Scalping is hard. It takes a lot of time, it can be emotionally draining and extremely stressful. And if you’re not careful with your risk control scalping can ruin your trading account. But there’s a time and place for every trading style and sometimes scalping should be your system of choice.

You Need Rules!

Scalping requires a quick mind and fast fingers. You need to have rules for both entries and exits, as well as for your risk management (more on this below). These rules need to be clear, simple and easy to follow. There must be no room for second-guessing yourself or thinking too much. In scalping, there’s just no time to analyse the charts to death and you can’t work out a plan after you enter.

Setting Up Our Charts

Time to setup our charts. My one minute system uses three indicators, two moving averages and one oscillator. For the Moving Average click on ‘Add Indicator’ in your J-forex platform, then open the ‘Overlap Studies’ folder and pick ‘MA - Moving Average’ from the list. The default values here are Simple Moving Average applied to the closing price, so you only need to change the initial value from 30 to 25. Now repeat the same process and add a second SMA with a value of 50 period.

On our first chart above you can see that I’ve applied two moving averages, the 25 period in red and the 50 period SMA in blue.

Now let’s set up our oscillator. Click on ‘Add Indicator’ again, then pick the ‘Momentum Indicators’ folder. Find the ‘Stoch – Stochastic’. We will be using the Stoch 8,3,3, meaning that you only need to change the default value for the ‘Fast %K Period’ from 5 to 8 and you’re set.

Entry and Exit

Our basic setup involves watching the 25 and 50 SMAs. Once the 25 moving average crosses over the 50 moving average, we have a bullish trend. If the 25 SMA moves back below the 50 moving average, the trend has switched to bearish.

On the left in our chart above we can see a bullish crossover signal. We have established the upward trend and are now looking for a way to get in a trade. We turn our eyes to the Stochastic, this indicator is used to show overbought and oversold market environments.

We will be looking for the Stoch to move BELOW the 20 line and then close back above it. This is a second bullish signal that gives confirmation to our trade. What we are essentially doing here is entering a currency pair that’s in a bullish trend but oversold in the short-term. The green arrow on our charts shows our hypothetical entry point.

The next picture above shows a bearish setup. Here we see that the 25 SMA (in red) is below the 50 moving average. Our entry is confirmed when the Stoch crosses above 80 then closes back down below this level. Out of the three signals given during this down trend, two would’ve been sure winners. The third trade is a borderline case.

Stop Loss and Take Profit Orders

The entry is only half of the battle. The rest is trade management and exit. There are a couple of ways you could exit your trade. One would be a change in the direction of the trend. If you’re long and the 25 SMA crosses below the 50 SMA, it’s time to exit that trade.

The second exit point is by hitting your stoploss. A suggested exit here would be placing the stoploss just beyond the latest swing high (if short) or swing low (if long). We see examples of this on our chart above. In all three cases, placing the stop beyond the latest swing gave ample room for our short to work out.

What about taking profits? Different market environments offer different returns. During high volatility you can stretch the take profit and aim for more pips. The reverse would be true in a low-vol situation. A simple rule would be to aim for X amount of risk. For example at 3X, if your stoploss is set at 3 pips, aim for 9 pips. Using this simple approach on our picture above would’ve delivered two 3R wins and 1R loss. If risking 1 percent per trade, the total return here would be 5 percent.

Unsuitable Market Environments

Of course trading isn’t always as simple, you can’t always get 3 times your initial risk. The chart below shows a classic situation when it’s best for trend traders to stay away. Notice how the 25 and 50 MAs keep crossing over each other? That’s a ‘red flag’. The second ‘red flag’ in this picture is the angle of the MAs. Notice how the 50 SMA spends most of the time flat lining? This means that there is no trend.

Below we can see an example of a good market environment for short trades. What you want to see is the moving averages spread apart and sloping at a downward angle, with the 25 SMA at the bottom. Reverse this situation for longs.

If you’re scalping, stay away from the Asian session. The picture below shows a snapshot of the Asian session yesterday. Notice all of the spikes? It would be hard to get executed here without slippage. In addition, trading spreads will be higher during this time period. And finally trading ranges are compressed during this time. If you look closely, you can see that the EUR/USD advanced by only 5 pips in one-and-half hours, from 1.0635 to 1.0640.

Risk Management

It’s important to employ strict risk management. This applies to trading in general but especially in the fast-paced space of scalping. Personally I wouldn’t risk over 1 percent on any scalp. And that’s the maximum, ideally you’d want to risk way less then that.

Avoid adding to losers or revenge trading. Ever been short and stopped out right before the market plunges? Get used to it. Trying to chase your losses or the market is a recipe for disaster.

Stay Small, Avoid Compounding

Things in the short-term space can turn on a dime. A system that worked beautifully one month may crash and burn the next. Compounding you gains in the short-term arena can be problematic. I don’t know how many times I’ve increased my trading size right before my scalping systems stop performing.

Here’s a better solution then automatically compounding your gains. On the way down, risk a set percentage of your account (example 0.5%). If you keep losing risking a set percentage will save you from a full account blowout because each successive loss will be smaller. But on the way up risking a set percentage can wreak havoc if you hit a soft patch. Consider keeping your trading size constant after a win. Only increase your size after you’ve accumulated a big cushion of wins.

Other Improvements

Here are a couple more improvements to consider:

- Pay close attention to the trend on the longer timeframes like the hourly and daily
- Mark important support and resistance levels (example: previous highs and lows)
- Mark the 50/00 round levels
- Get more chart time

In scalping, you need to be highly adaptable. It’s unlikely that any system will perform for a long period of time. You need a lot of chart time to recognize when and how is the market changing. There’s no substitute for experience here so hit those charts and good luck!
Translate to English Show original