The method can be used in any markets but it is best (and has least risk) when the market is range bound. It is a low yielding strategy. Although the profits are not huge, they are consistent when the system is correctly applied.
I have used this method over several months on both one-minute (M1) and five-minute (M5) time frames. Though, it can easily be adapted to work at different timescales if you choose.
Unlike most other scalpers, this method enters the market on triggers from an indicator as well as price action signals at each bar. A key element of this is that it spreads risk across a number of trades to create a scalp sequence. This averaging out is essential in restricting drawdowns and creating incremental profits.
With this approach, trades are allowed to drawdown. By contrast, many scalping systems abandon a trade as soon as it enters a loss. But because the exposure is spread among a group of trades the impact of drawdown is limited. And because of the need to allow trades to enter a loss, it is not advisable to use this method with aggressive leverage.
I don’t use more than one standard lot per $10k of account balance. That is, there is never more than one lot of exposure at any time. The exposure can be spread across up to 100 trades. However, with the entry signal I use there are rarely more than 10 trades open at once. It averages around 5 trades per day and the average total profit is 25.9 pips per day. The table below summarizes the setup:
|Max exposure (lots)||1|
|Maximum open trades||100|
You can adjust the setup for more risk or less risk as required.
I use a combined entry signal that detects likely turning points. To do this I use a combination of the Bollinger band lines and by examining the price action at each bar.
Two conditions have to be met to trigger the entry.
The first condition is that the price has to be at an extremity marked as one of the outer Bollinger band lines. An overbought/oversold state occurs when the bar touches one of the outer bands. The band parameters are adjusted for the chart, so that around 95% of the price high/lows are enclosed inside the bands.
When the price is at a lower band, this meets the first condition for a entering long (buy). When the price is at the upper band, this meets the first condition for entering short (sell).
Because the Bollinger is a lagging (delayed) indicator, a real time input is also necessary to improve the odds of each scalp run resulting in a profit. This input comes from examining the recent candle activity.
For the second condition, the current bar has to start retracing back towards (or inside) the band after reaching its high (low) point. This indicates that a brief pullback is taking place after reaching a short-term overbought/oversold state.
For example for a buy signal, the price has to start retracing back up towards the center line of the band. For a sell signal, the price starts to retrace downwards.
If these conditions are met the trade is entered provided the total open volume is not exceeded.
Since the system works best in tight ranges it’s also advisable to use a range finding tool to prevent (or limit) trades in trending markets.
Figure 1 shows a typical scalp sequence.
Example Scalp Sequence
The strategy will open trades between set time intervals until it reaches the maximum volume. As mentioned above, I use no more than one lot per $10k so the exposure is fairly low.
This is not a frenetic, high turnover scalping system. Using these entry signals there are rarely more than around 10 potential trades per day.
The stop is set at no greater than half of the width of the Bollinger band. So for example, if the bandwidth is 20 pips, the stop is placed half way at 10 pips.
The take profit amount is also set depending on the volatility. I set this around 5% of the bandwidth (typically 1-6 pips) but this should be varied depending on recent price history.
The table below illustrates this with a toy example:
At tick #1, I place a market buy to open order after the price descends to the lower Bollinger and after the first bar starts to retrace back towards the center line. At tick #2 the price moves in the direction of the scalp. At tick #3, the price pulls back but reverses again. My target profit of 6 pips is achieved at tick #4.
This system is good for capturing small profits caused by market volatility. Statistically we know that most trades will enter profit at some point owing to natural market movements. This scalper takes advantage of this.
With this approach, the profits can run by setting a higher profit target. The trader can vary the profit level according the strength of the current trend reversal. This is ideal for capturing the strong retracements that happen at market extremes.
Figure 2 below demonstrates this in a real trading scenario. This shows a small sequence of the test run of the strategy on the EUR/USD one minute chart (M1). The chart shows the complete sequence of four buy orders.
The spread is set at 2.1 pips for each test.
|Action||Order #||Vol||Price||SL||TP||Profit ($)|
The sequence starts at order #206. At this instant the price action satisfies both conditions of being within the threshold of the lower Bollinger band (to trigger a buy order) and the bar starts to retrace back towards the center line.
The second bar triggers another buy order as the price meets the entry conditions again. The price then pulls lower and the first two positions briefly enter drawdown. Following this, there are two more bars triggering entries, which results in four executed buy orders (see Figure 2).
The price continues to rise. After two more bars, the exit points for #208 and #209 are reached. This captures a profit of 0.432 and 0.17.
At this point, the price moves high enough to trigger the exit for orders #206 and #207 as well. This happens in the next bars leaving profits of 0.64 and 0.72.
The final P&L for the sequence is $1.96.
The chart above shows a typical run of sell orders while below shows a sequence of buy orders.
Example 1: GBP/USD 5-Minute Chart
The example below shows a run on pair GBP/USD (M5). The spread in Metatrader was set at 21 points (2.1 pips) again. The run completes 285 trades with a total profit of $168.85 (1689 pips).
Example 2: EUR/USD 1-Minute Chart
The next test shows a run on EUR/USD (M1). The spread again was set at 21 points. The run completes 394 trades with a total profit of $204.28 (2043 pips).
Example 3: EUR/GBP 5-Minute Chart
Finally, this run shows a EUR/GBP (M5) using the same parameters. The run completes 270 trades with a total profit of $156.84 (1568 pips).
This article outlines a simple scalping strategy that can be used to trade ranges. This technique does not generate large numbers of trades as do some scalping methods so it is suited to manual trading as well as automation. This is a low yield strategy that does not work well with high leverage. As with all scalpers, success lies in precise timing of the entry and exit points. Refinement of these factors can make this a steady profit generator. Choice of suitable liquid currency pairs with low spreads and low slippage is also key to success.