Scalping trading style is so popular because it can "instantly" score a profit each time you open a position. With that try-hard method in mind, a sound strategy is a must!

Recently, you've stumbled upon a veteran trader yammering about Scalping every now and then. This trading style is so popular because it can "instantly" score a profit each time you open a position. Honestly, with that instant gratification, no wonder every beginner tries their luck with it. But, do you even know how to do Scalping correctly? Because if you don't, the only thing you'll find is a streak of quick losses.

"Scalping is a method where a trader opens one or many positions frequently with short holding period in order to accumulate small gains."

In essence, Scalping is a method where a trader opens a position (or many) frequently with short holding period in order to accumulate small gains. Specifically, each Scalping position usually lasts less than a day and more often than not, in under a minute! Subsequently, Scalpers usually takes only meager profits for each position. That's because under a short amount of time the price movement will easily touch either the stop loss (SL) or take profit (TP). With that try-hard method in mind, a sound strategy is a must!

Scalping trading strategy

 

3 Simple Ways To Do Scalping

No worries, the strategies we're going to use here won't be riddled with mathematical equations. It is simple and applicable for anyone. Let's start it, shall we?

 

1. Use Moving Average Indicator to Identify the Direction of Current Trend

Step one, you need to identify where the current trend is heading to. It's important because, without a basic understanding of where the current trend is, you won't be able to tell which market orders should be prioritized over others. For instance, when the current trend is heading upward, the buy order is more prominent than sell. To do so, select the Moving Average indicator from your trading terminal (preferably MetaTrader4 or 5).

trade signal indicators

Zoom in to 5-minutes to 15-minute time frame. That small time frame will help Scalper to make entry during small price movements. Next, pick Exponential Moving Average (EMA) and input 200 as its period.

EMA-200

The chart below shows the NZD/USD pair with a single line of Exponential Moving Average-200 (red line). If the price moves above the red line it means the buyer dominates the market. Therefore, you can frequently open long positions (buy orders) while the price is trending upward.

NZD/USD in 5-minutes chart

Conversely, if the price moves below the red line (EMA-200), you should sell more often. Capiche, my friend?

 

2. Use CCI Indicator to Identify the Strength of Current Trend

Step two, identifying the strength of the current trend is just equally important. Why? Because if you don't, you'll be trapped while the trend finally reaches its peak and ready to reverse direction. Oh, my, believe me, it's a nasty experience!

For example, a newbie trader entered the market with a buy order while the market was trending upward. Little did he know that it was reaching its peak limit. The next thing he knew, the market went against his position and instantly drained his margin.

To avoid that predicament, you need indicators to detect whether the market is already reaching its overbought or oversold limit. Among those, the CCI (Commodity Channel Index) indicator can be your best pick. For example below, you can see that CCI shows the overbought condition when it soars above 100 points or oversold condition when it dips below -100 points.

CCI for scalping

Combined with EMA-200, this reading can give you a clear signal for Scalping. For example, when the price moves below the red line it tells you that the market is all about dropping "sell" orders. In that moment, your best chance to enter this downtrend is when the price is slightly skewed upward or overbought! But why? Simple, because if you want to reap maximum profit you have to remember these golden words, "buys cheap, sells high".

Therefore, you'll wait for the price to reach its maximum value when you want to sell! In our chart above, we should wait for the CCI to move above 200 to indicate overbought status. In opposite case, if you want to buy, you should wait for the price to enter oversold status or when the price is generally rock bottom. That's when CCI moves below -100. Simple, right?

 

3. For God's Sake, Use Stop Loss and Take Profit

Scalping is essentially a risky game because in order to make notable profits you have to make more wins than losses, and that is way easier said than done especially when each position lasts under an hour or so. For that reason alone, you cannot ignore the importance of Stop Loss and Take Profit. Setting Stop Loss and Take Profit may seem to be a pain in the neck at first, but when done properly it can save your capital from being drained by losing position(s). In that sense, setting SL and TP for each Scalping position is mandatory if you want to limit risks and make profits.

stop loss and take profit

By a glance, when you set a buy order you should set Stop Loss some pips lower and your Take Profit higher than your entry market price. Conversely, when you sell, Stop loss should be higher and Take Profit lower than your initial entry price.