We have discussed the 4 types of forex traders previously in blogs and in the Education section.
In this blog we are focusing on the shortest term trading out of the four main types. We will be discussing scalping and how to trade currency on minute charts following the price action.
Let’s start at the beginning.
What is scalping?
Scalping is a trading strategy that is based on making profits off of small price movements.
The aim with this type of trading is to make smaller profits per trade but carry out a large number of trades per day and thus make reasonable profits overall.
Scalpers trade on the 1 minute, 5 minutes, and 15-minute charts usually. This means that a trade is opened a closed within 15 minutes maximum.
In order to be a scalper, you have to be incredibly quick and sure-footed. You need to have a clear idea of what you want and be ready to take action on the spot.
This part of scalping, the one that demands quick decisions, seems to be very challenging and can make scalping appear to be a pro sport, but in reality, it is only a matter of knowing what you want.
Understanding price action
Price action means following the movements of the market in real-time and basing trading decisions on them.
So you don’t use any technical indicators to analyze the market and make a decision about your move. Instead, you look for support and resistance levels and candle patterns as they form and surface on the charts.
This allows you to make the most of any situation the market puts you in.
One of the best features of the forex market is that you can take advantage of both kinds of price action. If the trend is upwards, you can buy and make a profit by selling high. On the other hand, if the trend is downwards (i.e. the value of a currency is depreciating) you can sell and then buy back cheaper to make a profit.
The ball is always in your court if you can just understand the market and take the right action at the right time.
To do this, you need to have a solid strategy and that is where we come in. Given below is a strategy to trade currency simply through following and understanding the price action.
Price Action Scalping
The entire strategy can be outlined in a few steps.
- Figure out support and resistance levels by looking at bounce points.
- Once you have identified consistent bounce points (i.e. points where the price changed course) you can draw lines for support and resistance. This means that if the price reaches a certain value and then bounces up from there consistently 2 to 3 times, it can be seen as being a solid support level. The opposite will be true for the resistance level. You want to look for a place to which the price reached multiple times but then moved down from.
- Your aim will be to enter a trade when it is close to the bounce point or has hit it so that you can ride the wave for a little while.
- Support and resistance levels also tell the trader that this trend is strong. They are good markers of trend continuation. This also means that you can then trust that trend to be strong enough.
On 5 minute charts, there is a lot of noise. There is a lot of price fluctuation. When you are scalping, the longer trends are almost irrelevant to you. It is those minor price fluctuations that you can make the most of.
The continuation can also be marked by candlestick patterns. Take a look at this piece in the Education section to understand how candlestick patterns work and how you can spot consolidation.
Remember that in small time frames it is tricky to trade reversals. This is because there is too much noise. You cannot be sure when the reversal is real and when it is just noise. This is why your best bet is to look for continuation.
We hope this helped.