A Simple Forex Scalping Strategy

09/27/2013 9:00 am EST

Focus: FOREX

The staff at Investazor.com details step-by-step an easy way to trade medium-volatility, low-spread currency pairs profitably.

The strategy presented in this post it is one of the simplest, and it can be used on currency pairs with medium volatility and low spreads like: EUR/USD, GBP/USD, and USD/JPY. The recommended time frame is five minutes. The system is a combination of candlestick patterns, which offers reversal signals, and the relative strength index (RSI), which announces market exhaustion in overbought and oversold signals.

The candlestick pattern preferred for this scalping strategy is the shooting star. It announces a reversal of the power from the bulls to the bears. This pattern should be searched only on the highs of a trend, it is a bearish signal and the color of the candle doesn't matter.

chart
Click to Enlarge

The RSI used is recommended to have 14 periods. If the number of periods is too small, it will give many but of low-quality signals, while if the number of periods is higher, the quality of the signal could improve, but the number will drastically drop.

Let's get to the practical part of the trading. There are two scenarios that you could look for:

Look for a shooting star, drawn after a strong move, and for the RSI to get into the overbought area. If you get both signal from the RSI and confirmation from the candlestick pattern, open a sell order on the opening of the next candle after the formation, set a stop loss order above the shooting star's upper shadow and a take profit at 50% of the previous rally.

You can see an example in the image below.

chart
Click to Enlarge

Again look for the same pattern, drawn after an ascending move, and for the RSI to draw a divergence. These signals do not appear that often on the five-minute chart, but the time frame can be reduced to one minute. The signals given by the divergences are usually stronger than the ones given by the overbought. Place the sell order at the opening of the next candle, set a stop loss above the shooting star's upper shadow, and the take profit at 50% of the previous move.

You can find an example below.

chart
Click to Enlarge

Let's make a short recap of this simple forex scalping strategy:

This system is pretty basic-it is a bearish system but the signals can be adjusted to work as a bullish one, too. It works best on currency pairs like EUR/USD, GBP/USD, and USD/JPY and the time frame recommended is a five-minute one.

A trader should look for the formation after a strong up move confirmed by an overbought RSI or a divergence on the oscillator. Set a sell order on the opening of the next candlestick; place a stop loss above the shooting star's upper shadow, and a take profit at the 50% of the previous move.

By the Staff at Investazor.com

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