Scalping is a trading strategy that quickly captures the imagination of many forex traders. It consists of brief trades that take advantage of small movements in the market. A trader will typically hold trades for no more than a couple of hours. However, a trader may hold scalping trades for just a matter of minutes or even less. In this article, we’ll take a look at a simple EUR/USD scalping strategy that you may wish to backtest.
EUR USD Scalping strategy
The strategy itself comes from Andrew, over at the YouTube channel Forex Signals. Andrew himself is a veteran forex trader on the currency trading floors of London. The strategy is really simple. It’s based on trading with the trend, using two charts and two Exponential Moving Averages.
To set it up, simply place both the 8 and 21 EMA on the five-minute (M5) chart and the hourly chart (H1).
There are two main principles:
- When the 8 EMA is below the 21 EMA and the price is below them both, we are interested in short entries.
- When the 8 EMA is above the 21 EMA and the price is above them both, we are interested in long entries.
You operate on the 5-minute chart and use the 1-hour chart (H1) as your confirmation chart. What this means is that you would only enter a buy trade if the H1 chart also shows a bullish trend, and you would only enter a sell trade if it shows a bearish trend.
Tip
If you only want to look at one chart, there’s a really easy way to do this – add the 96 and the 252 EMA to your five-minute chart as well as the 8 and the 21. The 96 is the same on the M5 chart as the 8 on the H1, and the 252 is the same on the M5 as the 21.
EUR USD Scalping – Entering the market
The cue to enter the market is pullbacks – when the price pulls back in the opposite direction to the current trend and goes beyond the 8 EMA.
Buy trades
For a buy trade: there is a bullish trend and the price falls below the 8 Moving Average, and the H1 chart confirms a bullish trend:
- The candlestick where the price fell below the 8 EMA is your trigger to set a position in the market.
- From this trigger bar, count back five candlesticks.
- Place a buy stop pending order three pips above the highest of those five bars.
- Your stop loss will be three pips below the trigger bar.
- Your take profit point will be the same size as your stop loss. So if your stop loss is 15 pips, then so is your TP.
- Place the same trade again; this time with the take profit being double your stop loss.
When the first trade hits its profit point, you must set the stop loss on the second trade to the entry price, making it a risk-free trade.
Sell trades
The signal to enter a sell trade is exactly the opposite of the one to enter a buy trade. There must be a bearish trend on both the M5 and H1 charts, with the moving averages nicely fanned out.
- During the downtrend, the price rises into the 8 EMA – this is your trigger to set a position.
- From this candlestick, count back five candlesticks.
- Place a sell stop pending order three pips below the lowest of those five bars.
- Your stop loss will be three pips above the trigger bar.
- Your take profit point will be the same size as your stop loss, so a risk-to-reward ratio of 1:1
- Place the same trade again, this time with the take profit being double the stop loss.
Once again, when the first trade hits its profit point, you set the stop loss of the other open position to the entry price.
Exit strategy
If the price pulls back into the 8 EMA and you have created your pending orders, but the price then pulls back even further and closes beyond the 21 EMA, then the setup is no longer valid and you should delete the pending orders.
While this strategy may work on other minor forex pairs, it’s mainly intended EUR USD scalping. This is because EUR/USD is the most traded forex pair in the world and usually has relatively high liquidity and tighter spreads, which is vital for scalping so that spreads have as little impact on profits as possible.