My Top Three Scalping Trading

Strategies
Scalping is one of the most popular methods for trading financial markets. It
is primarily based on the idea of entering numerous trades to profit off
minor price changes. Instead of focusing on large moves that shift the
market sentiment around, scalping aims to profit from the price changes in
the initial phases, without worrying about where the price goes from there.

In this blog post, we look at what exactly scalping is, its advantages and
limitations, as well as three simple scalping trading strategies that you can
implement in your daily trading routine.

Definition

Scalping is one of the most commonly used trading methods. Its simplicity
and popularity make the method used across all markets and levels of
market knowledge. Still, scalping methods are best used in highly liquid
markets to minimize costs as more liquid markets have smaller spreads.

In essence, scalpers are looking to profit from small but usually fast market
movements. They are not particularly interested in macro economic factors
that move the market, but usually use technical analysis to identify levels
where the price action may accelerate or reverse.

Scalping is only useful in the trending markets. Ranging and choppy

markets make life difficult for scalpers as the price action whips around
without any directional bias. A strong uptrend or downtrend means that
different scalping methods can be used to make profits.

In order for this trading method to work, the basic assumption is that
traders have to open a large number of trades. For instance, scalpers will
look to open and close 10 days per day, looking for 5-10 pips from each
trade. This way, the profits should add up to a larger profit.

Scalping methods must finish in a much higher number of winning trades,

as winning and losing trades are usually the same in size i.e. a scalper may
close their position if 5 pips are in green or red.

Additionally, scalpers take profit early and look to minimize their losses.
They tend to close positions very quickly, with different strategies involving
duration of open trades from a few seconds to a few minutes maximum.

Due to such design, focus and discipline is of the utmost importance. The
scalper should have a strong adherence to their trading strategy. This is
especially important when it comes to closing trades that have a potential
to turn into one large loss that could erase gains from numerous successful
trades.

Popular scalping strategies

For the reasons outlined above, scalping is considered to be one of the

most intense trading methods. This method of trading can be both a
primary and supplementary trading strategy for traders. Many traders that
generally trade markets on higher time-frame charts sometimes use
scalping to make profits, especially in the highly liquid markets.

Below here, we look at three simple scalping trading strategies.

1) Scalp trading using the moving average

A moving average is arguably the most commonly used technical indicator.

You can find it on all types of charts, from those focused on scalping, to
monthly charts used by institutional investors in predicting larger market
trends.
This scalping strategy is based on two simple moving averages (SMA) - 5-
period (the red color) and 20-period (the blue color). In an illustration below,
we see a EUR/USD 15-min chart where two short-term moving averages
follow the price action closely.

This is a very simple trading strategy. We are looking for periods when the
price action trades in a clear direction, which is defined by the lower lows
and lower highs (downtrend), and the higher highs and higher lows
(uptrend).

Once the shorter moving average - 5-period - crosses above the 20-period
moving average in an uptrend, we enter a market with a buy trade looking
to earn 5 pips. As for the downtrend, the shorter MA should cross below the
longer MA. A stop-loss order is also set at 5 pips.

Scalping on EUR/USD 15-min chart (TradingView)

We made two quick scalps in EUR/USD. On the first occasion, the 5-period
MA crossed above the 20-period MA after the price action created a series
of bullish candles. We entered a trade at $1.08845 and placed both take
profit and stop loss orders at 5 pips off the entry on each of the two sides.

Just a few moments later, our profit-taking order was hit. The major
continued to trade higher after the shorter MA crossed above the longer
MA.

A few hours later, another opportunity arises. This time, the market is
trending lower after the trend direction changed its course. The 5-period
crosses below the 20-period to trigger our entry order. Very quickly, our
profit-taking order was hit.

After the downtrend ends, two moving averages intersect each other on
multiple occasions, which shows that this strategy is not effective in times
when the market trades sideways.

2) Scalp trading using Fibonacci

Another method is to use Fibonacci retracement instead of the moving

average technical indicators. Fibonacci is a technical tool used in trading to
define support and resistance levels. The retracement version identifies
levels where the price retreats from a certain point. There are five major
Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

For this strategy, we are focusing on arguably the strongest Fibonacci

retracement line - 61.8%. Therefore, we are first looking to identify a
trending market. The underlying idea is that the market will continue in the
prevailing trend direction after retreating to 61.8%, where buyers/sellers will
group to help extend the trend higher.
 Scalping on USD/JPY 15-min chart (TradingView)

In the USD/JPY 15-min chart, the price action retreats after creating a
short-term peak. During the pullback, the buyers are waiting to get on the
long side at $107.65 for two reasons. First, this is a 61.8% retracement,
and second, the price action was rejected in the past here, hence this is a
level of interest for traders.

As scalpers, we are only interested in a bounce and reaction at this level.

Thus, the entry is at $107.64, stop loss at $107.59 and take profit at
$107.69. As expected, the price action bounces off this level and to hit our
take profit.

Another scalping strategy based on Fibonacci involves other important

retracement levels - 38.2% and 50%. This approach is used by traders
looking to gain a few pips by betting that the price action will bounce every
time it touches these levels.
 3) Scalp using the RSI oscillator

Finally, we will show you a simple scalping strategy based on the Relative
Strength Index (RSI) technical indicator. This is one of the most popular
technical indicators among the trading community, used to determine when
the markets are trading in overbought and oversold conditions.

When the RSI displays readings higher than 70 it means the market is
trading in overbought conditions. On the other hand, a trip below 30 refers
to an oversold market. These parameters can be adjusted based on the
preferences of a trader. In this case, we will further move these two to 80
and 20 respectively to reduce the risk of our trades hitting stop loss orders.

On the other hand, the number of generated signals will also decrease as
the market may go to the 70s and reverse, without touching the 80 mark.
The basic idea behind this strategy is that the market operates in a
balanced fashion. Whenever it travels to overbought/oversold conditions,
chances of a reversal increase.

Please note that you are supposed to enter a trade only after the 15-min
candle closes above 80 or below 20. Hence, this is a counter-trend
strategy.
 Scalping on GBP/USD 15-min chart (TradingView)

In a few hours’ time, this scalping strategy generated three successful

trades on the GBP/USD 15-min chart. Since GBP/USD traded in a bullish
fashion, the market was entering the overbought territory frequently.

Every time the price passed the 80 mark, a sell trade would have been
opened with the same parameters - 5 pips risk and reward. On three
different occasions, GBP/USD reversed its course soon after entering the
overbought territory.

In the second occasion, the market came close to hitting our stop loss
order, but it stopped just shy of it and reversed to ultimately hit our take
profit level.

Summary

Scalping could prove to be a very profitable trading strategy. It can be used

both as a primary strategy where traders specialize in opening a high
number of traders to gain a small amount of pips. In other cases, traders
use scalping as a supplement strategy, especially when the markets are
highly liquid.

Arguably the most important elements for scalping to yield results is the
strict adherence to a trading strategy. Both profit-taking and stop loss levels
should be executed without hesitation to make sure that small profits
compound into large gains. This is especially important in order to avoid a
situation where one larger loss erases gains of numerous smaller profitable
trades.