The Definitive Guide to Scalping, Part 1:

Market Conditions
Scalping your favorite Forex pairs takes practice and dedication. This article series
will guide you through everything you need to know to become a Forex Scalper.
Talking Points

Forex Scalpers should always identify market conditions before trading

Markets can be broken into three major environments. Trends, Ranges, and
Breakouts
Once identified, traders can select the appropriate strategy that fits present
price action.

Before any scalper places their first trade it is important to identify the markets
current technical condition. Every day will bring a new price action, and it is
important that we are using the appropriate trading strategy to meet the days
challenges.
Today we will review the three most common market conditions presented to
Forex traders. All of these conditions can be identified by identifying key points on
your chart through basic technical analysis. Once we have a grasp on market
direction, we can then look to better implement the scalping strategy of our
choosing.
Learn Forex USDCAD Trend, Range, and Breakout

Price Ranges
Identifying a trading range is the first market condition we will review. A range
occurs when price is moving virtually sideways which can also be associated with
channel trading. Even though the market doesnt have a clear direction, it can still
provide opportunities for diligent scalpers once one is identified.
The first step to finding a range is to identify support and resistance on your chart.
These pricing levels can be found by connecting a series of recent market highs
and lows using horizontal lines. Resistance is the current ceiling on price and
Support is defined as price actions current floor. These points will be the basis for
our strategy, and should be clearly marked on our chart before moving further.
As long as a range holds, scalpers can take a neutral market stance. This means
they can look to take both buy positions near levels of support and sell look to sell
levels or resistance.
Learn Forex Identifying a Trading Range

Strategic Breakouts
When market ranges end, we are most likely to encounter a breakout. A breakout
market occurs when price moves through or breaks an identified level of support
or resistance. Immediately following a breakout, traders can look to take advantage
of scalping opportunities with the fresh market momentum.
Below we can see a breakout from the previously identified range on the USDCAD
30 Minute chart. Once the previous price ceiling broke, traders had the opportunity
to buy the market. The process of trading a breakout can be simplified through the
use of an entry order. These orders will remain pending and execute once the price
selected becomes available for trading.
It should be noted, in the event of price breaking a level of support, this process
can be replicated. However, with new downward momentum scalpers will look to
sell the market.
Learn Forex USDCAD Price Breakout

Trending Markets
Breakouts normally signal the beginning of a market trend. The Forex market is
known for its propensity to continue moving in a singular direction for an extended
period of time, and once found scalpers can trade in the direction of the trend.
The process of identifying the trend begins with the identification of a series of
swing highs and lows. A swing low is identified by a current valley on a graph,
which normally represents a temporary low. Swing highs will identify temporary
peaks in price action. If a currency pair is making a series of higher highs as in the
USDCAD 30Minute chart below, you are probably looking at prices advancing in
an uptrend. This is a strong signal for scalpers to begin looking for fresh buying
opportunities.
It should be noted that markets are just as prone to declining in downtrends. In the
event that a chart is printing lower lows and lower highs, scalpers should then look
to sell the market with the charts current direction.
Learn Forex USDCAD Uptrend

Now that you are a little more familiar with various market conditions, we can
proceed to look at some of the different topics that are vital to Forex scalpers. In
our next edition, we will begin to look at different timeframes and currency pairs,
along with how they can affect our scalping outlook.

The Definitive Guide to Scalping, Part2:

Currency Pairs
Currency selection is key for traders using scalping strategies. Learn which pairs to
trade with part 2 of The Definitive Guide to Scalping.
Talking Points

Forex Scalpers should always identify market conditions before trading

Factor in the spread to reduce transaction costs
Consider liquidity when trading to maximize trading

Scalpers are continuously faced with choices and tough decisions when trading
Forex. On a day to day basis however, none is as important as deciding which
currency pair to trade. Choosing a currency not only will affect the strategy we
choose but ultimately our profitability as well. So today we will review two key
factors that need to be evaluated prior to implementing your favorite scalping
strategy.

Spreads and Cost

Spreads and costs should be on every traders minds, but they are particularly
important to scalpers. Since scalpers tend to favor high frequency strategies, this
means they will incur the spread more often than their average positions trader. So
throughout the trading year, to keep costs down scalpers should gravitate to pairs
with lower spreads. Lets look at an example.
Above we can see the effects of trading a currency with a lower spread by
comparing two yen pairs. First we have the USDJPY with a 1.1 pip spread
compared to the NOKJPY with a 5.5 pip spread. Being Yen pairs at some point a
trader may have to decide between the two pairs above. However when looking at
spreads it should make this decision considerably easier. It costs more to trade the
NOKJPY! Traders save approximately $44 in spread costs per 100k transaction
trading the USDJPY!
For a complete list of spreads at FXCM, click the link embedded HERE.
Liquidity
Next when choosing a currency pair it is also important to consider liquidity.
Liquidity in Forex is easily defined as the amount of currency quoted at any
specific price point. Scalpers should value liquidity because it will ultimately
coincide with the ease we enter and exit the market.
From a traders perspective, illiquid markets are known to be volatile and are more
prone to market gaps based off of fewer buyers and sellers present in the market
place. This happens since every buyer must transact with a seller, and the further
they are off in regards to price the more a pair is prone to jump while exposing
scalpers to slippage. This is compared to a deep market where there is a breath of
market volume at multiple pricing points. With more liquidity available we
increase the ease that we can enter and exit the market because more buyers and
sellers are readily available to cross a scalpers transaction.

Currency Pairs
Now that you know what to look for its time to narrow the field of potential pairs
for scalping. Out of 56 different pairs offered at FXCM, traders should consider
scalping pairs comprised of the G8 currencies shown above or one of the Forex
Majors pictured below. These pairs are comprised of the most frequently traded
currencies in the world which helps when it comes to factoring in both spreads and
liquidity.

The Definitive Guide to Scalping, Part 3:

Time Frames
Talking Points

It should be a top priority to determine the appropriate chart for your trading.
Reference a specific date range to begin your analytics
Finalize your execution by moving to a shorter term timeframe

One of the most frequent concerns voiced by new Forex scalpers is how to identify
which timeframe and charts to use in their analysis. This question is often
addressed after selecting a currency pair for scalping, and makes sense because the
possibilities are almost limitless. The image below includes 12 different time frame
charts for the EURUSD. If all of these possibilities seem overwhelming, dont
worry youre not alone.
To help simplify this process today we will look at charts for scalping, and how to
identify the appropriate timeframe for our selected strategy.
A Frame of Reference
Whether you are a position trader or scalper it is always good to begin your
charting with a frame of reference. A frame of reference is specifically looking at
how much data is displayed on your chart. This reference is designed for scalpers
to find the short term trend while identifying key levels of support and resistance.
Think of it this way, scalpers looking for 10 pip gains would be ill advised to begin
looking at multi-year graphs on a daily chart to begin their analysis. So what
reference point and what timeframe charts should a scalper use?
Scalpers can begin by referencing 7 days worth of data. This allows the trader to
take in exactly one weeks worth of pricing to establish short term market
direction. Traders can then identify market swings and key levels of support and
resistance for the week without getting analysis paralysis from having too many
candles on their charting screen.
Below we can see two EURUSD charts, both looking at one weeks worth of data.
Notice how we can easily identify the trend on both graphs? Once this frame is
selected, the time frame chosen simply denotes the number of bars displayed for

the period selected. I find that a 30minute is a great place to begin, while traders
wanting fewer bars may opt for a 2Hour or 1Hour selection.
Learn Forex EURUSD Weekly Reference

The Execution Chart

Now that you have narrowed down the trend, its time to consider an execution
chart. This graph should be the final chart that you use in accordance to your
scalping trading plan. While this chart may be the reference chart mentioned
above, more often than not, scalpers prefer moving into shorter time frames at this
point. This can aid in identifying intraday trading opportunities, and is most
commonly called multi time frame analysis.
The final question you must ask yourself as a scalper is how many positions you
wish to take in one day. While this answer will vary from trader to trader, normally
in my experience the answer tends to fall in the 1 to 5 trade range. If you are
looking to take 1-2 positions a day, I would recommend starting off with a 30 or 15
min chart. Traders looking for 3-5 positions a day can begin by looking for entries
on a 5minute graph. Finally traders looking for 5 or more trades may be best
served by consulting a 1 minute graph.
Of course everything is customizable when it comes to trading! My final
recommendation is to find what works for you. Below is an example of a trade
taken today, based off of a 5minute strategy. Join me for next weeks article for our
Forex scalping guide as we look at different ways to determine support and
resistance.

Learn Forex EURUSD 5Minute Execution

The Definitive Guide to Scalping, Part4:

Support & Resistance
Every scalper should be able to identify key levels of support and resistance. Learn
three methods with the 4th edition of The Definitive Guide to Scalping.
Talking Points

Support and resistance levels are critical areas for scalpers to identify.
Price action, pivots, and moving averages can all be used to find these
values.
Once identified, traders can then look to employ the strategy of their
choosing.

One of the most important concepts a scalper needs to master is how to find levels
of support and resistance. These levels will act as price ceilings and floors which
will ultimately help us determine our scalping strategy.
While there are many ways to identify support and resistance, today we are going
to take a look at three of the most common methods that can be applied in our day
trading.
Learn Forex EURUSD and Price Action

Price Action
The first way of finding support and resistance is by using price action. Scalpers
should become comfortable with finding swing highs and swing lows on their
charts as they are natural areas of support and resistance. A swing high is identified
as a peak on the graph and a swing low can be pinpointed as a valley. These
extremes in price can help us prepare for either a swing or breakout trading
opportunity depending on what the graph is displaying.
Above we can see todays price action on a EURUSD 5minute chart. A price
channel has been drawn by connecting a series of swing highs and swing lows. The
swing highs help denote resistance and areas where scalpers may look for
opportunities to sell. By connecting the swing lows, we have created an area of
support where traders may wish to close existing sell positions, and potentially
look for opportunities to buy.
Learn Forex EURGBP with Cam Pivots

Pivot Points
Pivot points also make great areas of support and resistance. These lines are drawn
using a preset formula and are often favored by scalpers because they can be added
to virtually any chart. Above is a great example of support in action on a EURGBP
30 minute chart using Camarilla Pivot Points. Once added, you can clearly see

levels of support denoted by an S whereas lines of resistance are marked by an

R. It should be noted that there are a variety of pivot points to choose from.
Regardless of the pivots you use, their key purpose is to find these support and
resistance levels for you. With that in mind, lets look at an example.
Looking at todays price movement on the EURGBP, we can clearly see price
remained supported at the S3 camarilla pivot point. Traders looking to purchase the
pair can wait for price to bounce off this value before looking to buy towards
higher highs. It should be noted that resistance lines can also be used to find areas
to sell as long as price remains in the trading range. In the event that price breaks
the final levels of support or resistance, this would be identified as a market
breakout. Knowing this, scalpers can adapt their pivot trading strategy to any
market environment.
Learn Forex AUDUSD with 200MVA

Moving Averages
Last we will take a look at using simple moving averages (MVA) as a level of
support and resistance. Most traders may be familiar with this average on longer
period graphs, but is just as effective on shorter time frames such as the 30 minute
and 5 minute charts. If price is above the average, traders can wait for dips and

look to buy a currency pair. Conversely if price breaks below this value, the 200
moving average will change from an area of support to new resistance. Traders can
then look for selling opportunities as long as price remains under the indicator.
Above we have a 200 period MVA displayed on an AUDUSD 5 minute chart. For
the majority of trading on January 27th price stayed above the displayed 200 MVA.
Traders could have used this as an opportunity to buy retracements or look to trade
breaks towards higher highs on the AUDUSD. This morning however, support was
broken with price moving through the 200 MVA. At this point, traders should
consider the average as resistance while potentially changing their trading bias.

The Definitive Guide to Scalping, Part5:

Scalping Ranges
Talking Points

When markets are flat, scalpers can trade ranges.

Traders should identify support & resistance before considering entries.
Range trading can continue until price breaks.

Scalpers have a variety of choices when it comes to an execution strategy. This

decision should be decided after carefully evaluating current market conditions for
the currency pair of their choosing.
For todays scalping lesson, we will focus on ranges and how to trade them by
planning entries between key levels of support and resistance.
Learn Forex USDCHF Scalping Ranges with Cam Pivots

Trading the Range

As a range trader our first task is to identify key levels of support and resistance.
This can be done through a variety of methods mentioned in the 4th installment of
the Definitive Guide to Forex Scalping. Once traders have found these points and
price is confirmed to be traveling in a range, entries become very straight forward.
Traders can set an entry order to sell levels of resistance and buy levels of support.
From this point, scalpers must become patient and wait for the market to turn at
one of these designated points.
In the example below, we can see this technique in action. Support and resistance
have been found using Camarilla pivot points. Traders can set entry orders to sell
the USDCHF back in the direction of the primary trend, near resistance at .9051. In
the event that price touches these entries, they will be executed selling the
USDCHF. Risk has been managed by placing a stop at the next line of resistance,
designated as R4 at .9068. Taking profit should be done when price has reached the
opposing point of the range. When selling a range, limit orders can be placed at
support. Conversely in the event of buying range support, price targets can be set at
range resistance.
Learn Forex USDCHF Range Entries & Targets

Ranges with Oscillators

Traders can also choose to scalp market ranges through the use of an oscillator.
Again traders should wait for price to reach a key level of support and resistance
prior to considering an entry. Once this occurs, traders can turn to an indicator such
as MACD, CCI, or RSI to time their entry. In the event price touches resistance, as
highlighted below, traders will enter the market on a return from an overbought
level. This process can be replicated to buy levels of support when Oscillators
cross back above an oversold value.
Trading with an oscillator can potentially help traders better find market
momentum and even keep traders out of some bad positions. However, it should be
noted that this does not give scalpers license to use sloppy risk management! Just
as we would with our example using entry orders, traders can manage risk by
placing a stop above the next line of resistance, while targeting range support to
take profit using limit orders.
Learn Forex USDCHF Range Entries with CCI

It should be noted that ranges can be traded as long as support and resistance
remain intact! In the event the currency pair you are trading breaks or begins
trending, it will be time to abandon the range and either switch to a new chart or a
new strategy.

The Definitive Guide to Scalping, Part6:

Scalping Retracements
Talking Points

When markets pullback from the trend consider trading retracements

Traders can time entries at support and resistance using oscillators
Manage risk over previously market swing highs or lows

Scalpers have a variety of choices when it comes to an execution strategy. This

decision should be decided after carefully evaluating current market conditions for
the currency pair of their choosing.
Today to continue the Definitive Guide to Scalping, we will focus on trading
retracements and pullbacks in price from the primary trend.
Learn Forex USDCHF retraces in a downtrend

Trading a Retracement
As a retracement trader our first task is to identify the trend. This can be done
through a variety of methods mentioned in the 2nd installment of the Definitive
Guide to Forex Scalping. In the event that price is trending downwards,
retracement traders will look to sell the market after price retraces, which means

the market has moved temporarily against the primary trend. Likewise in the event
that price is trending upwards, traders would wait for prices decline before buying
towards a higher high. Above we can see a series of retracements on the USDCHF
currency pair offering selling opportunities.
Once a retracement is found, its time to begin planning where to enter the market.
The easiest way to do this is to place entry orders near a converging level or either
support (to buy in an uptrend) or resistance (sell in a downtrend). Below we have
an example of this technique in practice. Displayed you can see resistance in the
form of a trendline as well as a 78.6% Fibonacci retracement line. Traders can look
to sell the market at this point near .9035. Risk should be monitored above
resistance to close positions in the event of a price breakout, and finally profit
targets should be set towards lower lows.
Learn Forex USDCHF Support & Resistance

Retracements with Oscillators

Traders can also choose to enter retracements through the use of an oscillator.
Similar to trading a range should wait for price to reach a key level of support or
resistance prior to considering an entry. Once this occurs, traders can turn to an
indicator such as MACD, CCI, or RSI to time their entry. In a downtrend, such as
the $USDCHF example depicted above, traders will wait for momentum to return
to the downside prior to entering in the market.

Trading with an oscillator can potentially help traders better find market
momentum returning back in the direction of the primary trend. Below we can
again see the USDCHF 30 minute chart, but this time the RSI indicator has been
added to the graph. Price has moved off of resistance, but oscillator traders will
wait for RSI to close below an overbought value prior to entering into the market.
Once a trade is placed we should again evaluate our positions exits. Even when
trading with a confirming oscillator a stop should be used!
RSI is one of many oscillators that can be used with a successful retracement
strategy. If you would like to learn more about trading oscillators, click here to
sign up for our FREE RSI Training Course
.

Learn Forex USDCHF & RSI Oscillator

Overall, trading retracements is an exciting way to approach scalping. It should be

noted however that retracement trading is all about timing and may not be for
everyone! The key to retracement strategies starts with becoming comfortable at
pinpointing pullbacks in the market and managing risk appropriately.

The Definitive Guide to Scalping, Part7:

Scalping Breakouts
Talking Points

Breakout traders should first find support & resistance

Entries can be set as close as 1 pip above these values
Support and resistance can also be used for managing a position

Scalpers have a variety of choices when it comes to an execution strategy. This

decision should be decided after carefully evaluating current market conditions for
the currency pair of their choosing.
Today we will continue the Definitive Guide to Scalping as we focus on scalping
breakouts.
Learn Forex GBPCAD Early Morning Breakout

Trading a Breakout
The first key to scalping breakouts is to identify key levels of support and
resistance. This can be done through a variety of methods mentioned in the 4th
installment of the Definitive Guide to Forex Scalping. Once found, setting up a
breakout trade is a straight forward process. In the event of a level of resistance

breaking, traders will look to buy. An example of this is depicted above using
todays GBPCAD price action. Conversely, traders will look to sell when a key
level of support falls.
The big question is always where to enter into the market in the event of a
breakout. Theoretically a breakout occurs if a level of support or resistance is
breached by even 1 pip! This allows aggressive scalpers to get into the market as
soon as possible. Some traders may flock to this methodology as it lets traders
maximize their profits when a trade moves in their favor. However, getting into the
market first also will expose you to be the first trader stopped out in the event of a
false breakout. Traders that need further confirmation can wait for a 30 minute
candle close and then make a decision whether to enter the market.
As with any strategy, there are risks when trading breakouts. Lets now look at
managing an open position.
Learn Forex GBPJPY False Breakout with Stop

Risk and Breakouts

The first question I inevitably get regarding breakout trading, is how to prevent
false breakouts. While I understand that no one intends to take a loss, it will
happen at some point regardless of the strategy that you use. With that being said,
there is NO way to prevent false breakouts. All we can do is to manage our risk
when price moves back against a breakout.

Above is an example of a false breakout this morning on the GBPJPY. Notice how
price broke cleanly through support, and then abruptly changed directions. Even
though at one time the trade might have been profitable, when the market moves
back above the designated breakout area, traders should have a plan for exiting the
market. When selling a breakout of support, stops can be placed above this value
which becomes new resistance.
Learn Forex GBPCAD with Risk:Reward levels

Risk VS Reward
Overall, trading breakouts is an exciting way to approach scalping. It should be
noted since breakouts occur during times of market volatility it is imperative to
maximize your profits when the market breaks in your favor! This can be done
byusing a positive risk reward ratio. This means traders should look to make more
in profit, relative to what is being risked through the placement of a stop order.
Highlighted above is a 1-2 Risk:Reward ratio with traders looking to make 2x the
amount of profit on a breakout relative to the amount risked. This ratio can be
improved by either reducing the amount risked or increasing the amount of pips in
profit targeted on a position.

The Definitive Guide to Scalping, Part8: Risk

Management
Talking Points

Risk management should be considered prior to entering into a trade

Never risk more that 1% of your balance on any single trade idea
Stop trading if losses amount to more than 5% in one trading day

The final lesson scalpers must learn is probably the most important, risk
management. The decision on how to manage risk can have a great impact on the
bottom line of your account than deciding where your entry orders should go or
even what time frame to trade on.
Today we will conclude the Definitive Guide to Scalping as we focus on managing
risk when scalping.
Learn Forex GBPCAD Early Morning Breakout

Stop Placement
The first key to risk management is to identify a key level of support and
resistance. This can be done through a variety of methods mentioned in the 4th
installment of the Definitive Guide to Forex Scalping. Once found, regardless if

you are trading retracements, breakouts, or ranges will have a definitive area to
place your stop. In the event you are looking to buy a currency pair, risk should be
managed underneath a line of support. Conversely, if a trader is selling a currency
pair, risk should be managed above a level of resistance.
Traders should also consider how close to these lines of support and resistance to
place their stop. Aggressive traders can set their stop very close to these values to
close losing positions as quickly as possible. This is opposed to a more
conservative approach where stops would be placed further away to allow
positions more space to breath.
When it comes to placing stops it is important to remember that each traders
strategy and risk tolerances will be different! But regardless of your choices,
always scalp with a stop. Now lets look at a few other rules scalpers should
remember.

The 1% Rule
While no one wants to experience a loss on their account, it is an inevitable part of
scalping. Because of this, it is always important to have a plan of action to manage
risk before entering into a trade. While placing a stop is important, traders should
also consider the 1% rule. This means that traders should never risk more than 1%
of their account balance on any one trading idea. That means using the math above,
if you are trading a $10,000 account you should never risk more than $100 on any
one positions.
The 1% rule can also be coupled with a favorable risk reward ratio. Using a 1:2
setting, this means if we risk 1% in the event of a loss, at minimum we should look
to close our trades out for a 2% profit. This would translate into a $200 profit on a
$10,000 account balance. Now that you are familiar with the 1% rule, lets look at
our next risk management tip.

The 5% Rule
While no one wants to lose 1% of their account balance on any one trade idea, it is
also beneficial to review the maximum exposure you have for your TOTAL
account balance. The 5% rule reminds scalpers to never have more than 5% of
their total account balance at risk across all trades. I also recommend this as a final
cutoff point for trading. Meaning if you lose more than 5% in one day, it is
probably best to call it quits and look to pick up trading again when the market is
more favorable.
To put this into perspective a scalper with a starting balance of $10,000 on 5
consecutive open positions, at 1% risk per trade , your balance would still have
$9500 remaining at the end of the day. This is critical because even on your worst
day, you can still come back tomorrow and pick up your trading strategy! Also this
rule can prevent revenge trading and accruing even more losses.

FXCM Risk Management

To help traders control and manage their risk, programmers at FXCM have created
a simple indicator to help decipher how much risk is being assumed on any one
particular trade. Once added to Marketscope 2.0, the FXCM Risk Calculator, as
depicted above, has the ability to help a trader calculate risk based off of trade size
and stop levels.