Think of the price action as a snarling pit bull tied to a stake. It charges for you, but you know the exact length of its chain and you are standing confidently just an inch beyond that. It leaps for your face and just before it makes contact with your throat the length of chain reaches its end and yanks the dog back, throwing it violently to the ground.
What is scalping? It is when you take a small amount of pips (5-10 pips) from an anticipated reaction (movement) of price action. Scalping is done using a small time frame like the 5-minute chart but it is critical to reference the higher time frame so that you know at what price point to enter your trade. You have to know beforehand where there is strong support and resistance.
Scalping is a totally different technique then the trend based trading that you would normal do throughout the day or week. These scalping techniques are in fact, counter-trend. It is not for the weak of heart and it does carry a higher degree of risk but if you know the techniques and can apply them consistently then scalping will become a viable method of trading for you.
Couldn’t you use forex scalping strategies to trade with the trend? My answer to that is why would you want to? If you find a setup that allows you to trade with the trend then why are you going to settle for a measly 5-10 pips? The whole idea of trend trading is to get in at a pullback and let the trend carry you to higher ground. Scalping is reactionary. We know where price is going to bounce due to profit-taking and we bet against the trend and snag a few pips. The key to this forex scalping system is in identifying these price points and your execution.
Get your price points (levels of support and resistance) off of the daily chart. Use the 5 minute chart as you approach them. Don’t wait for price action to react at that point, it will be too late. You want to be in on the trade the moment before price action bounces. Remember, we are trading against the current direction in anticipation of a reaction when price action hits our price point. This will run against the grain of your accustomed trading.
This means that you will put in a buy order when that long bearish candle hits your price point. You can’t chase price, you trade against it before the bounce. It is scary at first but once you get it you will understand why that is the most sensible way to go about scalping.
Which currencies to scalp?
The spread needs to be low. If you scalp currency pairs with large spreads then you are at too much of a disadvantage for scalping. That means that GBP/JPY is off the table! Stick with GBP/USD or the EUR/USD. The spreads are better and price action is not as volatile. If you keep getting whipsawed when you scalp then you are trading the wrong currency pair.
Scalping is risky because the amount of pips you hope to gain isn’t a whole lot more then the spread cost and the stop-loss. At best you have a 1:1 risk to reward ratio. You improve that ratio by identifying the price points of strong support and resistance and you further improve it by not chasing price. You stand there waiting for it.
The first step is to identify potential price points where price action will bounce. In order to show you that we need to go over a little lesson. As you know, this market is composed of traders. It is the traders who drive the market. But not all traders are equal. There are institutional traders with billions at their discretion. When you and I place a trade in the market, it won’t even cause a tick but when these whales place an order it can make a big splash.
That is why when it comes to scalping, you want to pay close attention to the daily chart. You are not going to scalp off of the daily chart but you are going to use it to look for strong prices points of support and resistance.
Institutional traders don’t waste their time with intraday charts. They look to the daily and when they see their signals, they trade. That is why price action respects levels on the daily chart. The biggest fish in the market are looking at the daily indicators so that means you should too.
So what are the forex scalping indicators? What? There are none! Indicators are used for trend trading. This is counter-trend! We are only looking at these indicators on the daily chart because price action will react when it touches them.
So on the daily chart, map out all of these lines and indicators:
Pivot Points
The daily pivot levels S4 – R4 including the mid-levels (these pivots need to be calculated off of the GMT timezone because there is an actual world beyond the Eastern Time zone and they don’t care about what time it is in New York.)
Moving Averages
10 day EMA
10 day SMA
50 day SMA
100 day SMA
200 day SMA
These are the most common moving averages and the institutional types will be using them. Again, this has nothing to do with spotting trends. When price action hits one of these daily moving averages it will bounce. Note: Don’t put these moving averages on your 5-minute chart because it won’t be the daily. Moving averages are calculated off of the period of your chart i.e. 5 minutes. So if you want the 10 day SMA to show up correctly on your 5-minute chart then you would need a 2880 period SMA. It’s not so crazy; I do it all the time.
Old High and Lows
Draw the horizontal lines out for these high and low points. They cause a reaction.
Who is our favorite Italian? Fibonacci!
Map out the Fibonacci retracements and extensions for the major price movements. Don’t make this difficult. Just try to think of what would be most sensible. How would the market movers draw them out?
Psychological Numbers
Levels like 1.2500 or 1.5000 should be drawn out on your chart in bright neon pink because when price action hits these levels it’s like Christmas all over again. You’ll be gifted with an easy 10 pips no fail.
Trendlines
Once again, keep it simple. Draw out the most logical trendlines on the daily chart.
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That’s it! That’s how to scalp forex. It’s pretty simple, ballsy, but simple. The scalping technique is just three steps:
1. Identifying the price points
2. Executing your order against price direction
3. Taking out 5-10 pips (not being greedy)
Discipline is everything and if you need some then I highly recommend Peter Bain’s course. If you want to know the market then this is the man who can teach it to you. Follow it, apply it and be a success. Cheers!
