Forex Scalping Strategy

Pattern Scalping Strategy.. Part 1 - News Breakouts...
This article is part of our guide on how to use scalping tequniques to trade forex
Most scalpers try to benefit from price patterns in trading the markets. Those who like calmer markets choose to exploit formations like triangles and flags, while those who prefer trading the news tend to be active during breakouts. There’s no single type of market where scalping can be applied to best benefit, because there are many different kinds of scalpers. But there are some technical patterns which offer their greatest benefits to a scalping strategy, and those are the patterns which we’ll examine here.

First we’ll take a look at scalping during breakouts, and then study ranges.

News Breakouts

The most typical and significant breakouts observed on any trading day are those associated with important news releases, regardless of their nature. Volatility maybe caused by an unexpected government announcement, at other times a surprising result from a statistical release, and sometimes a mundane piece of data which the markets choose to interpret in an agitated manner. The characteristic of these events is a rapid rise in volatility: a strong initial movement which then has aftershocks, so to speak, lasting over hours and generating swings and fluctuations which are then exploited by scalpers. Scalping in the aftermath of news releases is different from scalping in stale, range bound conditions with respect to its stop-loss requirement, the average life of a trade, and the necessary risk controls.

Although this kind of scalping has some resemblance to fundamental trading, in fact it is a purely technical approach, and has little to do with the real nature or significance of the news or data releases. It is not possible to fully evaluate the meaning of a piece of economic data in the ten minutes where market reaction is most intense, and as such, there is no point in giving fundamental meanings to the market’s behavior during the same time period. This is especially the case when we consider that news releases are revised frequently, and sometimes drastically following the initial release.

In the above graph we have the hourly EURUSD chart and the highlighted region shows the immediate price reaction to the news release at 8 am, followed by its subsequent legs. As soon as the important piece of news was released the market generated a rapidly increasing momentum which never gave traders a chance to look back. The maximum value around 1.4290 was also the opening price of the hourly bar, and it was never revisited. It is easy to conjecture that soon after the release, and in the period immediately preceding it, spreads had widened significantly, and opportunities for scalping were limited. Yet, right after the news release liquidity came gushing back to the market, as traders hastened to readjust their positions. Favorable conditions for scalping would exist within about ten minutes after the news release.

The most important rule while exploiting a news breakout is to stay away from the market during the short period around the news release itself. Unless one is using automated tools for scalping, this brief period is too agitated, and chaotic to allow informed decisions. Worse yet, in the short term the brief but powerful widening of spreads makes technical planning an insurmountable task at times. Instead, a successful scalper will use this brief period to identify the possible direction of the market before entering positions in accordance.

In the example above, we’d be able to scalp the market for a four-hour long period, during the four red candles in the highlighted area. The best way to ensure against suffering losses in the volatility of this period is using a reasonably tight stop with a somewhat looser take-profit order. In example, if we open a short position at around 1.4250 during the third hour, with a 3-pip spread cost to be paid to the broker, we’ll place our stop loss at 1.4255, while our take profit order will be at around 1.4240. This would ensure a 2:1 risk-reward ratio for the position being maintained.

It is a good idea to add a time-stop to a scalping position as well. What is a time stop? This is a kind of stop order which will close a position once a certain period of time is reached, regardless of the amount of profit or loss involved (although of course, both the potential loss or profit are less than what would be indicated by the stop-loss or take profit orders). For example, in our previous example, we had placed our stop loss at 1.4255, while our take profit order was at 1.4240. When we add the time-stop to our initial order at, say, 2 minutes, we’ll close and exit our position two minutes after its opening regardless of the profit or loss involved in the trade.

Why do we use the time stop? We had defined previously that as scalpers we don’t want to be exposed to the markets for a long time. But the market does not need to listen to our expectations, and might as well refuse to hit both the stop-loss and take-profit points for a long of period (at least in the terms of the scalper). The longer we expose ourselves to market moves, the greater the risk of a sudden, sharp movement against our expectations. In order to prevent being caught in such an indecisive, but also dangerous market, we use to time stop as a safety valve allowing us to bail out of our positions if things don’t turn out as we had initially expected.

Scalping of news breakouts can be very profitable, because all the ideal conditions required by scalpers are present. The swift, large, moves which occur in the brief timeframe during which scalpers are willing to expose themselves to the market allow the formulation of profitable forex scalping strategies.

--- by; ForexTraders ----

Forex Scalping Strategy 2009-10-20T21:00:00-07:00 Rating: 4.5 Diposkan Oleh: admin