Article Summary: Identifying a currency pair for scalping is an important skill for short term traders to master. Today we will identify one of this week’s opportunities in the Forex market.
Each week currency scalpers must decide which pairs are best suited for trading. Today we will review how to make this determination using y using both trend and momentum based analysis. Lets begin with this weeks example on the AUDUSD .
When deciding on a pair for trading, first scalpers are tasked with finding a strong market trend . Below we can see the AUDUSD making a quick descent declining over 1054 pips. Currently the pair is making a fresh montly low at .9527. As the market continues to make lower lows, this provides prime opportunites for short scalpers to then institue their term trading trading strategies.
Learn Forex –AUDUSD Daily Chart
(Created using FXCM’s Marketscope 2.0 charts)
The next step that should be taken is to identify short term market momentum. This step is necessary to avoid moments where a currency pair is moving against its primary trend. To identify the optimal trading scenario, traders should look for a series of lower lows and lower highs in a downtrend for at least one full trading week. This can be found as shown using the method below.
The blocking method for identifying short term momentum is intended to divide a trading week in half to ensure short term momentum is in line with a longer trend. We can see the AUDUSD being blocked off below by identifying the previous Wednesdays and Sundays on our chart. The key to a this analysis falls in a currency pair making a lower low and lower highs which is in line with our existing downtrend. In the event that price breaks the previous high, which currently stands at .9695, traders would contend that short term momentum is turning and should look for other trading opportunities.
Learn Forex –AUDUSD Building Blocks
(Created using FXCM’s Marketscope 2.0 charts)
Now that both trend and momentum have been identified, traders can then look to implement the scalping strategy of their choosing. It is important to remember that even though this analysis has vetted a pair for trading, the trend may turn at any given point in time. Knowing this all scalpers should always set stop orders on each new open position.
---Written by Walker England, Trading Instructor
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