The Building Blocks of Forex Scalping

DailyFX

Article Summary: 2013 has brought a directional shift in the AUDUSD. Traders can look to incorporate momentum analysis to identify short term direction prior to scalping.

When talking about currencies pairs, it is inevitable for someone to ask if they should be buying or selling. This is always a great question, and I insist the answer lies in the direction of the trend and price momentum. Below is a prime example on the AUDUSD 4Hour chart. Below we can see price advancing as much as 253 Pips through Januarys high at 1.0597. Now price has retraced from its high, and has declined as much as 301 pips through today’s price action.

Knowing this, should we be looking to buy or sell the market? One way we can further refine our outlook on the market is to continue our analysis by blocking off a 30 minute chart.

Learn Forex – AUDUSD 4Hour Trend

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The_Building_Blocks_of_Forex_Scalping_body_Picture_2.png, The Building Blocks of Forex Scalping

(Created using FXCM’s Marketscope 2.0 charts)

AUDUSD Building Blocks

One way to identify short term momentum is to divide the previous week’s trading into two trading Blocks. This technique is designed to see if there is continued short term momentum, in the direction of the trend to present price action. They key to this analysis is that both Block 1 and Block 2 should be heading in the same direction to ensure that we are spotting a strong trend before finding scalping opportunities.

Below we can see the current AUDUSD 30 minute chart divided into two pricing blocks. Block 1 begins on Wednesday the 30th and runs through Sunday the 3rd. Block 1displayed strong downward momentum as price declined as much as 114 pips. Block 2 displayed the continuation of the downtrend as price again moved to lower lows. To help aid our analysis, both blocks have been painted red to indicate this continued downward momentum. As price momentum continues lower, Forex day traders will be looking for opportunities to sell the AUDUSD.

Learn Forex – AUDUSD Building Blocks

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The_Building_Blocks_of_Forex_Scalping_body_Picture_1.png, The Building Blocks of Forex Scalping

(Created using FXCM’s Marketscope 2.0 charts)

It is important to notice that price has already cascaded through the Block 2 low. At present prices our current price block will also be painted red upon closing. Scalpers can take advantage of this move as momentum remains strong to the downside and attempts to move to lower lows. Traders will finally watch the standing high at 1.0357. A break above this point would indicate a short term reversal and potential momentum shift on the AUDUSD.

---Written by Walker England, Trading Instructor

To contact Walker, email wengland@fxcm.com. Follow me on Twitter at @WEnglandFX.

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