What’s up Traders, in this article, we’re going to be talking about Best Scalping Indicators for Forex and CFD Stock Trading.
In the following minutes, we’ll discuss about scalping trading, we’ll see what are the main requirements of this trading style and we’ll also talk about the best indicators to use when adopting this technique.
So, scalping is a popular trading method used by experienced traders and especially by market beginners.
Obtain small incremental gains that add up to a large profit
- Scalpers Trade on highly liquid Markets
- Good Computer and a fast Internet connection
- Professional and Reliable Broker
- Parabolic Sar
- Stochastic Oscillator
- ADX (Directional Movement Indicator)
The main aim is to obtain small incremental gains that add up to a large profit, rather than big gains from a small number of trades, as in the case of swing trading or position trading.
Scalpers Trade on highly liquid Markets
This method involves holding trades for just a few seconds or minutes, at the most. Scalpers generally choose to trade on highly liquid markets, because this allows them to get in and out of positions very quickly.
If you want to engage in the fast-paced world of scalping, you need the right tools to maximize your success. First you need, a good computer and a fast internet connection. As a scalper trader, you need your trading platform to execute a trade as fast as possible.
Good Computer and a fast Internet connection
You don’t want to work on a slow computer, with little ram, just to see your pc frozen when you want to enter a trade. Also, a slow internet connection speed could make the difference between a successful scalping trade and a bad one.
Remember, you want to get in and exit the market promptly and 1-2 seconds could be crucial to your results.
Professional and Reliable Broker
- Good Broker for Scalping
- Low Spreads instruments
Second, you need a professional and reliable broker. When you are scalping in real time for several hours, it can be an intense experience.
If you practice scalping with a poor broker, it is very likely that they will not allow you to make short-term profits. Most brokers use dirty practices to stop scalpers such as stop-loss hunting, spread widening or slippage. In order to be successful while scalping, a high-quality broker must offer instant execution.
Good Broker for Scalping
Your broker must provide a live data feed for charts and must have very competitive spreads for the instruments you will be trading on. Also, the trading software must be easy to use and fast to execute trades with.
I’ve tested a lot of brokers in the last years and all of them have their pros and cons. In the recent year I’ve settled with one broker and so far this is the best one for my needs.
Low Spreads instruments
The third requirement is instruments with low spreads. Because of the nature of scalping you need to open and exit a number of positions in a day.
The cost of the trades will become an important factor. As a scalper, by default you’ll use tighter stop-losses, aiming for small profits. The higher the spread, the lower your stop-loss will become.
For example, if you scalp with a 10 points stop-loss order, a spread of over 3 points will leave room only for 7 more points in order to exit the trade. That’s a small margin. In scalping, every point counts so you need to trade with low-spread instruments.
I personally never scalp an instrument that has a spread higher than 2 points. The risk/reward ratio is not worth it. My favorite low-spread instruments on which I apply scalping techniques are Dow Jones index, DAX 30 index, EUR/USD, GBP/USD, EUR/JPY and USD/JPY.
Now that we saw the requirements and tools of scalping, let’s see what are the best indicators I use when I’m scalping the market.
One of the best indicators for scalping the market is the parabolic sar. The parabolic sar is an indicator mainly used to identify the market direction and the beginning of reversals.
Parabolic sar allows scalpers to evaluate the trend direction, to pinpoint entry and exit points and also placing trailing stops. The indicator is displayed as a series of dots.
Unlike other trend-following indicators, parabolic sar formula can spot short-term price changes, which is ideal if you want to scalp a few points from the market.
So, parabolic sar indicator provides great signals that the market trend on lower timeframes is about to change.
A dot appears below the price when the trend is upward (this indicates a buy signal), and above the price when the trend is downward (and this indicates a sell signal).
The PSAR trails the price until the trend has finished and begins to reverse (which is why is also known as stop and reverse indicator).
The parabolic sar provides excellent exit points, as it provides a stop loss level that moves closer to the price, regardless of the market direction.
The rule is that you should close buy positions when the price moves below the sar and close sell positions when the price moves above the sar.
The parabolic sar works best in trending markets, helping the trader to ride trend waves for a good period of time and capture substantial profits.
However, in ranging markets the parabolic sar will generate a lot of false trading signals, as will whipsaw back and forth.
Another indicator suitable for scalping the market is the stochastic. The stochastic oscillator compares where the price closed in relation to the price range over a given time period.
Here is why the stochastic is an excellent indicator for scalping. First, because it works both in trending or range market condition.
Also, this oscillator identifies cycle turns, stoch is also good at identifying overbought and oversold areas on the chart.
Plus is useful at identifying strong momentum, in conjunction with support and resistance Levels on lower timeframes.
When scalping, traders use two types of stochastic: fast stochastic and slow stochastic. The fast stochastic oscillator is very volatile, its reaction to market price will generate many signals.
In a strong trending market, the fast stochastic isn’t able to filter noise and will offer a lot of false signals, which will lead to bad trades. Which is why the slow stochastic is more suitable for scalping because it reduces the volatility by a notch.
I will release a article soon with a scalping strategy involving the stochastic oscillator, but for now let me quickly explain, how I take signals when I’m scalping.
I prefer to use the stochastic oscillator with 8.3.5 settings for spotting divergences on the 1-min chart and I also look for the crossover between the 2 lines of the indicator. But more on this in following articles.
ADX (Directional Movement Indicator)
Another indicator excellent during scalping conditions is the ADX. Basically, the ADX tells traders whether the bulls or the bears are in control on the market.
Scalping Technique: Search for DMI crossovers
A common scalping technique to take entries with the ADX indicator is by spotting the DMI crossovers:
The positive DMI line crossing above the negative DMI line, indicates a buy scalping opportunity.
The positive DMI line crossing below the negative DMI line, indicates a sell scalping signal. Because the market is in a continuous movement and trading opportunities on lower time-frames develop quickly, the ADX must be used in combination with other tools or price action.
Scalping seems easy, but is not
Scalping with these indicators may seem easy in theory, but the reality is that it’s an advanced trading style. It requires very quick decision making, quick reflexes to react when setups are spotted, and the scalper trader must be skilled at quickly executing a trade.
And more important, if you want to make money from scalping, it’s imperative to have a disciplined approach to trading and to keep things simple and don’t over-complicate your scalping setups with lots of indicators.
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