Scalpers make a profit from small market movements. They take advantage of a ticker tape that does not stand still. Scalpers have relied on Level 2 bid/ask screens for years to point buy and sell signals. They buy when demand is set up on the bid side and sell when supply is set up on the ask side. As soon as balanced conditions are returned to the spread, they book a profit or loss. These days, however, this methodology is not that reliable in the electronic markets and there are three reasons for it.
- First, after the flash crash of 2010, the order book emptied permanently. It happened because deep standing orders were the target of destruction on those chaotic days which forced managers to hold them off-market or execute in secondary venues.
- Secondly, HFT (High Frequency Trading) dominates intraday transactions these days and generates wildly fluctuating data that undermines the interpretation of market depth.
- Finally, the majority of trades now occur away from the exchanges in dark pools which do not report in real-time.
Scalpers can meet the challenges of this era with these technical indicators for applying best forex scalping strategy –
Moving Average Ribbon Entry Strategy
You can place a 5-8-13 Simple Moving Average (SMA) combination on the two-minute chart. With it, you can identify strong trends that you can buy or sell short on counter swings, and get a warning of approaching trend changes that are inevitable in a usual market day. It is easy to master the scalp trading strategy. During strong trends keeping prices stuck to the 5 or 8-bar SMA, the 5-8-13 ribbon can align pointing higher or lower.
Penetrations into the 13-bar SMA indicate waning momentum that favors a reversal range. The ribbon flattens out during the range swings which makes the price crisscross the ribbon frequently. The scalper then observes for realignment and ribbons turn higher or lower and spread out showing more space between the lines. This tiny pattern is a trigger for the buy or sell short signal.
Relative Strength/Weakness Exit Strategy
How can a scalper know the exact time for taking profits or cutting losses? 5-3-3 Stochastics with a 13 bar, and 3-standard deviation (SD) Bollinger Band can be used in combination with ribbon signals on a two-minute chart in actively traded markets. Some of these markets are Dow components, index funds, and widely held issues such as Apple Inc. (AAPL).
When Stochastics goes lower from the overbought level or higher from the oversold level, the best ribbon trades set up. Similarly, you need an immediate exit when the indicator crosses and rolls against your position followed by a profitable thrust.
You can schedule the exit more accurately by observing brand interaction with the price. Taking profit into band penetrations is a good idea as they foresee the trend slowing or reversing. Keep in mind that scalping strategies cannot stick around via retracements or any kind. Moreover, take a timely exit when a price thrust fails for reaching the band. However, if Stochastics rolls over, you need to get out.
When you are comfortable with the workflow and interaction among technical elements, you may adjust the standard deviation lower to 2SD or higher to 4SD in order to account for daily changes in volatility. You can get a wider variety of signals by superimposing the additional bands over your current chart.
Multiple Chart Scalping
Another forex scalping strategy is pulling up a 15-minute chart with no indicators so you can keep track of background conditions. These conditions can affect your intraday performance. You have to add three lines. One will be for the opening print and two will for the low and high of the trading range set up within the first 45 to 90 minutes of the session. You have to keep an eye for price action at those levels as they will set up a larger-scale two-minute buy or sell signals. Moreover, you will notice that the greatest profits during the trading day come with the alignments of scalps with support and resistance levels on the 15-minute, 60-minute, and daily charts.
It is no longer possible for scalpers to rely on real-time market depth analysis to receive the buy and sell signals required to earn multiple small profits on a trading day. It is better to use the forex scalping indicators instead.