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Develop a Scalping Strategy in 3 Steps

Talking Points:

  • Scalping strategies can be broken down into three components

  • Always consider market direction and the trend

  • Plan entries around retracements or breakouts

Many traders want to implement a scalping strategy, but don’t know where to get started. The truth is, you can develop a simple scalping strategy in as little as three steps. Today we will review the three components of a scalping strategy. Let’s get started!

Find The Trend

The first step to scalping is finding the trend. Finding the trend is vital because it helps create our trading bias for a currency pair. For example, if the pair is creating a series of higher highs, traders would only want to look for buying opportunities. This is opposed to a graph that is moving towards lower lows, when sell positions are preferred.

Using the example below, we can see the USDCAD has been trending upwards with the creation of a series of higher highs and higher lows. This means that scalpers should look for opportunities to buy the market.

Learn Forex: USDCAD 30Min Trend

Develop-a-Scalping-Strategy-in-3-Steps_body_Picture_2.png, Develop a Scalping Strategy in 3 Steps
Develop-a-Scalping-Strategy-in-3-Steps_body_Picture_2.png, Develop a Scalping Strategy in 3 Steps

Time Your Entry

The next step in developing a scalping strategy is to decide on an entry mechanism. Normally, scalpers will choose from either a retracement strategy, or a breakout strategy. In an uptrend, retracementtraders focus on pullbacks in the trend, in order to buy at a lower price. This is opposed to a breakout trader that will only buy when the market breaks a key level of resistance as price forms a higher high.

Below we can see two points that scalpers could consider as entry points. First, if price moves and forms a higher low, this swing could be an opportune retracement for trading. Next on the USDCAD you can see the breakout above the weeks previous high. This point on the graph would provide an opportune point for breakout traders to scalp in the direction of the trend.

Learn Forex: Breakout & Retracement levels

Develop-a-Scalping-Strategy-in-3-Steps_body_Picture_1.png, Develop a Scalping Strategy in 3 Steps
Develop-a-Scalping-Strategy-in-3-Steps_body_Picture_1.png, Develop a Scalping Strategy in 3 Steps

Manage Risk

The last step of any trading strategy is to manage risk. While there are a variety of ways to place stops, traders should also consider the told risk associated with their trade. Normally a good frame of reference is to risk no more than 1% of your trading balance on any 1 position. This way, in the event of a position being stopped out, the majority of your account balance is remaining to look for other trading opportunities.

Now that you are familiar with the 3 basics steps to designing a scalping strategy, it’s important to find the components that work for you. You can get started developing your own strategy with a Free Forex Demo with FXCM. This way you can develop your trading skills while tracking the market in real time!

---Written by Walker England, Trading Instructor

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

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original source

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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