Forex scalping is a popular trading strategy that involves making multiple trades in a short period of time to profit from small price movements. To be successful at scalping, traders need to use the right indicators to identify entry and exit points. In this guide, we’ll explore the top 3 indicators for successful forex scalping and how to use them effectively to improve your trading strategy and increase your profits.
We at forex dominant have curated a list of 5 of the best indicators for scalping. Consider that mainly the indicators will be discussed while dabbling a bit into strategies.
Therefore, here are the best indicators for scalping forex, here you go;
- #1. Moving averages.
- #2. Stochastic oscillator.
- #3. MACD Indicator.
The Moving Average
The moving average is undoubtedly one of the “go-to” indicators for scalping the forex market. Broadly speaking, there are two types of moving averages; the simple moving average and the exponential moving average.
The simple moving average is set to a certain value called a period. For example, if the moving average is set to a period of 10, an average/ mean of the last ten closes is determined.
This is done repeatedly as the market progresses; plotting the resulting values will give the moving average of that chart. In today’s market, this calculation is done by your chosen trading software.
These periods can be adjusted to suit every trader’s taste, but only moving averages with a small period are suitable for scalping.
Likewise, the exponential moving average is similar to the simple moving average, except it is more sensitive to price movements.
It is handy for a scalp trader since the aim is to get it on every price change as soon as possible. Regardless, I’d recommend sticking with the simple MA to prevent being faked out.
Also, multiple moving averages can be placed on a chart to determine a bias, and this could make a decent scalping strategy.
For starters, three moving averages of different periods should be placed on the pair of your choice. Next, ensure the time frame(s) being traded isn’t higher than the 15mins.
Then, long if all three moving averages cross the price and curve upwards. Conversely, a short order is taken when the trio of moving averages curves downwards after crossing the price.
The stochastic indicator is a momentum indicator that was developed in the late 1950s by a man named Dr. Gorge Lane.
It compares the recent closing prices of a currency pair to the highest and lowest prices during a specified period.
The changes in prices during this period are used to predict potential reversals. Further, the stochastic sensitivity can be adjusted by reducing or increasing the time period.
Also, the stochastic indicator has overbought and oversold regions bounded within a scale of 1-100.
Generally, cells are taken above the 80 mark, which is the overbought region. While buys are taken in the oversold region, below 20.
The stochastic indicator is easy to understand, so it is “beginner-friendly”. Below is an example of the stochastic in use on a forex chart.
Moving average convergence divergence is an indicator that shows the relationship between two moving averages of a currency pair’s price. The result is displayed with the MACD line.
The signal line is a moving average of the MACD line, and its period can be adjusted to your liking.
While the histogram indicates the magnitude of bullish or bearish momentum.
The MACD line reacts faster than the signal line. When the MACD line crosses the signal line, it indicates the start of a new trend.
Over the years, two methods have been developed to trade with the MACD, and they’re explained below.
3.1 MACD Crossovers
The MACD line reacts faster than the signal line. When the MACD line crosses the signal line, they move away from each other. This shows the start of a new trend.
The histogram always reads zero when this cross-over occurs. This is because the difference between the lines is zero when they crossover.
When the fast line crosses ABOVE, the slow line indicates the start of an uptrend. The histogram will be above the baseline.
Conversely, if the fast line crosses BELOW the slow line, it is a bearish signal indicating the start of a downtrend. The histograms display below the baseline in this case.
3.2 MACD Divergence
Divergence occurs when the MACD indicator forms highs and lows that diverge from the current highs and lows in the price.
Although divergences are not as accurate as the crossovers, by analyzing past data, it will be noticed that failed divergences cannot be found.
This is because as the price progressed, it no longer appeared as a divergence.
A bullish divergence occurs when the MACD forms two rising lows, but the price forms two falling lows.
A bearish divergence occurs when the MACD establishes a series of two falling highs that coincide with two rising highs in the price.
Frequently Asked Questions
The Stochastic Oscillator is a momentum indicator that compares the closing price of an asset to its price range over a specific period. It oscillates between 0 and 100, indicating overbought and oversold conditions. Traders can use the Stochastic Oscillator on a 5-minute chart to identify potential reversals and generate scalping signals.
The Parabolic SAR (Stop and Reverse) is a versatile indicator often used for scalping on MT4. It places dots above or below price bars, indicating potential trend reversals. Traders can interpret the dots as stop-loss levels or as signals to enter or exit trades.
The Ichimoku Cloud is a comprehensive indicator that provides multiple signals for scalping on Tradingview. It includes various components such as the cloud (Kumo), Tenkan-sen, Kijun-sen, and Chikou span. Traders can utilize these components to identify trends, support/resistance levels, and potential entry/exit points.
The Average True Range (ATR) indicator can be useful for scalping gold. It measures volatility by calculating the average range between high and low prices over a specific period. Traders can use ATR to set appropriate stop-loss levels and gauge potential profit targets.
The Moving Average Convergence Divergence (MACD) is a popular trend-following indicator suitable for scalping strategies. It consists of two lines (MACD and signal lines) and a histogram. Traders can interpret the MACD crossover, divergences, and histogram patterns to identify potential trend reversals and generate scalping signals.
The Relative Strength Index (RSI) is a widely used momentum indicator for scalping. It oscillates between 0 and 100, indicating overbought and oversold conditions. Traders can utilize RSI readings to identify potential price reversals and generate scalping signals.
Fibonacci Retracement is a popular tool for identifying potential reversal levels. Traders use Fibonacci ratios (such as 38.2%, 50%, and 61.8%) to draw retracement levels on price charts. These levels can act as support or resistance zones, helping traders identify potential reversal points for scalping trades.
Please note that these are examples of indicators commonly used for scalping purposes. The best indicator for you may vary based on your trading style, preferences, and the specific market conditions you are trading in.
Scalping Explained Briefly
Scalp traders analyze the market in ways peculiar to them. Afterward, either buy or sell orders are opened and closed in seconds- minutes.
Only a few pips are caught this way. Therefore, to realize true gains, multiple positions are opened with large lot sizes. This is done a bunch of times over the course of a trading day.
Summary: Best Indicators for Scalping FOREX
Scalp trading is practiced mainly by new traders who come into this industry thinking it’s a “get-rich scheme” wanting to make money as quickly as possible.
This is normal. Every successful trader has been through a similar phase. The first challenge as a new trader is protecting your capital, which should be prioritized.
Scalping is the polar opposite of this, it is a very dangerous affair as multiple entries are taken at a go, and risk management is not adhered to.