12.5 Build a Profitable Forex Scalping Strategy

Additional Reading about Let’s Build a Scalping Strategy

Applying Fundamentals to Trading - Text Version

 In the previous lessons, we explained what scalping is and outlined the major issues traders interested in scalping should consider.

In this final lesson, we’ll build a Forex scalping strategy from ground-up that you can implement yourself.

There are many ways to apply technical analysis in scalping the Forex market. In this strategy you’ll learn how to find a trend and then take a bite out of the trend at the best possible moment.

Step 1 is to identify if there is a trend. To do that, we will use a higher timeframe, the 1-hour chart. To help us, we will use one of the most popular trend-following indicators, the humble Moving Average.

On a 1-Hour chart, place two Moving Average lines. For our strategy, the settings will be an 8 period Exponential Moving Average and a 21 period Exponential Moving Average. 8 and 21 are both numbers in the Fibonacci series.

Together, we will use the 1 hour candles and the Moving Average lines to see if there is a suitable uptrend or downtrend.

For an uptrend, we want to see the moving average lines pointing upwards and clearly separated from each other, with the last candle above the moving average lines.

For a downtrend, it’s the opposite: we want to see the moving average lines pointing downwards and separated, and the final candle entirely below the moving average lines.

Of course, the market might be messy, and you may not find an uptrend or a downtrend. For example, the Moving Averages may be tangled, or the last candle between the two moving average lines. When that happens, you must wait until the rules are met.

Step 2. Once a trend has been clearly identified, we execute the strategy on a lower timeframe. We will use the 5-minute timeframe, and to help time the entry, we will use the same Moving Average settings, an 8 Exponential Moving Average and a 21 Exponential Moving Average.

To establish the price is in the right area on the Lower Timeframe, we want to see both Moving Average lines pointing in the same direction as they are in the 1-Hour chart

Step 3. We time the entry. To do this, we look for a candle to touch or pierce the 8 EMA on the 5-minute chart, but without the candle closing beyond the 21 EMA. Waiting for a candle to touch the 8 EMA tells us the price has pulled back so we’re not chasing the trend. Making sure the candle doesn’t close beyond the 21 EMA helps us know that the price hasn’t pulled back so far that the trend is looking to fail.

When a candle meets these conditions, we call it the “Signal Candle”.

Step 4. Once a Signal Candle appears, we have our Forex setup scalping-style! We enter our trade order, including stop-loss and take profit orders. Let’s look at our entry order first.

For a long entry in our strategy, we count back the last 5 candles and enter 3 pips above the highest one of those last 5 candles. This would be a Buy Stop entry order.

For a short entry, we count back the last 5 candles and enter 3 pips below the lowest one of those last 5 candles. This would be a Sell Stop entry order.

Now let’s consider our stop-loss. For the long entry, the stop-loss is 3 pips below the low of the Signal Candle. And for the short entry, the stop-loss is 3 pips above the high of the Signal Candle.

The last part is choosing where to take profit. We have two take-profit targets in this strategy. The first take-profit is at 1 unit of reward to risk, or 1R, and the second take-profit is at 2 units of reward to risk, or 2R. Let’s imagine the difference between the entry and stop-loss is 10 pips. In this example, we would exit half the position at 10 pips of profit and the second half of the position at 20 pips of profit.

This is a complete scalping strategy: it has entry rules, stop-loss rules and take-profit rules.  But before you trade it, you should test it yourself and not just take my word for it! Back test it or test it in real-time with a demo account. Think carefully about with which currency pairs and which time of day you’ll be using – not all combinations work. Testing the strategy will help you get comfortable with any losing streaks this strategy may produce. Once you have an idea of the strategy’s typical results, you can dip your toe in the water with live money.

Here’s a bonus tip to make this strategy even better: line up the entries with support and resistance levels on the 1-hour and 4-hour charts to help improve your success rate!

That’s the end of our course about scalping. We hope you’ve enjoyed, and you’re ready for this fast, potentially rewarding but also relatively risky trading style.