As usual, my disclaimer. I am not a trader, I haven’t touched a live account and I’m not even that good with paper trading. If I’m here is because I want to share a “side-strategy”, as I like to call it, I’ve been using in my spare time while testing my main strategy for about a week. To my surprise, this turned out to be more profitable than my actual trading system and I’m thinking about switching to this one permanently.
I also take no credit for this, because of how simple this is. It is pretty much price action 101 applied to scalping.
Basics
This is a scalping strategy based purely on price action. The idea is to enter the market on low timeframes right after a continuation reversal. A continuation reversal happens when a trend makes a pullback, is unable to break through a support or resistance, and resumes its original move.
Tools
Supports and resistance zones.
Candlesticks.
20 periods Exponential Moving Average.
Timeframe
5 minutes chart. If you are willing to take a little bit of drawdown, 15 minutes charts are also good.
Pairs
EUR/USD
GBP/USD
USD/CAD
USD/JPY
These are the ones I check. Any major will do.
Buy signal
Price is trending upwards, making higher highs, higher lows and sitting above the 20ema. Price breaks through a resistance zone, but then pulls back to retest it. If price fails to close below the zone, you enter the trade. If a pin-bar forms, the signal is stronger. Example.
#Sell signal
Price is trending downwards, making lower highs, lower lows and sitting below the 20ema. Price breaks through a support zone, but then pulls back to retest it. If price fails to close above the zone, you enter the trade. If a pin-bar forms, the signal is stronger. Example.
Stop and Target
Stops and targets are going to be based on market structure. You need to have a market that allows at least 1:2 risk-to-reward ratio - if not, stay out. I usually try to go for a 5 pips stop and a 10 pips target.
Stops have to be placed behind as many barries as you can. There are three barries you can be on the lookout for, from strongest to weakest: Support or Resistance; Candle high (for selling) and Candle low (for buying); the Moving average line. Ideally, you want to have a zone, a candle high/low and the moving average within the span of your stop. Example.
Targets have to placed before as little barries as possible. They have to be easy to hit, so I like placing them a few pips before the next support (for selling) or resistance (for buying). Example.
Trailing Stop
An alternative approach to stop losses is to use a trailing stop to lock in profits. I am experimenting with both methods, and each has its own pros and cons. I suggest placing a trailing stop that allows your position to at least reach your target, in order to assure you get your 1:2 ratio regardless of what happens.
Risk Management
You are probably going to be tempted to take a lot of trades considering the speed of the timeframe being used. Risk Management is a personal subject and everyone can do what works for them. In my case, I find myself comfortable risking 1% of my account on a single trade as long as I can make 2% on a win.
##Trade Management
Considering the strict rules about stops and targets, you don’t actually need to stay in front of your charts in order to trade. This being a scalping method, however, I do expect you will want to do so regardless. If so, you may want to consider manually trailing your stop to breakeven once you are at least 3/4 of the way towards your target.
I advice against doing this before that point, even if the risk of getting stopped out is higher, because doing so will result in you losing a lot of potential profits in the long run. It is much better to take the risk and let your edge grind a net profit after a number of trades.
Edge
I haven’t taken enough trades with this strategy in order to give you a winrate or an edge statistics. However, if you follow the 1:2 ratio rule to a tee, you’re going to need a 34% winrate in order to breakeven. On 100 trades, each with 5 pips stops and 10 pips targets, you can be wrong 66 times and still end up with 5 pips gain.
Can this strategy achieve 34% winrate? I don’t know, but I believe a good trader can aim for such a number with any trading system. I’ll continue to backtest this and keep you updated on the results.