Momentum Scalping Strategies in Trending Forex Pairs

[RichardCox 10]

One reason that longer term traders often change their overall strategies comes from a general lack of involvement, as it can sometimes take weeks or months for a trading plan to reach completion. Many traders would like to devote more of their time to actual trading activities, and an added advantage is that extra effort will allow you to capitalize on smaller moves within the larger trends. This provides the opportunity to increase trading gains, as investors can identify oversold and overbought conditions and increase on the total number of successful trades.

 

For traders with enough time available to watch charts on an intraday basis, scalping strategies should be considered, and while this form of trade plan is not for everyone, it can be a suitable addition for traders looking to diversify their approach to the Forex market.

 

Here we will look at a simple scalping set-up that focuses on key psychological levels (the 50s and the 00s) as a means for gauging momentum on shorter term time frames. Trade parameters here will include an inverted risk to reward ratio, where we use a 50 point stop loss in each trade, along with a 25 point profit target. Inverting the risk to reward ratio will likely make longer term traders nervous, but this can prove to be an effective method for traders using scalping strategies. The trade is then split in half (half of the position is committed on the initial entry, half is triggered later if prices retrace unfavorably). This allows us to improve on our average price if momentum does not turn on the initial entry.

It should be remembered that this trade set up requires a very close focus on price activity, as traders will likely encounter problems if the trading station is not being monitored as long as the trade is open.

 

Next we will look at the best pairs to trade with this method. Specifically, we want to identify Forex pairs with a high tendency to trend, and with this we will focus on GBP/USD, GBP/JPY, EUR/USD, and USD/JPY. These pairs tend to be the most applicable for this type of trading structure. Trades will be triggered when prices break above a 50 or 00 level (for buy positions) and below these levels for short entries. We will look for prices to then retrace back to the psychological area before positions are executed. To help manage the frequency of the trading signals, we will use a 15 minute charts, but variations can be made here as well.

 

Example 1:

 

 

In the example above, we can see the long entry is initiated after prices break above the psychological 1.32 level, and rally another 15 points before retracing back to the break out level. Expecting this level to hold now as support, half-sized buy positions are triggered. If momentum had continued to the downside (dropping another 25 points), we would have added to the position (full lot size) while leaving the stop loss level in its original place.

 

In the short position, the reverse is seen, as prices are now breaking back below the 1.32 psychological level. The breakout point is then retested and prices continue to reverse, so that the position is underwater by 10 pips. If this had continued another 15 pips, we would have increased the position size (now a full lot size), keeping the stop loss at 1.3250. The trade then continues lower, and the position is closed as prices reach 1.31.75.

 

The underlying argument for this method is that price activity tends to be explosive at major psychological levels and scalping opportunities can be seen when risk to reward ratios are inverted on short term time frames. Adding to the validity of these trade examples is the relationship of price to its moving average, as the buy entry occurs when prices are above the 100 and 200 period EMAs, while the reverse is seen prior to the sell entry.

[fxtrader12 10]

Re:

 

[...] The underlying argument for this method is that price activity tends to be explosive at major psychological levels and scalping opportunities can be seen when risk to reward ratios are inverted on short term time frames. Adding to the validity of these trade examples is the relationship of price to its moving average, as the buy entry occurs when prices are above the 100 and 200 period EMAs, while the reverse is seen prior to the sell entry [...]

 

...

[joshdance 10]

As this seems to be a pretty specific strategy and well suited for testing, have you done tests to find out:

 

1) the median MAE on winning trades? -- This would either justify the 50 pip stop loss, or provide the basis for reducing the 50 pip risk if you find that the MAE is typically much smaller than 50.

 

2) the win %? -- Given that your inverted R:R requires a 67% to break even, and realistically 85%, to even begin to think about really making money, particularly since you are averaging down, this would be good to know.

 

My initial reaction with these numbers is that since you will only have half a position on when a "normal" win occurs, and that you will have always a full position on when a loss occurs, and given that the target is half that of the risk, this strategy is destined to fail over the long term.

 

Scalping with an inverted R:R can work, but the trader better be damned good and have a very high win rate. A bit more finesse may be required than simply a breakout of round numbers. I do not trade currencies any more (it's been a few years), but my guess would be that trading around round numbers are manipulated as often as they are in any instrument to trap traders. Given that the math is severely skewed against you, I'd need to see some serious data before I considered trading something so simplistic, starting at such a mathematical disadvantage.

 

I would never trade something like this so these are just my hypothetical thoughts; I do not know with what level of discretion you trade this, but I would personally have to use a lot of discretion, as the risk math does not add up for me.

 

Lastly, a friendly request: why not upload your image to TL's servers? Imageshack is the worst, and the ad popups are a killer.. very "ghetto" if you will.

[BlueHorseshoe 10]

This sounds very nice and simple, doesn't it.

 

But can you provide any evidence whatsoever that this works? Or should I just take your word for it?

 

Bluehorseshoe

[gaoxing 10]

looks alot like boris slossberg's flow trades