will likely be required to leverage their initial investment to achieve this, which will require a larger deposit.
All online Forex brokers will offer leverage, levels will vary, but some will allow a position to be taken up to 100x the value of their account. If a trader initially deposits £1,000 to open an account, leverage of 100x would allow a position of 100,000 units.
The purpose of forex leverage trading is to create a trading position that is worth taking. Trading at higher levels increases pip value in accordance with the leveraged trade size, therefore increasing potential gains that would arise from small pip movements.
» For more information see our beginners guide to leverage.
Tights Spreads Are Essential
Understanding spread is in Forex trading is essential as it is the primary cost of placing a trade. Essentially, spread is the broker fee, charged in the form of commission for placing a trade on the traders behalf. Online brokers charge a spread for every single trade placed, whether it is a tight or wide spread will be determined by market conditions at the point of placing the trade.
Forex scalping should only ever be actioned on the major currency pairs. Liquidity is a key element when brokers calculate the spread and trading only within high liquidity markets will minimise the risk of being caught out by a large spread.
Assume by means of example that a trade has been taken with a view of making a gain of 10pips. If the broker spread is 4pips, 40% of the potential gain from the trade has been lost to the spread. Look to scalp markets that offer a spread in the region of 1-2%
» For more information see our guide what is spread in Forex trading.
Summary
Trading using the 1 minute Forex scalping strategy is a very popular trading strategy due to its simplicity and clarity of information provided. If a trader is able to be attentive to market conditions and act promptly on trading signals, there is potential to make gains. Consideration should be given to both the levels of leverage that will be required to trade this strategy, along with margin requirements and the necessity for tight spreads to be made available.
