Forex scalping
Midnight setup strategy for Forex Scalping
If you are awake and available for trading the Forex Market at midnight this strategy can makes you win. Pay attention to the following details!
This strategy is based in the principle that it’s very difficult to find same size candles for 2 consecutive days on a daily chart. The main fact that it’s going to influence us from this conclusion is that prices are moving steady either up or down without producing “noise”, an element always present on smaller time frames.
Entry
The entrance hour should be at the 00:00 according to your local time or according to your trading platform. In this moment, the daily candle is newly formed and you will be able to find the highest and lowest price of the day for the previous daily bar.
If the price bar (including shadows) is less than 90 pips long we recommend not to open new trades the next day (this is a requirement for GBP/USD pair, but can be changed for other currency pairs).
If you suddenly discover that the previous day bar becomes an Inside bar you should be careful with entries the following day. While an Inside bar candle gives a good breakout opportunity the following day, it can also be a dual whipsaw breakout, the most unwanted scenario for Forex Scalping.
If anyways you decide to trade the next day you will be depending on the candle of the day before so, establish a Buy Stop order at the top (the highest price +5 pips) and a Sell stop order at the bottom (-5 pips). Over the time you will be able to adjust these additional pips s and stops depending on the currency pair you are trading with.
Exit
You should exit once that one of the orders is filled. At midnight with the new daily candle open, adjust your orders and stops according to the previous daily candle, following the same routine; keep on scalping the market until you raise +100 pips, then you can close current and enjoy the benefits of a well done job because your profits will arrive soon.
You should quickly close your current open positions (with either profit or loss) in two different cases: first of all if a daily candle becomes a Doji candle (or it’s about to become). The second occasion in which you should close your trades is if you met a Shooting Star candlestick in an uptrend or a Hammer candlestick in a downtrend.
Inviduals scalping in the Forex Market
There are several individuals that act in the Forex market, the traders are usually divided into two groups:
The first one in composed by the hedgers account that represent less than the 5%, consists on business and other kind of organizations competing in the international trade. Their main aim is to diminish or neutralize the currency fluctuations’ impact by using different market tools.
The other percentage (95%) is composed by the speculators account, the private companies and individuals, the public organizations and banks. Their purpose is to get profit from the fluctuations in the exchange of currencies, ought to that the Forex market can enjoy its liquidity.
Talking about the individuals acting in the Forex market we also have to mention the market makers. Almost all the deals are made by traders (mention above) and market makers in conjunction.
The market makers are the counter part to the clients, they don’t operate as trustee intermediaries. They perform their clients’ hedging according to their policy that covers different guidelines and agreements. The commonest examples are banks or trading platforms, they don’t represent the client as an intermediary, but use their money for buying and selling financial instruments. They don’t have a fluid relationship with their clients and they usually manage all the positions as a whole, detecting interesting movements and acting for all their clients at the same time.
Useful charts while scalping the Forex market
The charts are one of the main tools in Forex trading; they are based on the market action that involves the prices. We can find several kinds of charts that can help us to identify behavior patterns, to create forecast and to analyze the market’s conditions.
The charts can be used in both kinds of analysis, the fundamental and the technical ones. While the technical analyses are focused on the “micro” movements, the fundamental ones are focused on the “macro” events (or external factors) that affect the trend of the market.
Among the main types of charts we can distinguish:
The line chart: is the simplest one, in each time unit shows the closing rates creating a homogeneous line. Although it doesn’t show what happened during the time unit selected by the users, is such a good tool for helping to set support and resistance levels.
Point and figure charts: these charts are focused on the price without time specifications. Instead of showing a linear representation of time they show the different trends in the price. This kind of chart is especially useful to filter out non-significant price movements helping the trader to determine the critical support and resistance levels.
Bar chart: this type of chart shows in each time unit that we select three different rates for each one. The common rates shown by bar charts are the high, the low and the closing, but we can also find charts that show one more rate, the opening of the period of time.
Candlestick chart: this type of charts comes from Japan. The units represented are similar as the ones in the bar charts, they show the prices at their opening, high, low and closing rates in candles form for each unit selected. We can find two kinds of candles, the transparent ones that show increase and the dark or full ones, which show decrease. The length of the candle’s body represents the range between the opening and the closing, while the whole candle (top and bottom included) show the whole range of trading prices for the selected time unit.
Different exchange rate systems
We have 4 different types of exchange rate systems where an exchange can operate.
1. Fully fixed exchange rates
In these systems, the government or the central bank intervenes in the currency market to maintain the exchange rate in a fixed quantity. This kind of systems doesn’t allow fluctuations from their central rate.
2. Semi fixed exchange rates
These systems are characterized for permitting a little movement in a determinate range. The exchange rate is the dominant target of the economic policy-making and the interest rates are established to meet the target exchange rate.
The advantage of both kinds of fixed rates is the less speculative activity of the market, providing a great certainty for exporters and importers.
3. Free floating exchange rates
In these cases, the value of the currency depends on the foreign exchange market’s demand and supply. Ought to that, the trade and the capital flows are the main elements that affect the exchange rate.
The main characteristic of these systems is the exchange rates’ possibility of moving according to the market force, always without the intervention of the government or economical institutions. The currency can experiment a change on its value due to the changes in the supply and demand.
These systems are not very common as the governments usually try to control and manage the value of their currencies.
4. Managed floating exchange rates
These systems are the preferred for most of the countries, where the value of the currency is determinate by the market forces and where the government can intervene if needed.
In the case of the floating exchange rates we can highlight two different advantages, the first one is the fact that the large balance o payment deficit that some countries could experimented can be solved by an automatic adjustment provided by the fluctuations in the exchange rate. The second advantage is the possibility of the government to flexibly determine the interest rates.
Best forex scalping strategies
One of the best practices of scalping consists on the use of Fibonacci levels, a useful tool that will help us to determinate the trade direction while scalping. These levels are especially useful to analyze the market trends without caring about the size of sudden fluctuations or the lack of clarify in the possible destinations of the price.
The aim in using this strategy consists on identify the levels where the price could be rebound. For drawing the Fibonacci extension is important to identify the beginning and the end of the price movement that we want to extend.
As an example, in the five minute chart of the USD/CHF pair we can identify a sudden and sharp movement, we draw its extension after the first red bar; drawing the extension in the indicated area we will notice the 61.8, 100 and 161.8 extensions of the first movement.
Examining the chart above, we can see not only the fact that the price rebounded several times between the extension levels of the indicator, but also we can realize that these levels strongly act pulling the price towards themselves. The rest of the extension level supports the price preventing it to “fall through” twice.
The other two levels similarly created performance bars for the trend which, once broken, created further momentum for the trend. It’s not recommend to trade against the trend because of the risk of sudden reversals. Applying the Fibonacci levels we will identify the general direction of the trend and even if we register some losses, our gains will justify the trading activity.
In this example we scalp the market buying at the red arrows shown on the chart; if we detect that the price is returning to the resistance that the level indicate us, we should stop trading until the market shows some clarity. The secret is scalping between the extension levels as long as the trend continue intact.
With the Fibonacci extension level through a reasonable degree of accuracy we can guess the main momentum of the price action and reach incredible profits.
Forex scalping indicators
There are some forex scalping indicators that can help traders to create an edge over the market by performing different functions to ensure a better winning possibility. Despite of that, the use of these indicators doesn’t guarantee secure profits as trading often depends on probability.
Among the main indicators we can highlight:
- Parabolic SAR indicator: this indicator is a tool that can give us a trade entry or exit signal. The important thing is to see the PSAR flipping to the side of our favor when we would like to begin trading and exit whenever we see the PSAR flipping to the side against our position.
- Stochastic indicator: the main aim of this indicator is to help us to prevent low winning probability trade, as there is no point in entering a long position when the market is already overbought. The stochastic indicator helps us to improve our trading accuracy by mapping out the current situation of the market. When the stochastic hits the overbought or oversold zone and reverse, the price will usually retrace and this is the best time for you to scalp the movement. By using this indicator we will be able to predict the retracement of the market.
- Pivot Point: support and resistance are the most important terms for a scalper. When the price hits a support or resistance it has the possibility of been repelled, and this is what a scalper is looking for. The daily pivot point can help us to identify major support and resistance. The pivot point is so powerful because it is usually used by those commercial traders and thus has more significant than other levels. When we see the price getting closer to the pivot levels is time to take a look at the stochastic and PSAR for an entry chance.
A brief history of Forex market
To analyze the history of the foreign exchange market we have to travel from the days of the gold exchange to nowadays through the Bretton-Woods Agreement.
The Bretton-Woods Agreement was established in 1944 and pretended to protect the national currencies against the dollar fixed rate of USD 35 per ounce of gold. Bretton Woods was aimed at establishing international first monetary stability avoiding the speculation in foreign currencies.
The weakness of the gold standard system was its facility to create boom-bust economies. A strengthened economy would import a good deal ending with all the gold reserves required to support its currency; as a result, the money supply would diminish, interest rate would increase and the economic activity would slow down until the point of recession.
The Bretton-Woods Agrement was established just at the end of the World War II to regulate the international Forex market. All the countries involved agreed to maintain their currency value within a narrow margin against the dollar and an equivalent rate of gold. With the agreement, the dollar gained a premium position as a reference currency dominating the Europe and USA markets.
In 1971 the dollar ceased to be exchangeable for gold so the agreement was scrapped. Throughout the 1970s the supply and demand forces were in control of the currencies which began to move freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing while new financial tools as the market deregulation or trade liberalization emerged.
In 1980, the boom of the computer technology began, increasing the transactions in foreign markets. The capital movements through Asia, Europe and America increased from almost 70 billion dollar a day in the 1980s to more than 2 trillion dollar at the beginning of 2000.
With the rapid development of the Euro/Dollar market (we can define it as US dollars deposited in banks outside the US) the Forex trade market experienced an injection of speediness. Similarly, Euro markets are those where currencies are deposited outside their country of origin. Both markets are in a leading position nowadays in the Forex trade market.
The importance of the technical analysis while scalping the Forex market
Technical analysis is a method to predict the future movements of the market by studding what happened in the past using charts. It is concerned with what has actually happened in the market rather than what should happen. The main tool is to create charts with data from the past price of the instruments and the volume of trading.
The technical analysis is focused in three primary premises:
- It is concerned only with price movements and doesn’t care about the reason of the changes.
- Prices move in trends. The technical analysis is focused on the common patterns of the market behavior trough which future results can be predicted.
- History repeats itself. Forex chart patterns have been identified and analyzed for over 100 years leaving the conclusion that patterns which worked well in the past will also work in the future.
The main advantages of the technical analysis are that it can be used to project movements of any asset available for trade, its capacity to focus in the present and future, the price movements as the most important element and the possibility to detect the end of a trend before it becomes real in the market.
Instead of it, the main disadvantages are the problem of the Dow approach (as prices are not random) and the critics about the late appearance of the trend changes.
Scalping the flag pattern
The flag pattern in forex scalping is understood as the limits of an upper or lower range pattern that could be trade to exploit benefits without taking big risks. They usually last for 30 or 60 minutes.
With this kind of pattern the trade strategies can be applied without the risk of big losses because the volatility is almost inexistent. There are no great expectations of big gains and the activity could be quiet unexciting.
In the graphic we can observe three flags registered in the USD/CHF pair; the first and the third are perfect to trade because they consist of a simple range without change of directionality. To exploit a flag it’s important to identify the moment when the price rises and becomes closer to the upper part of the flag, when the situation reverses is the moment to issue the sell orders. In this moment we can get profit of the established range pattern by entering small and quick different sell orders.
The same happens when the price falls and becomes closer to the lower limit of the flag, traders should wait until it begins to rise again.
Scalping the market trough the flags is an easy and secure technique but traders should be careful of not to be caught in the breakout when the flag pattern dissipates and the main trend appears.
Technical breakouts
Pattern Scalping Strategy
We can define technical breakouts as the cases in which a range breaks down without any previous or obvious reason. In the case of the news released traders know that they are under the possible effects of an unexpected argue that could affect to the trade market the whole day so they are prepared for it; while with a technical breakout anyone could be catch unaware.
Technical breakouts are almost impossible to predict and sometimes also almost impossible to explain.
Ought to their unusual and sudden apparition scalpers should be much more conservative when scalping this pattern than in the case of scalping the news released. The main risk is to find a market that is up and suddenly goes down without warning; to avoid the chaos is recommend to trade with small sizes and stop-loss orders.
The key issue is to identify the phase of the range pattern- that could be up or down- and trade it in short periods of time applying the general rules of technical trading.
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