dazrul

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Monday, 23 March 2009 at 21:41

Scalping is a term that goes back to pit trading at the exchanges, where the floor traders, being members, didn't have to worry about spread. After making one point, they would close the position. This was done up to 60 times a session and even the younger members found it exhausting!

With FX, I don't think precisely the same method is practicable. There is too much volatility. And why risk 25 pips to make 10, say, when the amplitude of a micro-cycle, on the yen crosses for example, is 120-160?

I prefer the method of swing trading, which is basically buy low and sell high. You can try the following:

1. Open a 5-min chart on EURJPY and put on stochastic (9-5-3) and RSI (9). I prefer to have RSI as a histogram as it is clearer to me. You can also use plain momentum as an oscillator.

2. Preparation: identify the bias over the past five hour cycle. Let us assume the direction is now up, so we will be buying not selling.

3. Signal: stochs must visit 20 or lower to start you off. This is often accompanied by RSI doing a low around 22. This is your alert. You are not trying to buy the indicator low!

4. Trigger: you must have one, or you will never enter the market! A trigger is a hard rule you always follow. I suggest a good trigger is a line on stochs at 46. If the %K moves over that line, they are buying, so you can join them. If it baulks at that level and returns lower, the cart is still pulling the horse. 46 can also act as a support level for a second surge, which is very lucrative.

Generally, because financial markets move in a compound series of half sine waves (like frogs hopping along a pathway), if the indicators visit a low, eventually they WILL get back to a high (stochs around 90 on this setup, RSI at least 65). However, you cannot just buy and sell the indicator levels - the world is not so simple.

Tips:
The higher cycle bias will predominate, so you need to check the 2-hour and 30-min charts for the status.
Don't sell in an upswing or buy in a downswing of the cycle.
Start with buying - it is a lot easier to identify a low node than a top node. Selling is a different game.

Closing a position is up to you. But I often wait for a second surge and possible negative divergence on indies. Alternatively, you may be content with 120 pips and use a limit order.