In the world of trading, scalping strategies are commonplace. Scalping, overall, is a trading style focused on making profits while taking advantage of tiny price changes in Forex or CDFs trading. Traders enter and exit positions within a tight time frame (seconds to minutes) and use a handful of scalping strategies and indicators to make profits. Today, we will discuss the top five indicators you should learn more about in case you want to master scalping.
1. Simple moving average indicator
The SMA is a scalping indicator you can use to put together a simple strategy. The SMA shows the average price over a specific time. In other words, it allows you to understand whether the price is moving up or down, helping you to identify a trend.
The SMA is an arithmetic moving average you can calculate by the following formula: add the recent closing prices and divide them by the number of periods in the calculations’ average.
- Example: for a seven-period on a 10-minute chart plot, add all the closing prices of the last 70 minutes then divide the sum to 7.
The SMA is an excellent indicator when you build your DAX scalping strategy. However, keep in mind that short-term averages react fast to changes, while long-term ones respond slower.
2. The exponential moving average indicator
Another useful indicator in your trading efforts, the EMA has the advantage of giving more weight to recent prices (in comparison to the SMA, which assigns equal weights to all values). As you can quickly figure out, the EMA responds quicker to recent price changes than older price changes as compared to the SMA.
Like all moving averages, the EMA is technical indicator trader use to obtain buy and sell signals stemming from the crossovers and the divergences of the historical average.
When you use technical analysis, you will find both the SMA and the EMA handy, as long as you calculate, apply, and interpret them correctly. The conclusion you must reach after using these moving averages should confirm you a market move or indicate the market’s strength.
3. The average convergence divergence indicator
The MACD is more than a scalping indicator, but a complex and versatile one useful to traders of all types and styles. The lagging indicator (just like the EMA) proved its great usefulness in the last decades. It is the best tool you can employ for understanding momentum, following and capturing trends. In short, the MACD displays the relationship between two MAs of a security’s price.
You can calculate the MACD indicator formula by subtracting the 26-day Exponential Moving Average from the 12-day EMA. The default setting of MACD – the signal line as traders know it – is the 9-day EMA of the MACD plotted on top of the MACD, typically marking buy/sell signals triggers.
Before you jump at the opportunity to use the MACD in your scalping strategies, you should understand convergence and divergence in depth.
4. The parabolic SAR scalping indicator
The Parabolic Stop and Reverse (SAR) scalping indicator shows you a price action trend. If the trend goes upwards, the SAR will display chart points below the price. Vice versa, when the pattern goes downwards, the SAR will chart positions above the price, signaling you the beginning of a retracement.
Traders use this indicator to determine the future short-term momentum of an asset, helping them to understand where and when to place stop-loss orders. The Parabolic SAR works best in markets showing steady trends.
Of course, all traders will use the SAR in conjunction with other momentum indicators, candlestick patterns or MAs, to get accurate assessments of the current trend’s strength. The SAR alone, in ranging markets, can provide you with false trading signals, forcing your hand to enter or exit a position prematurely.
5. The Stochastic Oscillator indicator
Last but not least on our list, the Stochastic is one of the most popular ones traders use in Forex, Indices, and CDFs trading. Used for scalping and intra-day trading, among others, the Stochastic Oscillator is also a momentum indicator.
It follows a simple, but intriguing premise: the momentum precedes the price; therefore, traders use the Stochastic to obtain the signal of the actual movement just before it occurs. Another remarkable assumption of the indicator is that an issue’s closing price tends to trade at the high end of the trading day’s price action (meaning the price movements of an asset).
While the complex formula of the Stochastic Oscillator goes beyond the purpose of this article, you must know that traders consider it a reliable tool for buy and sell indications. It measures the relationship between the closing price of an asset and the price range of the same asset over a preset period.
Scalpers prefer the Stochastic Oscillator because it serves their purpose well: it identifies the major turning points in the market with high precision, and scalpers’ goals are to take advantage of them to make a profit.
Scalping strategies require traders’ profound knowledge, impeccable experience in using trading platforms (as many of these indicators come embedded within brokers’ software), alertness, vigilance, and fast decision-making skills. The thing nobody should forget, however, is that a successful scalping strategy, no matter what indicator or combination of indicators you use, depends on a realistic approach to the market. In other words, do not trade on Forex, Indices, or CDFs without a stop-loss order, no matter your trading style!