Once I heard the sentence: “Scalping is not a system, scalping is an art.” Of course, I am far from combining poetry with trading because it is a somewhat absurd comparison. The main task of any business, including speculation, is to generate a positive financial result. However, it is true that short-term speculation requires from trader observing accurately chart and “feel” behaviour of market participants. Short-term strategies require traders to have a detailed plan of action, otherwise, they will face “account death” meaning losing all funds held on trading account.
Tools used in the Scalping EURUSD RSI BB strategy
In the following strategy, we use indicators known as the relative strength index (RSI) and Bollinger Bands. They are very well known and popular in the environment of traders. RSI is used to determine the levels of overvaluation/undervaluation of the instrument. In the fundamental analysis of companies undervalued means that the share price does not exceed its fair value. This means then that from an economic point of view, the investor should consider buying shares as the market value that the company below its fair price. The opposite situation occurs when the paper is overvalued. Then, the market values the instrument above its fair price and in that case, it would be appropriate to consider selling shares and buying them back at an undervalued price. “Buy low, sell high,” as it is in the old investors’ saying.
In the case of technical analysis overvaluation/undervaluation can be determined only on basis of price behaviour. That is the main assumption of the RSI indicator. When the indicator is in the area of 0-30, then trader should only consider a long position. On the other hand, in the case where the value of RSI area will be 70-100, only sell transaction is worth consideration. As for the parameters of the indicator, the standard settings is the 14-periods. Bollinger Bands is a combination of moving average and standard deviation. The standard deviation inform the trader in which range is price moving from the moving average. Of course there always can happen deviation from the norm above average, and therefore in settings of the indicator, we can determine a factor for the standard deviation. The greater the value, the further the upper and lower band will be from the average. In Bollinger Bands strategy we use parameters of 20 periods and 2 standard deviations. The strategy due to opening positions in the minute interval (M1), requires that trader will use currency pair with the smallest possible spread. Therefore recommended currency pair for this strategy is EURUSD, because of high liquidity on Forex market allows to keep a low spread most of the time.
Entering position
The main issue that will define our further action is to observe the RSI indicator. When it is in the area of undervaluation, then we are looking for opportunities to take a long position. Long position occurs when the price rebounds from the lower band of Bollinger Bands, while the RSI is in the undervalued area. Short position is when it comes to break the upper band of BB and RSI values above 70.
Scalping belongs to specific forms of making money on the market. In most policies trader restricts his approach to implement a set of indicators on the platform and then determines whether the signal was already generated or not. In case of short-term speculation, it is also essential, at which point of the session we decide to enter market activity. Mismatched time trading could cost us some errors, which will contribute to the posting of losses on the account. And each trader with experience knows that the longer the series of losses, the greater devastation is left in his mind. European markets take off at 9:00 am, and the stock-index futures are quoted earlier. I often say that the foreign exchange market is the secondary market, which means that it expresses the sentiments of the trends in the stock market, commodity and stock exchange. Due to the secondary nature of this segment of the world economy stems from the fact that money is hard currency with which we come to pay for certain goods. Therefore, when the stock market moves Europe, we can see positioning of specific market participants, interested in a particular instrument (currency or commodity). Short-term trader should use the time between 8-11 to be able to make cash on positioning of the institutional investors. After 11 o’clock you can relax for the next three hours, up to 14 hours when the market “wakes up” by speculators from the United States. Between 14-17, the trader should again watch the EURUSD currency pair to be able to search for the signals described above. However, he should abandon the trade for 30 minutes before and after the publication of important macroeconomic data, which introduce considerable confusion on the chart and produce a large number of false signals.
Closing position
Each transaction brings profit or loss on our trading account. Opening position is only a certain part of our trading business. To be able to determine that the transaction has brought a certain profit or loss you need in a particular time to decide on its closing. This means in fact, that we need to plan carefully when it is high time to “take money off the table,” regardless of whether with the profit or a loss. In strategy Scalping EURUSD RSI BB, time to close profiting trade comes when the price returns to the area of the moving average Bollinger Band. On the other hand, always be prepared for the possibility of loss. Those who do not do that usually risk everything to eventually lose everything. Stop loss order should be placed in the area of 7 pips from the opening of position.
Capital management
Strategies using low time frames require from the investor adequate time and meritorical preparation as well as relevant funds. However, the most important issue is the approach to risk management. Although after a series of successful transactions, when in the mind there is a thought that investor has figured out the secret of investing, issues related to the risk recede into the background. It is important to always remember that trading is actually nothing other than risk management. Traders have no effect on the emotions of market participants or the result of the published data. The only thing he can decide is how much risk he is able to take in a particular transaction. Trading on the M1 chart, a speculator must choose such level of risk to be able to withstand 100 losing trades. In this way, you will be able to move issues of declines in capital into the background, while focus on correct implementation of the strategy. Therefore, the recommended maximum loss should not exceed 0.5% of the capital for investment.
