There are various approaches to trading currency pairs. Some people day trade, while others swing or position trade. Some people only trade during news announcements, some trade based on technical, some rely on fundamental analysis. The list goes on and on. What this tells us is that there are many ways to make money in the market. However, what works for one trader may not work for another. Each trader needs to find an approach that fits his/her personality the best.
In this guide to the best indicators for scalping Forex pairs, we’ll discuss what scalping is. What some of the best indicators for scalping are and how to use them.
If you are starting the trading journey, it’s best to learn about various trading styles and approaches, build your own strategies and test them on a demo account before going live.
What is Scalp trading?
Before we start discussing the best indicators for scalping FX pairs, let’s first discuss what scalping is precisely and how it works. Scalping is the day trading strategy where traders try to reap profits from small and quick price movements on the market. When scalp trading, it is important to approach the market with a very precise and well-thought-out plan of action, including a well-selected stop-loss strategy. Scalpers usually keep their positions open for a few minutes and try to realize profits from small intraday price movements.
Usage of the best indicators for scalping trading Forex is not enough to succeed. You also need to trade during the most active trading hours and pick the currency pairs that offer the best liquidity. For scalpers, tight spreads are critical for success. And spreads are the tightest in highly liquid markets. The most liquid trading sessions are during London and New York trading hours.
Scalping requires good risk management strategies, as scalping typically involves placing large amount of trades compared to position and swing trading. Risks need to be spread among these trades proportionately. Typically, position sizes are smaller per scalp trades.
Scalping as well as most day trading strategies heavily rely on technical analysis. FX best indicators for scalping are highly useful for technical trading. However, as we have already mentioned, they need to be a part of a well put together trading system to result in profits. Scalpers need to effectively use money management strategies that usually includes selecting a proper position size and usage of stop loss orders. In addition, it’s important to be able to control emotions and only enter trades once opportunities present themselves. The best indicators for scalping Forex will be proving you with trading signals.
- Indicator Type: Lagging indicator
- Best timeframe to use: 5-period for SMA, and 3-period for EMA
- Goes best with: MACD
- Placed on: On top of the chart
Moving Average is one of the best and most widely used indicators by Forex scalpers. As the name suggests, a Moving Average shows the average price of an asset across certain time frames. When trading, traders can use two common moving averages, Simple Moving Average, and Exponential Moving Average. SMA tracks the average price of an asset, by adding up the closing prices of an asset and dividing it by the number of periods included. While EMA puts more weight on the recent price changes and follows the market more tightly.
When using Simple Moving Averages, traders can use a combination of short-term SMA such as 5-period SMA, and longer-term SMAs such as 20 and 200 period. Once these indicators are overlaid over the chart, traders can look for crossovers between 5-period and 20-period Simple Moving Averages and open the position in the direction of the trend. If the 5-period MA goes above the 20-period MA, it signals a buy order, while if it falls below the 20-period traders should think of selling, meanwhile 200-period SMA can be used to have a basic understanding of the market conditions.
Meanwhile, when using the Exponential Moving Average, traders can follow the same strategy but can use shorter timeframes. When using EMA, traders can look for crossovers between 3-period and 12-period EMAs, while 100-period EMA can be placed for general overviews.
Example of using Moving Average for Scalping
In the image below, we are trading with EUR/USD currency pair using the Simple Moving Average as our indicator. The red line represents 5-period SMA, the yellow line is 20-period, and the blue line is 200-period SMA.
Looking at the chart, we can see that the 5-period SMA has crossed over the 20-period SMA and signaled a potential bullish run. This run continued for over one hour, but as we are scalp trading, we only entered the market for 10 minutes and realized the profits made from the initial two spikes. But this is not enough to call a successful trading day, and we need to look for more of these crossovers and act accordingly.
Relative Strength Index
Relative Strength Index or RSI for shorts is a momentum indicator that signals traders about upcoming price reversals. This indicator measures the price momentum and indicates if an asset is overbought or oversold. It has a range of 0 to 100, where 30 and 70 marks are used as support and resistance levels respectively.
When using the RSI indicator, traders need to look for crossovers of the RSI indicator and 70 and 30 marks on the chart. When RSI goes over 70 it signals that there are too many buyers on the market and the trend might reverse soon. In this instance, traders should consider opening a short position, while if RSI falls below 30, it means that there are too many people selling and the trend might change. When this takes place, traders should consider opening a long position as prices are expected to rise.
Example of using RSI indicator when scalping
Now let’s look at an example of using the RSI in order to see why it is one of the best indicators for scalping in FX trading. In this instance, we are trading using EUR/USD currency pair. The RSI indicator displayed below the chart provides us with trading signals. As we can see, when RSI went above 70 and reached the 80 mark, the price reversed and started to fall down. We can use the indicator to sell when the price goes above 70 level and buy when it goes below 30. The RSI displays overbought and oversold conditions and whenever the market is overbought, it is a signal that the market will reverse downwards. Whenever the market is oversold, it is an indication of an upcoming bullish move.
- Indicator type: Lagging Indicator
- Best Timeframe to use: 5 minutes
- Goes best with: Stochastic
- Placed on: Below the chart
MACD is a trend-following momentum indicator that is commonly used by Forex traders. While using this indicator, traders can receive signals about potential market reversals and act accordingly. MACD is calculated by subtracting 26-period EMA from 12-period EMA and then plotted below the chart along with 9-period EMA as a signal line. As we know, EMA is a moving average that puts more weight on more recent price changes. Usage of MACD means that we are using an indicator that puts big attention on recent price movements, and that is exactly what we need as scalpers.
While using the MACD indicator when scalping, we should keep an eye on two important things. The first one is the crossover of the MACD indicator and the signal line, which in our case is the 9-period EMA. This crossover signals a trend reversal, but we need to make sure that there is a trend going on, and this crossover did not happen during the range, as here the signal might be inaccurate.
Another thing we need to look at is the histogram. When the MACD histogram is displayed it can be seen as mountain peaks consisting of multiple bars, and the longer the bar the bigger the difference between 12-period and 26-period MACD. When these peaks shrink and are about to reverse, it signals that the trend might also reverse, and scalpers can use this as a good trading opportunity.
Example of using MACD indicator when scalping
Now let’s look at one of the best indicators for scalping example, by taking a look at the example of MACD indicator in trading. In the image below, we are trading with EUR/USD currency pairs using the MACD indicator as our entry and exit signal.
We can see on the chart that there are two potential signals provided by the MACD indicator. The first signal provided by the MACD indicator is the histogram reversal, but if we take a look we can see that once the reversal happened prices did not fall immediately and the downtrend started only after the crossover. This is exactly when scalpers should enter the market and reap the profits. If we take a closer look at the chart, we can see that during the downtrend there were still instances when prices went up, and this is why it is crucial to have a good stop-loss strategy when scalping.
Stochastic oscillator is a technical and one of the best indicators for scalping in FX trading. It is a momentum indicator that compares the latest closing price to the range of its prices across a certain period. While using this indicator traders get the signals telling them if an asset is overbought or oversold, and just like many other oscillators, it is done in the range of 0 to 100.
When using a Stochastic indicator, if we see an indicator go over the 80 mark it usually means that the market is overbought, while if we see it drop below 20 it means the market is oversold. But scalper traders can not fully rely on just these signals, as assets might remain oversold or overbought for extended periods of time. Therefore, traders should keep an eye on the Stochastic indicator and the signals line for more accurate confirmation. If we see that the Stochastic indicator has crossed and gone above the signal line, it can be a signal that a reversal is happening. This is exactly when traders should enter the market.
Example of using Stochastic indicator when scalping
In the image below, we are trading with the EUR/USD currency pair, using a Stochastic indicator on a 5-minute time frame chart. As we can see in the image, when the Stochastic indicator (Blue) crossed over the signal line (Red), the market went into an uptrend and this was a great time to open a position. As we are scalp trading, we could have taken advantage of this uptrend market and executed a few orders, up until we saw that the Stochastic indicator has fallen below the signal line. When this happens, scalpers then need to change their position and start selling.
We should always be careful when using this indicator and make sure to always have a good stop-loss setup because there can be wrong. Assets can remain in overbought or oversold condition for extended period of time and markets might start trending. It is even apparent in the image, after the second crossover, the market went into uncertainty and prices remained flat with minimal up-and-down movement, even though the indicator moved up and down.
Parabolic SAR indicator
The last indicator on our list is the Parabolic SAR indicator, which is commonly used by Scalper traders. This is one of the best indicators for scalping Forex, and every scalper should consider implementing this indicator into their everyday trading sessions. This is a trend-following indicator that spots the direction of the trend and potential reversal points.
The Parabolic SAR indicator looks at extreme price points and is trying to spot these extremes, making new lows. It also takes into account current extreme low and extreme high, and in the end, gives us signals regarding the state of the market. When plotted on the chart, the Parabolic SAR indicator is shown as small dots that are either above or below the price of an asset. If we see that the dots are above the price, it signals that the market is in a bearish state, and it is best to open a short position. When we see that these dots are below the price, it means that we have a bullish market conditions and opening a long position will be the best option.
Example of using Parabolic SAR indicator for scalping
Now let’s take a look at the example of the Parabolic SAR indicator on the chart below and learn how we can use it. In this case, we are trading with EUR/USD currency pairs on the 5-minute chart using a Parabolic SAR indicator. Looking at the chart below, we can see that the PSAR indicator is above the price of an asset, as it signals that the market is in a downtrend. Scalper traders can take advantage of this situation and execute multiple sell orders to gain small but multiple profits.
As we can see, there are instances where candlesticks show positive gains, meaning that just because PSAR is above the price of an asset, it does not mean that every period will follow the signal indicated by the indicator. Because of this, it is crucial to have stop-loss implemented in every open position.
The main takeaways
Scalp trading is a complex trading strategy that is not fitted for every person. If you are starting out as a trader, it’s best to learn about various strategies and techniques and test them to find out what works best for you. Scalping heavily depends on technical indicators. Scalping is a day trading strategy that involves active trading. Some of the best indicators for scalping Forex pairs are: Moving Averages (Exponential Moving Averages to be precise), RSI, MACD, Stochastic Indicator, and Parabolic SAR indicator. To successfully scalp, traders need to select highly liquid forex pairs such as major currency pairs, use good risk management strategies and trade during the most active trading hours such as London and New York trading sessions.
FAQs on the best indicators for scalping Forex
What are the best indicators for scalping?
Some of the best indicators for scalping Forex pairs are: Moving Averages, RSI, MACD, Stochastic Indicator, and Parabolic SAR indicator. Keep in mind that traders also need to use each indicator in certain situations. Scalpers take advantage of small price movements and for them tight spreads are critical. The spreads are tightest during the most active sessions, such as London and New York trading hours. In addition, Major pairs are more liquid than Minors and Minors are more liquid than exotics.
Are the best indicators for scalping easy to use?
Yes, most of the scalping indicators are oscillators that are easy to analyze and read signals from. Those that are normal indicators are also relatively easy to use, as they don’t require any big expertise. The challenge here is creating a good mix of indicators and building a successful scalping strategy around these indicators.
Can the best indicators for scalping get you profits?
Most certainly yes. However, be noted that scalping may not be for everyone. It’s best to learn about different indicators and strategies, test them using your demo account and only after you make sure that you have a profitable system, go live. Each indicator can be highly profitable when traders use them in proper trading setups.