Scalping is a fast-paced trading style with very small margins for error. Things tend to go so fast that a trader barely has time to react but still needs to make that profit-defining choice.
To succeed as a scalper, you need practical indicators and the best strategies in your toolkit. These seven proven indicators can help you make informed decisions and make the most out of every trade!
What is Scalping in Forex?
Scalping is a common day trading strategy that profits from small market movements. Scalpers (traders who practice this kind of trading) conduct numerous trades throughout the trading day, holding positions from a few seconds to minutes.
Scalping in Forex involves making multiple trades in a short period, typically using a short-term time frame such as 1-minute or 5-minute charts.
The theory behind scalping is quite simple. You want to catch many small gains with short-term price movements than one big gain in an extended period.
For example, the price data for EUR/USD can move five pips in any direction every two minutes. However, it can also move 100 pips in one direction in 4 days.
As a scalper, you would take advantage of each 5-pip movement on the market, whether up or down, and profit by trading large volumes. Instead of waiting 2 days for 100 pips, you could have already profited from 20 5-pip trades in less than an hour!
A scalper can do this by relying on technical analysis and setting up scalping indicators.
What is Technical Analysis?
Before we proceed with indicators, we must first discuss what is technical analysis, and why it is important in forex scalping.
Technical analysis is a method for predicting future price movements in the forex market. It involves analyzing historical price data or price trends (daily, weekly, monthly, or all-time). This approach usually focuses on volume trend direction rather than the fundamentals of a currency.
What are Technical Indicators?
Technical indicators are created through technical analysis. Think of it as a pre-programmed analysis.
They are created through a series of analyses involving historical market data and mathematical formulas. Different technical indicators can tell you different things depending on your overall trading strategy and goal.
Why do Scalpers Use Indicators?
Scalpers use indicators to identify trading opportunities and make informed trading decisions. This allows for quick decision-making in a fast-paced market and allows them to execute trades within minutes or even seconds.
Scalpers often trade in 1-minute, 5-minute, and 15-minute timeframes. This means that a scalper sometimes has less than a minute to analyze the market and make a trade. Moreover, scalpers have to do this multiple times a day, which can be a lot to keep up with.
Indicators appear to be the perfect solution to this. They automatically calculate based on historical data and then plot the calculations visually on the price chart. This makes it a lot easier for scalpers to interpret market dynamics and make a trade!
Importance of indicators in scalping
Indicators are essential in scalping as they help identify opportunities and make informed decisions in the shortest amount of time.
With proper indicators, a scalper can utilize these benefits of indicators:
- Make quick decisions. Indicators provide and visualize real-time data that help traders confidently make quick decisions.
- Identify trends. Indicators like Moving Average Convergence Divergence (MACD) help scalpers identify short-term trend direction and make profitable trades.
- Measure volatile markets. Tools like Bollinger Bands and the Average True Range (ATR) measure market volatility, helping scalpers understand price ranges and adjust strategies.
- Identify overbought and oversold conditions. Indicators such as the Relative Strength Index (RSI) and the Oscillator can help identify oversold conditions or an overbought zone that signals potential trend reversals.
- Lessen guesswork. Indicators provide objective data, therefore lessening the guesswork involved in trading.
Indicators are extremely important in scalping. Considering the nature of scalping, trading without indicators would be no different from gambling.
What are the best scalping indicators for Forex?
Now, let’s take a look at the best scalping indicators for forex traders!
Volume-Weighted Average Price (VWAP)
VWAP is a technical indicator that calculates the average price of a security throughout the trading day. It is one of the best indicators for short-term traders, whether in the forex, stock, or indices markets.
The VWAP is calculated by dividing the total dollar amount traded for every transaction (price multiplied by volume) by the total trades.
It appears as a single line on intraday charts to determine the price trend direction for the day.
How to interpret VWAP
Interpreting the VWAP is quite easy. If the price is above the VWAP, it indicates a bullish signal; when the price is below the line, it indicates a bearish signal.
The VWAP also allows traders to identify ranging markets. If the price consistently hangs too close to the VWAP line, that signals a ranging market. If you’re a trend trader, that could signal a break from the market.
This indicator is most useful for short-term trading. However, it is not practical for larger timeframes because it is programmed to reset at the end of each trading session.
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (MACD) is a momentum indicator that shows the relationship between two moving averages. It is a popular technical analysis indicator used to identify changes in the strength, direction, momentum, and duration of a currency trend.
The MACD relies heavily on Exponential Moving Average (EMA) to calculate the trend direction.
The MACD has three components: the MACD line, the Signal line, and the Histogram.
- MACD Line. This is calculated by subtracting the 26-period EMA from the 12-period EMA.
- Signal Line. This is the 9-period EMA of the MACD line and acts as buying and selling signals.
- Histogram. This is the difference between the MACD and signal lines, visualizing the trend’s momentum.
How to Interpret MACD Indicator
There are three ways to interpret the MACD indicator, with crossovers among the simplest.
When the MACD line crosses above the signal line, it is bullish. Meanwhile, a MACD indicator that crosses below the signal line shows a bearish signal.
On the other hand, when the currency pair’s price diverges from the MACD, it can indicate the end of the current trend.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements. This indicator is useful in identifying overbought or oversold conditions that signal potential reversal points.
On the other hand, price reversals can signal entry or exit points.
How to interpret the RSI Indicator
The Relative Streng Index (RSI) scale ranges from 0 to 100. If the indicator reads above 70, this usually means that a currency pair is overbought, and the trend will reverse downward. Meanwhile, a reading below 30 indicates the oversold region, and the trend will reverse upward.
Using the RSI Indicator, a common strategy for entry is to go short when the indicator dips below the 70 level. This allows you to catch the price as it reverses. On the other hand, wait for the cost to rise above the oversold level after dipping below the 30 mark before you go long.
Exponential Moving Average (EMA) Indicator
The Exponential Moving Average (EMA) indicator is among the most reliable scaping indicators because it is visualized as a simple line on the chart.
The EMA indicator helps determine the market’s overall trend but primarily considers the most recent price action data. This means it is updated in real-time compared to the Simple Moving Average (SMA), which assigns equal weight to all data points in a period.
Moreover, the indicator’s sensitivity to price changes is more pronounced than that of the SMA. The EMA is also most useful when trading the trend or making decisions based on the trend direction.
How to interpret EMA Indicator
The Exponential Moving Averages indicator appears on the price chart as just one line. A simple interpretation is that if the price exceeds the EMA, it indicates an uptrend. If the price is below the EMA, it indicates a downtrend.
However, don’t be deceived by the singular line, as it can be used in various ways.
Monitoring the crossovers between short-term EMAs can signal potential entry and exit points for small price movements.
Another easy way to use the EMA indicator is to combine two or more periods together. For instance, you could use the 9 and 15 EMAs, where you buy when the 9 EMA crosses the 15 EMA upward or sell when the 9 EMA crosses the 15 EMA downward.
Bollinger Bands Indicator
Bollinger Bands are also great scalping indicators. It was developed by John Bollinger, an American financial analyst, in the 1980s. This indicator helps traders gauge market volatility and identify potential overbought and oversold conditions.
The Bollinger Bands consist of three bands: the middle band, the upper band, and the lower band.
- Upper Band: The upper band is the middle band plus two standard deviations.
- Middle Band: This is a simple moving average (SMA) typically set to a 20-day period.
- Lower Band: The lower band is the middle band minus two standard deviations.
How to interpret Bollinger Bands
A signal is generated when the price crosses the Middle Band in the Bollinger Bands. An upward crossover of the midpoint indicates a bullish signal; a downward crossover indicates a bearish signal.
Meanwhile, wider bands indicate increased volatility, but if the bands narrow, volatility decreases.
A “squeeze” occurs when the bands come very close together. This shows low volatility and a potential share price movement shortly.
Parabolic SAR Indicator
The Parabolic SAR (Stop and Reverse) Indicator is a technical analysis indicator developed by J. Welles Wilder, an American mechanical engineer known for his work on technical analysis.
The Parabolic SAR indicator uses a series of dots below and above the price to determine market direction. When the price is rising, the dots appear below the price, and when it is falling, they appear above the price.
To calculate the Parabolic SAR, you have to take into account the current trend’s highest high and lowest low and the acceleration that increases as the trend continues.
How to interpret the Parabolic SAR Indicator
This simple-to-use indicator has become a hand friend for many scalpers.
Entering positions is easy. The appearance of the first dot below the price signals a bullish trade. On the other hand, take a bearish trade after the dot appears above the price.
As a short-term trading strategy, scalpers often use the Parabolic SA as a trailing stop-loss order. As the price moves in the direction of the trend, the dots move closer to the price, helping to lock in profits.
Schaff Trend Cycle (STC) Indicator
The Schaff Trend Cycle combines the MACD and Stochastic Indicators. It is designed to identify potential entry and exit points by combining trend and cycle analysis elements.
This indicator’s sensitivity is far more powerful than that of its parent indicators, and it reacts more quickly to price changes. Aggressive scalpers who find the MACD too slow use this tool more.
The STC Oscillates between 0 and 100, with values above 50 typically indicating a bullish trend, while values below 50 indicate a bearish trend.
How to interpret the STC Indicator
The STC helps scalpers identify the direction and strength of a trend. As mentioned above, it is much more responsive than other indicators and, therefore, highly useful for detecting short-term trends.
Typically, an STC value above 80 may signal that a currency pair is overbought. Conversely, a value below 20 may mean the security is oversold.