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Find Momentum for Forex Scalping

Find Momentum for Forex Scalping

Walker England, Forex Trading Instructor

Article Summary: The AUDCHF has advanced as much as 365 pips from February lows. As the trend continues, traders will use momentum analysis to identify scalping opportunities.

The strength of the Aussie Dollar (AUD) has come into question relative to multiple currency pairs throughout the 2013 year. Due to the Aussies volatile and seemingly unpredictable nature, it is always best for a scalper to identify the trend along with market momentum to determine if they should be buying or selling the AUD in a particular Forex pair. So how do we conclude if the pair is suitable for scalping? To find out, let’s take a look at an example using the AUDCHF.

One of this week’s strongest trends is the continuing uptrend on the AUDCHF. Taking a look at the 4Hour graph below, we can see the pair advanced as much as 365 pips from its February low while creating a series of higher highs. However, even though the pair is moving in an upward direction, short term momentum should be assessed prior to initiating a day trading plan. One way to evaluate momentum for scalping is to move in and block off a 30min chart.

Learn Forex – AUDCHF 4Hour Trend

Find_Momentum_for_Forex_Scalping_body_Picture_2.png, Find Momentum for Forex Scalping

(Created using FXCM’s Marketscope 2.0 charts)

AUDCHF Building Blocks

To find out if this week’s trading momentum is heading in the same direction of our primary 4Hour trend we will now turn to a 30 min chart and apply our building blocks analysis to the graph. Essentially by dividing last week’s price action in half, we will determine if the market has been heading in a singular direction. If momentum appears to be continuing with the trend on the AUDCHF, traders will have a preference to buy with the market. If momentum is seen declining or reversing, it may be time to look for other market opportunities.

Below we have divided our previous trading week into segments labeled Block 1 and 2. Block 1 begins on Wednesday the 27th and runs through Sunday the 3rd. Block 1 shows the AUDCHF advancing and creating a new high at .9654. Block 2 confirms the strength of the pair as price breaks out and creates a series of higher highs. As price has continued its ascent over the past trading week both blocks have been colored blue. Forex traders looking to scalp the strongest trends backed by short term momentum, should confirm both blocks of a currency pair are heading in the same direction prior to entering into new positions.

Learn Forex – AUDUSD Building Blocks

Find_Momentum_for_Forex_Scalping_body_Picture_1.png, Find Momentum for Forex Scalping

(Created using FXCM’s Marketscope 2.0 charts)

To take our analysis one step further, traders should notice price has already exceeded the Block 2 high. This is a strong indication that market momentum is continuing, while this new higher high will ensure our next trading block will be painted blue as well. Scalpers looking to take advantage of this continued price advance will look to use this momentum and buy the AUDCHF.

Despite being in a strong uptrend, traders should always keep an eye on a currencies previous low. If price begins to decline and breaks lower, this would at least suspend any bullish bias on the AUDCHF.

---Written by Walker England, Trading Instructor

To contact Walker, emailinstructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.

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