Sometimes I take positions that take several days or weeks, during which time, quite frankly, I am bored. Now I don't recommend that people trade out of boredom, but I figured I'd try some small lot scalping to test a commonly used scalping system to entertain myself (and hopefully make a few additional pips) while longer-term plays develop and (hopefully) come to fruition.
The Basic Method
There are a number of variations of this scalping system, but the rules have been basically presented as follows ... .
The chart set up is basically a virtually naked chart with all but a 25 SMA on the 1H. I have read that you can use virtually any time frame for this method, but I am going to stick with the 1H for practical reasons, since you will be looking at the charts for "signal" candles at the top of each hour.
(Certain variations of this system have S/R lines at obvious support/resistance levels where price has shown a tendency to retrace, which I imagine can't hurt with the possible success of the method ... .)
If you have a platform that can tile views of a large number of pairs at the same time, it is recommended that you set your screen up that way so that you can scan multiple pairs for "signal" candles.
Start your screening of possible scalp set-up's for pairs that are trending (i.e., with the 25 SMA moving discernibly up or down) and with consistency of price in relation to the 25 SMA on the 1H and the 4H. If the pair is ranging, consolidating, or there is divergence between the 1H and 4H (i.e., price is above the 25 SMA on one, but below on the other), don't trade that pair.
Also, it appears that it is the preference of many traders to use this system at or near the beginning of sessions, when price movement is likely to be the most pronounced, avoiding, of course, those times when economic data is going to be announced that might affect the trajectory of the pair (a separate variation discussed below).
Once you identify these pairs and the direction of the trend, watch for counter-trend candles to appear. For example, if the pair is trending down as shown by the 1H and 4H charts, look for counter-trend bullish candles to appear. (Some methods use 1, 2, or 3 counter-trend candles; I think the more the merrier, but I also don't want to wait three hours for three counter-trend candles to form ... .)
On the close of the next candle that appears in the direction of the trend (that is your "signal" candle), fashion an entry order to trade the pair in the direction of the trend at or below close of that candle (in the case of a short), setting a stop loss 8 pips above that entry, with a TP of 10 pips.
There are variations on this set-up, with the SL being set above the "high" of the signal candle; the TP and SL being managed after entry into the trade and such ... . 8 pips seems like an arbitrary SL to me, but it also sets your risk at a predetermined level; 10 pips is also likely to cut short potential "runners" but then again, you're in and out, have locked in your profit after which you move on, go to sleep, do your business without thinking about those open positions you're running ... . Naturally, if you run into a situation where the position appears to want to run longer than 10 pips, I naturally see no harm in moving your SL to breakeven and then managing the SL as price moves favorably in the direction of the trend.
Unfortunately, I did not see a huge discussion about risk management with this method. One way to look at it is to say that for each microlot I devote to the trade, I am facing an $.08 loss if price moves against my position for each micro lot and a $.10 gain per each microlot if it does not. For example, if I devote 20 micro lots to the trade, then I am facing a potential loss of $16.00 and a potential gain of $20.00. Tweak the lot size in a way that conforms with your risk appetite (or lack thereof). For my part, I am thinking about using a 2 x equity max per scalp, which is not particularly aggressive ... .
Naturally, there are other subjective components to the method that are too numerous to outline here that involve reading what the candles are telling you as to whether buyers are in control, whether sellers are in control, or whether a tug-of-war is occurring. I would naturally recommend boning up on how to read candles, candle patterns, and the like, since that may give you an additional edge with the method, keeping you out of some trades that meet the objective criteria for entry or that give you additional confirmation that your entry is a good one.
The News Event Variation
Okay, so I hate trading the news. Way too wild. Way too fast. And there is the little thing about my not having an approach as to how to trade the news.
Well, here is a scalping approach ... . And it basically ignores any trend a given pair is experiencing at the 1H or 4H, although I imagine if the news results in movement that is in keeping with the prevailing trend that exists at the time, it is likely to be more profound in depth ... .
First, look at the economic calendar for high impact news events. For me, I have a day job that basically starts and ends with the New York session (which is why I call this thread the U.S. Day Job Scalper, since I'll have to resort to scalping primarily in the Asian session). So, I basically can't scalp either the London (sleeping) or the New York (working) sessions, so my main focus will be on scalping Asian session econ news events.
Second, hop on that computer shortly before the announcement, set your chart to the 5 minute time frame, and watch price action as the data is announced.
Third, on the close of the first five minute candle after the news announcement: (1) if the 5 minute candle is bearish, fashion an entry order to short the pair at or slightly below that five minute candle's closing price, with an SL at the open or above the price high for that candle, moving the SL to break even as soon as the opportunity presents itself and then to at least +10 pips when the opportunity presents itself; (2) if the first, post-announcement 5 minute candle is bullish, fashion an entry order to buy the pair at or slightly above that five minute candle's closing price, with an SL at the open or below the low for that candle, moving the SL to break even as soon as the opportunity presents itself and then to at least +10 pips when the opportunity presents itself. In both cases, proceed to manage the TP by watching for a "signal" candle or other evidence that shows that price is potentially reversing ... .
As far as lot size is concerned for a news event scalp, I am likely to go lower in size than with the other scalping method described above and the reason is quite simple: when I enter the trade, the size of that first five minute candle may vary dramatically and thus my potential risk may vary dramatically. With news events, price can move particularly quickly, so I won't have a lot of time to dick around with figuring out an ideal lot size based on the size of that first candle. For my part, I am likely only devote 1 x equity to such a trade, since it could potentially involve greater risk and therefore greater loss ... .
I imagine that if the order doesn't execute fairly quickly, you will want to delete the entry order fairly soon, as you naturally don't want to get caught in some kind of nasty retrace. Unfortunately, I don't have any particularly useful guidelines as to when to give up on the entry ... . The one thing you don't want to do is to attempt to chase an entry; if it doesn't execute, delete it and move on to another pair.
* * *
I'll try to post examples as I go along ... .
The Basic Method
There are a number of variations of this scalping system, but the rules have been basically presented as follows ... .
The chart set up is basically a virtually naked chart with all but a 25 SMA on the 1H. I have read that you can use virtually any time frame for this method, but I am going to stick with the 1H for practical reasons, since you will be looking at the charts for "signal" candles at the top of each hour.
(Certain variations of this system have S/R lines at obvious support/resistance levels where price has shown a tendency to retrace, which I imagine can't hurt with the possible success of the method ... .)
If you have a platform that can tile views of a large number of pairs at the same time, it is recommended that you set your screen up that way so that you can scan multiple pairs for "signal" candles.
Start your screening of possible scalp set-up's for pairs that are trending (i.e., with the 25 SMA moving discernibly up or down) and with consistency of price in relation to the 25 SMA on the 1H and the 4H. If the pair is ranging, consolidating, or there is divergence between the 1H and 4H (i.e., price is above the 25 SMA on one, but below on the other), don't trade that pair.
Also, it appears that it is the preference of many traders to use this system at or near the beginning of sessions, when price movement is likely to be the most pronounced, avoiding, of course, those times when economic data is going to be announced that might affect the trajectory of the pair (a separate variation discussed below).
Once you identify these pairs and the direction of the trend, watch for counter-trend candles to appear. For example, if the pair is trending down as shown by the 1H and 4H charts, look for counter-trend bullish candles to appear. (Some methods use 1, 2, or 3 counter-trend candles; I think the more the merrier, but I also don't want to wait three hours for three counter-trend candles to form ... .)
On the close of the next candle that appears in the direction of the trend (that is your "signal" candle), fashion an entry order to trade the pair in the direction of the trend at or below close of that candle (in the case of a short), setting a stop loss 8 pips above that entry, with a TP of 10 pips.
There are variations on this set-up, with the SL being set above the "high" of the signal candle; the TP and SL being managed after entry into the trade and such ... . 8 pips seems like an arbitrary SL to me, but it also sets your risk at a predetermined level; 10 pips is also likely to cut short potential "runners" but then again, you're in and out, have locked in your profit after which you move on, go to sleep, do your business without thinking about those open positions you're running ... . Naturally, if you run into a situation where the position appears to want to run longer than 10 pips, I naturally see no harm in moving your SL to breakeven and then managing the SL as price moves favorably in the direction of the trend.
Unfortunately, I did not see a huge discussion about risk management with this method. One way to look at it is to say that for each microlot I devote to the trade, I am facing an $.08 loss if price moves against my position for each micro lot and a $.10 gain per each microlot if it does not. For example, if I devote 20 micro lots to the trade, then I am facing a potential loss of $16.00 and a potential gain of $20.00. Tweak the lot size in a way that conforms with your risk appetite (or lack thereof). For my part, I am thinking about using a 2 x equity max per scalp, which is not particularly aggressive ... .
Naturally, there are other subjective components to the method that are too numerous to outline here that involve reading what the candles are telling you as to whether buyers are in control, whether sellers are in control, or whether a tug-of-war is occurring. I would naturally recommend boning up on how to read candles, candle patterns, and the like, since that may give you an additional edge with the method, keeping you out of some trades that meet the objective criteria for entry or that give you additional confirmation that your entry is a good one.
The News Event Variation
Okay, so I hate trading the news. Way too wild. Way too fast. And there is the little thing about my not having an approach as to how to trade the news.
Well, here is a scalping approach ... . And it basically ignores any trend a given pair is experiencing at the 1H or 4H, although I imagine if the news results in movement that is in keeping with the prevailing trend that exists at the time, it is likely to be more profound in depth ... .
First, look at the economic calendar for high impact news events. For me, I have a day job that basically starts and ends with the New York session (which is why I call this thread the U.S. Day Job Scalper, since I'll have to resort to scalping primarily in the Asian session). So, I basically can't scalp either the London (sleeping) or the New York (working) sessions, so my main focus will be on scalping Asian session econ news events.
Second, hop on that computer shortly before the announcement, set your chart to the 5 minute time frame, and watch price action as the data is announced.
Third, on the close of the first five minute candle after the news announcement: (1) if the 5 minute candle is bearish, fashion an entry order to short the pair at or slightly below that five minute candle's closing price, with an SL at the open or above the price high for that candle, moving the SL to break even as soon as the opportunity presents itself and then to at least +10 pips when the opportunity presents itself; (2) if the first, post-announcement 5 minute candle is bullish, fashion an entry order to buy the pair at or slightly above that five minute candle's closing price, with an SL at the open or below the low for that candle, moving the SL to break even as soon as the opportunity presents itself and then to at least +10 pips when the opportunity presents itself. In both cases, proceed to manage the TP by watching for a "signal" candle or other evidence that shows that price is potentially reversing ... .
As far as lot size is concerned for a news event scalp, I am likely to go lower in size than with the other scalping method described above and the reason is quite simple: when I enter the trade, the size of that first five minute candle may vary dramatically and thus my potential risk may vary dramatically. With news events, price can move particularly quickly, so I won't have a lot of time to dick around with figuring out an ideal lot size based on the size of that first candle. For my part, I am likely only devote 1 x equity to such a trade, since it could potentially involve greater risk and therefore greater loss ... .
I imagine that if the order doesn't execute fairly quickly, you will want to delete the entry order fairly soon, as you naturally don't want to get caught in some kind of nasty retrace. Unfortunately, I don't have any particularly useful guidelines as to when to give up on the entry ... . The one thing you don't want to do is to attempt to chase an entry; if it doesn't execute, delete it and move on to another pair.
* * *
I'll try to post examples as I go along ... .
Fireworks are fun ... as long as you don't blow your fingers off.
