Have you ever witnessed a trader who opens dozens of trades during a day only to close them a few seconds or minutes later?
That trader follows a scalping trading style. Learn
They try to make a profit on very small price movements.
Since the profits are low, a scalper needs to open a large number of trades during a day in order to make a respectable amount of profit.
But beware: Scalping can be difficult, especially to inexperienced traders.
If you want to master the art of scalping, start first with some longer-term trading styles and try to become consistently profitable with them. Since scalping requires lightning-fast reflexes, fast decision making and nerves of steel, there’s no reason to believe that you would be a successful scalper if you can’t make a profit with day trading and swing trading.
Strategy Overview
Let’s take a look at the 3 main steps of our 1-minute crypto scalping strategy.
Step 1: Identify the short-term trend
The two moving averages are used to identify the current trend in the 1-minute timeframe. The 50-period EMA calculates the average price of the past 50 minutes, while the 100-period EMA calculates the average price of the past 100 minutes. The 50-period EMA is faster than the 100-period EMA, which means that it reacts to price-changes more quickly.
If the faster 50-period EMA crosses above the slower 100-period EMA, this reflects that average prices are starting to rise and that an uptrend is likely to establish. Similarly, a cross of the 50-period EMA below the 100-period EMA signals that average prices start to drop and that a short-term downtrend is about to form. Will only take trades in the direction of the short-term trend.
Tip
Using the exponential moving average (EMA) and not the simple moving average (SMA). EMAs react more quickly to recent price changes than simple moving averages because they add more weight to the newest prices.
Step 2: Wait for a pullback
Once we determine the short-term trend in the 1-minute chart based on the location of the slow and fast EMAs, it’s time to wait for a pullback to the moving averages. This step is important because prices tend to return to their mean value after a strong up- or down-move. Waiting for pullbacks prevents us from entering into long and short positions immediately after a strong price-change. Profit-taking activities often cause the price to reverse after a sustained move, which can lead to fake signals and losses.
Step 3: Wait for the stochastics indicator to move above/below oversold/overbought conditions
Finally, our stochastics indicator serves as the last filter and helps us take only high-probability trades. The Stochastics indicator is an oscillator that oscillates between 0 and 100, depending on the strength of recent price-moves. A reading above 80 usually signals that the recent up-move was too strong and that a down-move can be expected. This market condition is usually referred to as overbought.
Similarly, a reading below 20 signals that the recent down-move was too strong that an up-move may be ahead. This market condition is usually flagged as oversold. After the price completed a pullback to the EMAs, Stochastics will usually become overbought/oversold as a result of the recent price-move.
Buy Setup Example
The following chart shows a buy setup generated by our 1-minute Forex scalping strategy. Let’s take a look at what happened in the chart, step by step.
The 50-period EMA crossed above the 100-period EMA – The first arrow from the left shows a cross of the faster 50-period EMA above the slower 100-period EMA, signaling that the EUR/USD pair is entering into an uptrend in the 1-minute chart. As long as the faster EMA remains above the slower EMA, we’ll only look for buy opportunities in this chart, in order to only trade in the direction of the trend.
Price returns to EMA and Stochastics move below 80 – The next two red arrows show the pullback to the moving averages. After the 50-period EMA moved above the 100-period EMA, Stochastics became overbought and the price started to make a pullback to the MAs.
Buy signal – The pullback lowered the reading of the Stochastics indicator to below 20, signaling an oversold market environment. Once the Stochastics indicator moves above 20 again, our system triggers a buy signal.
Sell Setup Example
The following chart shows an example of a sell signal generated by our 1-minute Forex scalping system. Again, let’s cover the main points of this sell setup example.
The 50-period EMA moved below the 100-period EMA – This signals that the pair is entering into a downtrend as the average price of the last 50 minutes is sharply dropping. From now on, we’ll look only for short opportunities as long as the 50-period EMA stays below the 100-period EMA.
Pullback – After the price finished its strong down-move, moving the Stochastics indicator to below 20 (oversold conditions), the price started to form a pullback to the moving averages. Simultaneously, the Stochastics oscillator crossed above 20, heading to overbought market conditions.
Sell signal – After the price finishes its pullback and the Stochastics indicator moves below 80, indicating that the market isn’t overbought anymore, we can enter into a short position.
Discipline is key
Scalping is a fast-paced trading style that attracts many impulsive and undisciplined traders. Ironically, to master the art of scalping, a trader needs to be very disciplined. The main difference between scalping and swing trading are the timeframes involved in analyzing the market.
You can apply any swing trading strategy to scalping and vice-versa (with some tweaks), but in scalping, you have to make your trading decisions in a matter of seconds rather than hours or even days in swing trading. This makes scalping very difficult. If you’re not profitable on longer-term timeframes, why should you be a profitable scalper?
Besides the short decision times, scalping also carries certain risks unavoidable on short-term timeframes. You’ll likely encounter much higher trading costs than with swing or day trading, and market noise can have a significant impact on your bottom line.
