Jadd's Price Action Scalping System Development Journal

[B]Preface:[/B] I would like to start out by saying that this is not a signal service, nor will it ever be one. This system is in its early infancy and should certainly not be followed with the expectation of making money. I am literally building it from the ground up. That is, I will start trading with only a few basic principles, then expand and refine my system further and further by learning from the outcome each trade.

[B]About Me:[/B] I’m currently a Junior in college studying engineering. I quickly realized that the 9-5 rat race is not for me. I have 3 years of experience trading stocks, and I discovered Forex a year ago. Since then I have been learning and practicing in the Forex market. I love Forex and the opportunities it offers. I am determined to make it in the market and I hope to be a full-time trader within the next couple years.

I have already achieved consistency as a trader on the Daily charts thanks to the Forex School Online method, which I highly recommend. However, personality-wise I think scalping the smaller time frames suits me better, and I have always been curious about it. I have very little experience with scalping and it’s probably going to show. I made this thread to chronicle my progress.

[B]System Background:[/B] Although I have achieved a consistent 5% average monthly return for the past few months on the Daily charts, I find that my profits are limited by the number of opportunities presented to me and I cannot increase my returns without risking more of my account than I am comfortable with. I also do not like being locked in a trade for several days. I think scalping is a much better fit both for my personality and to allow me to meet my trading goals faster.

I am a firm believer that price action is all a trader needs to understand the market. Indicators are usually just smoke and mirrors that give you old news and misleading signals. You won’t find me trading with any indicators on my charts, or trying to develop a method that can be automated. There’s a human element that can’t be removed from price action, which is why I believe it endures when so many other systems fail.

The point of this system is not to try and take advantage of every move the market makes. Some days no trades will be placed, and that is okay. I don’t want to be like some scalpers that take hundreds of trades per day and barely break above even. I want to win most of my trades, to show that I’ve truly developed an understanding of the market and what makes it move.

The thoughts I had which would later form the foundation of this system were about the power of compound interest. If I can win just a single trade from the market each (trading) day where my R:R was 1:1 and I risked 1% of my account, that would become over 1200% return per year after compounding. A linear increase in the daily return will lead to an exponential increase in the weekly, monthly, and yearly returns. That is why I am not concerned with catching every move of the market. I only need to be able to consistently net a handful of pips on average every day to achieve my goals. The key is [B][I]consistency[/I][/B], which is why I will only be hunting for the handful of high probability scalping trades that the market has to offer.

[B]System Goals:[/B]
[ul]
[li] To develop a price action scalping method which will consistently return 1% or greater of the account balance on average per day
[/li][li] To achieve the above while spending 3 hours maximum of chart time per day
[/li][li] To foster a deeper understanding of the market and its underlying mechanisms
[/li][li] To show that all that is needed to be successful in the Forex market is a passion for the market, a desire to learn, and some chart time
[/li][/ul]

[B]System Rules:[/B] The rules for this system will be very few in the beginning. The reason for this is that I want to start with a blank slate - nothing but my price action knowledge - to ensure that the outcome of this system is 100% the fruit of my own efforts. The rules that I will begin my journey with are as follows.

[ul]
[li] I trade only the AUD/USD and EUR/USD
[/li][li] I never trade when volatility is low, or when the spread is larger than 2 pips
[/li][li] I trade only the 1M chart
[/li][li] I will use commanding candlestick signals (mainly engulfing bars, pin bars, and 2 bar reversals) for entry, and will not enter until the candle closes
[/li][li] I will trade .5 lots (50,000 units) which will give me a value of $5 per pip
[/li][li] I will exit when price has moved in my favor and shown signs of stalling, or when price has convincingly headed the opposite way of my trade
[/li][/ul]

As you can see, risk management is almost completely non-existent. Like everything else in this system, it will be developed over time. For this reason, I will be trading a [B]demo account[/B] with Oanda, with a starting balance of $1000.00 USD. I will remain on demo until such time as I deem my performance fit and consistent enough for a live account.

Although it’s not a rule, I usually trade during the Australian/Asian market overlap, from 9:00 PM - 12:00 AM EST due to my schedule. It’s not uncommon that I will only trade an hour or two per day, however I’ll often go back the next day and see how the rest of the session played out. EUR/USD and AUD/USD seem to both have decent movement during this session and the spreads on Oanda usually range between 1-2 pips, hence why I have chosen those pairs. I usually just pick one chart at a time to look at.

I’ll try to update this journal at least once per day, although I’ll likely be posting trades the following day so I can get to bed. I will edit this post with a link to a Myfxbook sub-account once I get it set up.

https://www.myfxbook.com/portfolio/jadds-pa-scalping-demo/884462

[I]“If you don’t build your own dream, someone else will hire you to help build theirs.”[/I]

Before I start looking for trades tonight, I’m going to post my results from last night, which was my first night trading this system.

Trades taken: 1
Trades won: 0
Daily Gain/Loss: -0.4%


Here is a bearish engulfing bar, the only trade I took last night. I shorted it, but the reason I lost the trade was because I was messing around with a stop in MT4. I released it too close and was instantly closed out of the trade due to the spread. If that didn’t happen, I probably would have exited at the pin bar for about +3 pips, or a 1.5% gain. Oh well. It was my mistake and I will fully accept responsibility.

Also highlighted with arrows is a nice 2 bar reversal that I missed at the time because I was still kicking myself for what I did with the previous trade. Live and learn.

Here’s my results from last night. The 1M chart is a totally different animal than what I am used to.

Trades taken: 1
Trades won: 0
Daily Gain/Loss: -5.95%


Spotted a bearish engulfing bar engulfing the previous 10 candles on AUD/USD 1M chart. Looked like a solid setup, however it only moved in the opposite direction and at one point I was down 10% of the account balance. This begs the question of when I should accept that a trade has moved against me and is never coming back. I’d like to get a few more trades under my belt before I start establishing risk management however, as it’s only demo.

I love to lose trades on demo. It’s a great thing, because it gives an opportunity to refine the system and avoid situations like that in the future, keeping you out of losing trades and possibly putting you in a situation to take advantage of the market (i.e. by trading the opposite way when the same conditions present themselves). I did some work to find out exactly why my trade didn’t work out the way I planned, and here is what I found.


A support level, clear as day on the 1H chart. I was shorting directly into this level that a bunch of 1H candles had failed to break over the past week. One of the number one takeaways about support and resistance levels (which I believe is highly emphasized in BP School) is that we always look to trade away from them, never into them. Since there was never a convincing close below this support level, I should have never been looking for short trades. I should have been looking for long trades, away from the support.

New Rule:
[ul]
[li] Plot support and resistance levels on the 1H chart before I begin to trade
[/li][li] Trade accordingly to respect these support and resistance levels
[/li][/ul]

Done trading for the night.

Trades taken: 2
Trades won: 1
Daily Gain/Loss: -1.91%

Started off with a winning trade, barely. Made 1 pip.


Shorted the bearish engulfing bar highlighted by the red arrow. Price stalled and meandered for a while before finally putting me in a position to take profit. Volatility was much lower tonight than usual…

The green arrow is indicating a much better trade which occurred before I sat down to trade for the night. It’s another bearish engulfing bar, this time rejecting a resistance level that I market on the 1H chart:


The thing that stuck out to me was how fast that move would have put the trader in a position to take profit of 2-3 pips (after the spread). It didn’t meander like the entry I took did.

Here’s the second bearish engulfing bar I took, which is the trade that put me in the hole for tonight:


Turns out I was shorting right into a support level on the 1M chart:


No surprise there - it held as support and I was left with a losing trade. I exited the trade once I realized why the bullish momentum had picked up. Lessons have been learned for tonight…

Hi Jadd, I like your thread. a couple of observations, one it seems like your playing the lower tf differently than you would higher tfs, h4,d1 etc. Same principles applies. Also doesn’t seem ebs are working here, maybe stick to pbs and ibs just to see if it makes much difference. Just my 2 pips. Keep up the great work.

'best

Darth

Hey Darth, thanks for your comment. The reason I’m playing it differently than I would a higher TF is because I didn’t want to enter with any bias from a previous system. I want to be 100% sure that the same price action rules apply to the 1M chart, because it seems in some cases that the rules are a little bent and need to be adapted. I also think it’s helpful for newbies to see the development of a system from almost nothing to something by refining your system and adding rules after learning from your trades. Hence me ignoring the intra-chart support and resistance levels. :slight_smile:

I think you’re right about mixing up my entry signals, they’ve all been engulfing bars so far! I’ll play some pin bars next week now that I’ve got a feel for how this 1M chart interacts with the S/R levels. Now that I’ve got that sorted I’ll be looking to lay down some basic risk management by the end of next week.

Well, I’ve set up a myfxbook account and I will edit the original post to add the link.

Week 1 Summary:

Trades Taken: 4
Trades Won: 1
Weekly Gain/Loss: -7.75%

Marking some levels on my charts and looking to place some trades in a few hours, should volatility permit.

1H S/R levels will be market in pink. 1M S/R levels will be marked in orange.

Didn’t end up taking any trades last night, the volatility was a little lacking and I didn’t see any good set-ups. I have other commitments tonight and will be unable to trade, so I will return to the market on Tuesday.

Same im in collage studying electrical engerneering? Soo weired soo many people doing this in the engerneering field

Also engineering in university! Also using OANDA. Think the engineer mindset is just attracted to trading it seems. Thought about going live yet? It’s a lot different to trading demo in the aspects you would think twice about making a trade or sometimes not at all. All the best

Hi guys, I took a break from trading this system for a while as I recently had what [I]appears[/I] to be a breakthrough with another method. So I’ve been too busy forward (and back) testing that one to devote enough time to scalping.

Personally I find the theory behind engineering interesting but all the internships I have had are boring as hell. Plus I could never be happy working for somebody else… I’ve been successfully trading live with a different method for a few months; the gains are slow but steady at about 5% per month.

The new method I have been playing around with recently is looking like it has promise to yield 5% per week or higher, so I’m really hoping I can take it somewhere. The entry criteria definitely presents an edge over the market and I’m currently forward and back testing to determine the optimal trade management. I’d like to get at least 30 demo trades with the method under my belt before I put my money where my mouth is. If it turns into anything worthwhile I’ll start a new thread to share a few secrets.

I am a Chartered Building Surveyor or should I say was. I was sick and tired of working 12 hour days for less and less money for a big Corporate Company. 3 years ago I packed it all in and came to Thailand. I have been studying and demo trading forex now for just over a year. I have the same mind set at looking at the forex market as I do analysing a building or defect.

Caught a nice breakout on the USD/JPY M5 chart tonight with my new system that I’ve been working on for a while. It was designed as a trend-catching system for the Daily chart but it actually works better on the M5 chart to predict either a breakout or a trend that I can ride for a short while.

1:2 Risk:Reward, +2.45%.


Plenty of squiggly lines and colors!

I also missed a valid signal to grab 15-20 pips on AUD/USD shortly before this trade, 1:3 R:R. I really need to invest in a couple extra computer monitors so I can watch multiple charts at once conveniently.

If all you had was a line…

Could you trade?


I prefer candles but is possible!

Opportunity?

Learn to use your tools in different ways. An SMA can be used as a value filter in a trending market.


Every day since my college semester ended, I’ve put in countless hours of studying charts and reading various books and forums. Every day my understanding has grown, little by little.

I am very much a minimalist in my life. I don’t want for much. I prefer to live through experiences rather than by acquiring possessions. Forex trading is a means to an end; to give myself the freedom to enjoy my life as I see fit instead of being a 9-5 drone at some MegaCorp.

It didn’t occur to me until recently to apply that philosophy to my trading. The question I asked myself,

[I]Isn’t the penultimate goal just “buy low, sell high” and “sell high, buy low”? What do I [B]really need[/B] in order to do that?[/I]

Well, that’s what I’d like to find out.

Nice thread Jadd

Have you ever considered using a 5 minute chart instead of the 1 minute?

It filters out some of the “noise” and I’d imagine that you’d get less false entries.

Furthermore, is it worth considering some other indicators to serve as confirmations to enter a trade? I know a lot of people say indicators “lag” and are not up to date, but on these smaller time frames, they are as close as they can be to being update “live”.

Good luck

Hi ivanyo,

Thanks for your post. Yes I’ve played with the M5 as well as the M1. But I am growing to prefer the M1.

To be honest, I don’t subscribe to the “market noise” theory any longer. Anyone who accepts wave theory and fractals as real market phenomena should not, either. Higher time frames are just data compression. The fact is that the M1 chart is the market in one of it’s purest forms (with the exception of tick charts and second denominated charts). Another benefit is the much lower exposure times.

See this thread by our very own FOREXunlimited: http://forums.babypips.com/candlesticks-chart-patterns-price-action/66357-myth-lower-timeframes-noise-great-live-example.html

As for adding an indicator for extra confirmation, perhaps down the road if I find one I like. The SMA still lags though (as it’s based on number of candles, not a time period). It’s not the crux of the method anyway - just a simple visual filter to determine trend direction and depth of retracement.

I’m glad you pointed me towards that post - it’s always good to see other traders sharing their thoughts and clearing up misconceptions or the “norm”.

When I get some time, I might decide to look further into the M1 charts as well.