The first scalping strategy is to look for small price moves in highly volatile financial markets.
A good example would be a ‘major’ forex pair with high trading volume and small bid-ask spreads.
‘Major’ forex pairs are those pairs from the largest economies, such as the USA, Canada, Europe, UK, Japan & Australia.
Examples of those pairs are: EURUSD AUDUSD USDJPY USDCAD EURJPY AUDJPY CADJPY GBPJPY GBPUSD EURGBP etc
Certain commodities are also used by day traders & scalpers, especially the more volatile commodities such as Natural Gas, WTI Crude & Gold.
When the particular financial instrument is moving in a small range, the trader can buy at the bid price and sell at the ask price, pocketing the spread as profit.
Or the trader can draw trend lines on a short term chart, such as the 15 or 5 minute chart. The trader can then sell short at the upper end of the trading range & buy at the lower end of the trading range.
Another scalping strategy is to trade news releases.
This involves identifying key economic events, such as non-farm payrolls (unemployment), average earnings, CPI (consumer price index), retails sales, money supply, consumer confidence or interest rate announcements.
The trader will be ready for the release of the economic statistic, knowing that volatility is likely to increase in the minutes after the release. The trader then tries to trade the price movement that occurs after the news is released.
A third scalping strategy is to trade off technical analysis.
This involves using tools such as moving averages, Bollinger bands, and trend lines to identify a clear trading range.
The trader then has potential entry and exit points at the upper & lower end of the trading bands.
Scalpers can then enter and exit trades quickly based on these technical signals. They will try to risk less then they think they can make & repeat the process over and over again, taking a profit on a small move each time.
The trader can magnify the profit by taking bigger risks & trading in larger size. However this also increases the potential losses so the trader must be highly skilled & experienced.
Most importantly the trader must be able to trust him or herself to exit quickly when the trade turns in to a loss. The trader could execute dozens of trades each day so risk management is absolutely key.
If the trader does not adhere to important trading rules the losses can mount very quickly & even wipe out a trader’s account in a single day.
It’s important to note that scalping can be a high-stress and high-risk strategy, and it’s not suitable for everyone.
It’s crucial to have a solid understanding of the markets and a well-thought-out plan before attempting to scalp.
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