Learn Forex: The Building Blocks of Scalping Analysis

By DailyFx | January 23, 2013 AAA

Article Summary: The British Pound remains one of the weakest currencies of 2013. To find if scalping opportunities remain on the GBPUSD, traders can analyze short term market momentum.

The first rule of any good trading strategy is to determine market direction and momentum. Market direction is used to determine if we should be buying or selling a currency pair. Short term momentum can help establish if a pair is suitable for finding scalping opportunities. Today we will apply our analysis to the GBPUSD and see

Looking at the 4Hour chart depicted below, we can see the current decline of the GBPUSD. With the January 2013 high in place at 1.9781 the pair has declined as much as 540 pips year to date. The pair is considered in a downtrend as the pair continues to make lower lows and lower highs. Knowing this, trend traders will begin to instinctively look for opportunities to sell the GBPUSD.

Learn Forex - GBPUSD 4Hour Trend

Learn_Forex_The_Building_Blocks_of_Scalping_Analysis_body_Picture_2.png, Learn Forex: The Building Blocks of Scalping Analysis
(Created using FXCM's Marketscope 2.0 charts)

GBPUSD Building Blocks

Pictured below, we can see the short term GBPUSD trend divided into building blocks. This is a great way to determine if weakness for the pair is continuing in the short term. The analysis for Block 1 began last Wednesday, on January 16th. The pair immediately started moving lower at the start of Wednesdays trading, and moved as much as 214 pips lower at the conclusion of Block 1. Due to its strong downside momentum, price has been depicted as a red block signaling a continuation of our bear trend.

To see if momentum continues to the downside we can now begin analyzing Block 2. Block 2 begins where Block 1 concluded and also depicts and indeed confirms the GPBUSD's bearish momentum. The clear indication that our trend has continued is the creation of a new low for Block 2 at 1.5805. As such price again will be painted red confirming downward momentum.

Learn Forex - GBPUSD Building Blocks

Learn_Forex_The_Building_Blocks_of_Scalping_Analysis_body_Picture_1.png, Learn Forex: The Building Blocks of Scalping Analysis
(Created using FXCM's Marketscope 2.0 charts)

Remember, the purpose of blocking off your chart in the above fashion is designed to find continued market momentum for scalping. The strongest trends should consistently have both blocks painted in the same color as price moves in one continuous direction. Once a strong trend is found traders can then feel free to apply the scalping strategy of their choosing. Many traders may choose to use an oscillator or even a breakout system to pinpoint market entries. Regardless of the method ultimately chosen, this analysis would only be invalidated on the creation of a higher high, potentially marking a market reversal.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker's e-mail distribution list, send an email with the subject line "Distribution List" to WEngland@FXCM.com .

Been trading FX but wanting to learn more? Been trading other markets, but not sure where to start you forex analysis? Register and take this Trader Quiz where upon completion you will be provided with a curriculum of resources geared towards your learning experience.

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