For those traders who like their forex action hot and heavy, the one-minute and five-minute charts contain the best computer game ever invented. Short trades on these charts, known as scalping, take these microcosms of market sentiment and earn profits from the microtrends these charts’ longer-term brethren filter out.

Scalping gains are not large, with 25 pips being a substantial trade and fifteen minutes being a long time period. However, for those addicted to the action, the gains so earned pile up throughout the forex trading day and, with the right technique, can equal a substantial amount by the time the computer is powered down for the night.

One technique for scalping involves using moving average crossovers, discussed twice previously in this journal, as indicators for market entry; however, rather than using two longer-term moving averages, this technique involves three short-term ones, with market entry indicated by the two shortest-term moving average lines being both on the same side of the longest-term one.

Examine the chart below. This is the weekly chart of the AUD/JPY, the definition of the carry trade and the best indicator of risk aversion in the forex trading market:

In this illustration, the green line represents a five-period moving average, the blue line is a ten, and the yellow is a twenty.

When market sentiment is positive, the major investors and traders are willing to take a chance on global financial stability and risk a carry trade, selling the Japanese yen and taking a loan at the Bank of Japan’s 0.5% interest rate, and then purchasing the Australian dollar and investing it at the Reserve Bank of Australia’s 7.25%, earning the difference on the spread between the rates and taking the risk that exchange rate fluctuations will wipe out their gains. When bad news hits and traders become averse to risk, they close their investments in Australia and use the funds to repay their loans in Japan. The resultant rises and falls in the AUD/JPY currency pair read like a map of risk sentiment, and the precipitant drop in July 2007 on the chart above clearly marks the beginning of the current global financial markets crisis.

Now examine the one-minute version of this chart:

The extensive trending of this currency pair, even at the shortest of terms, makes it especially suitable for this technique (recall that moving averages work best in trending rather than range-bound markets).

The rules for this technique are:

•    enter the market long when both the blue and green lines are above the yellow line;

•    enter the market short when both the blue and green lines are below the yellow line;

•    and exit the market when a clear exit signal is given. Because these trades are low-volume, one should not wait for profits to erode far, but exit at the second closed wrong-coloured candlestick or heiken ashi, at the second doji, or when the blue moving average line crosses the green one. Consider re-entering if the touch is actually a bounce.

This technique is not plug-and-play. It requires a trader to sit in front of the screen and pay attention to the game, but the profits can make winning worth the effort.