If you like fast-paced market movements and want to get into and out of a trade as fast as possible, then this 1-minute scalping strategy might be very interesting for you. Instead of waiting for days for a trade setup to occur on the daily chart, Forex scalping allows you to take multiple trades in a single day whenever the strategy provides a buy or sell signal. In addition, all trades are closed by the end of the day, meaning you won’t have any risk of holding trades overnight and you’ll be able to precisely calculate your net profit or loss by the end of each day. In our Forex scalping guide, we’ll cover what scalping is and how to scalp trade Forex.
What is scalping in Forex trading?
Scalping is a trading style that is based on very short-term timeframes, such as the 1-minute or 5-minute timeframes. While fundamentals don’t play an important role at such low timeframes, certain technical tools that we will introduce shortly are able to generate profitable trading signals.
Scalping is much more fast-paced than longer-term trading styles, such as day trading or swing trading, making this trading style an ideal substitution for traders who are not patient enough to wait for hours for trade setups on longer-term timeframes.
That being said, scalping carries also certain risks which are unavoidable at short-term timeframes. Market noise makes up the majority of price movements on the 1-minute or 5-minute timeframes, and scalpers need to utilize certain technical tools to filter that market noise and find tradeable opportunities. Don’t worry, we’ll show you how to do that shortly.
Scalping also involves larger transaction costs than day trading or swing trading as you’ll be opening multiple trades per day, but the larger costs should be offset by the profits you make if you strictly follow this scalping strategy. Also, try to trade only during the most volatile and liquid market hours, such as the New York – London overlap, to increase your profitability and save on transaction costs.
How to scalp Forex? Strategy explained
This 1-minute Forex scalping strategy is based on a simple trend-following and mean-reversing principle, combined with overbought/oversold market conditions. While this may sound complicated at first, I assure you it’s not. We’ll shortly cover a few examples to show you how it’s done.
In general, we want to trade the buying or selling momentum on the 1-minute timeframe, with additional confirmation coming from pullbacks (the mean-reversing part). To do so, we need to employ a few technical indicators that will generate the trading signals for us.
The tools you need to scalp trade Forex on the 1-minute chart
For this strategy to work, we’ll use the following tools:
- Two exponential moving averages: a 50-period EMA and a 100-period EMA
- A Stochastics oscillator with a period-setting of (5,3,3)
In addition to the two technical indicators above, you also need to pay attention to the market hours during which you trade. This strategy works best during volatile and liquid market hours, such as the New York – London overlap. Trading during these hours ensures enough volatility to make profits and lowers the transaction costs on the trades due to the high liquidity.
The two moving averages are utilized to identify the overall trend on the 1-minute chart. Exponential moving averages tend to work better than simple moving averages in this regard, as they tend to adjust more quickly to most recent price movements. Basically, when the faster 50-period EMA crosses above the slower 100-period EMA, the trend is up. And when the faster 50-period EMA crosses below the slower 100-period EMA, the trend is down. We want to trade only in the direction of the trend.
The Stochastics indicator is an oscillator which is used to identify overbought and oversold market conditions. The indicator’s reading can only be between 0 and 100, with overbought conditions arising when the indicator’s value crosses above 80, and oversold conditions arising when the indicator’s value crosses below 20. Overbought conditions signal that the price may fall soon, while oversold conditions indicate that the price might rise soon.
Rules for a long entry
Now that we explained the main tools that we’re going to use, it’s time to see how to use the strategy in scalping the Forex market. Basically, there are a few conditions that need to be met in order to enter with a long position.
- Wait for 50-period EMA to cross above the 100-period EMA – The 50-period EMA is the faster moving average of the two, meaning it will react to recent price action quicker than the slower 100-period EMA. When the faster MA crosses above the slower MA, this indicates that the overall trend on the chart turns bullish and provides as with the first confirmation for a long entry.
- Wait for the price to make a pullback to the 50-period EMA – This step is especially important in our strategy. It ensures that we don’t enter immediately after the MA-crossover, as profit-taking activities from other traders may reverse the price and leave us with a losing position. In addition, price movements that spike up or down on large trading momentum tend to be unsustainable in their direction, leading to a countertrend price movement. This is the mean-reversing part of our strategy – we wait for the price to reverse to the moving average before entering our position.
- Wait for the Stochastics indicator to move below overbought conditions – Now the Stochastics indicator comes into play. The fast-slow MA-crossover typically happens on high trading momentum, which pushes the Stochastics indicator into overbought market conditions (indicator reading above 80). Buying when the Stochastics is above 80 isn’t a wise decision, as overbought market conditions signal that the price may reverse soon. This is another reason why we have to wait for the price to make a pullback to the MA, as the pullback will usually decrease the value of the Stochastics below 80.
Once all three conditions are met, we can scalp the market with a buy position as shown on the chart below.
On the chart, you can see a typical buy setup using the rules explained above. As the 50-period EMA crossed above the 100-period EMA, the Stochastics indicator became overbought (>80). The following pullback of the price to the EMA pushes the Stochastics back below 80, and revealing a BUY trading opportunity.
Rules for a short entry
Similar rules apply when entering with a short position, only here we need to confirm a downtrend instead of an uptrend in the case of long entries. For a short entry, the following rules apply:
- Wait for the 50-period EMA to cross below the 100-period EMA – This rule ensures that a downtrend is intact. We only want to enter short during downtrends.
- Wait for the price to make a pullback to the EMA – Similar to a long position, the price has to make a pullback to the EMA which prevents us from trading immediately on the fast-slow MA crossover. Trading on high momentums can be risky as the price tends to reverse soon after a breakout.
- Wait for the Stochastics indicator to move above oversold market conditions – The pullback of the price will usually push the Stochastics indicator to normal trading conditions. Entering with a short position when markets are oversold can increase your risk significantly, which is why we need to wait for the Stochastics to move above 20.
The following chart shows all the mentioned rules for a short position in play.
Once the 50-period EMA crosses below the 100-period EMA, we have to wait for the price to return to the EMA. The Stochastics will meanwhile rebound from oversold market conditions, confirming that our short entry is ready to be placed. As can be seen on the chart, the price a significant move lower following the pullback and our entry.
Conclusion – how to scalp Forex successfully
In this article, we answered the question on what scalping is in Forex and explained a simple, yet powerful, 1-minute Forex scalping strategy. Scalping Forex strategies cater to traders who don’t have the patience to wait for a trade setup on the 4-hour or daily chart and want fast-paced trading during the day. Nevertheless, Forex scalping is not an easy technique as it takes market experience to identify the uptrends and downtrends on the lower timeframes, which host a large amount of market noise. If you want to learn Forex scalping, practice first on a demo account until you get completely familiar with the trading strategy.
Our 1-minute Forex scalping strategy is based on three tools: a fast moving average, a slow moving average, and a Stochastics indicator which is used to signal overbought, and oversold market conditions. In this regard, it includes trend-following and mean-reverting techniques to get the most out of the market. Still, to increase your chances of winning trades and lower your transaction costs, aim to use this strategy only during the New York – London market overlap.