Scalping strategy for range bound markets
The advantage of scalping is that you can be in and out of the market with scalpel like entries, taking anywhere between ten to hundreds of trades per day. These small trades might look like they create small profits, but when they are added together a scalper can turn these profits into something significant.
Like any trading strategy, the key is to have a strict set of rules that you adhere to each time you place a trade. These include strong entry criteria, stop loss levels, and take profit zones. While this might seem easy at first, in this series the discussion will move to why having a trading system for different market conditions is imperative to your trading success.
How to recognise a rangebound market
One of the easiest ways to recognise a market that is rangebound is by identifying when it becomes trapped between two points. The chart above shows 1-minute price action on the GBP/USD with price becoming trapped between resistance at 1.25469 highlighted in yellow at the top, and support at 1.25359 highlighted in yellow at the bottom.
By identifying that the price is trapped between two zones early, scalpers can then implement a strategy that can be used effectively to trade these conditions. The price action above has highlighted two touches (purple boxes) to both sides of the yellow highlighted resistance and support areas. Once this has been identified, it is possible to change your trading strategy to a range bound system and begin trading the zone or area in between the two points.
Using the MACD Indicator to find a buy/sell zone
Once a Scalper has identified a rangebound trading zone, they can begin to add appropriate trading indicators for these conditions to the charts. One of the most popular indicators from a Technical Analysis standpoint is the MACD indicator. This indicator can be used in a variety of ways, and using the signal line with the histogram is one of them. Above there are arrows pointing to red highlighted areas. These areas show what the MACD indicator is doing when price is reaching either the resistance or support lines drawn.
The first thing to point out is that the MACD histogram component is lower in these highlighted points than the previous touch to the resistance or support areas. The second most important part of the highlighted zone is that the signal line (red dotted line) exits the histogram as price starts to turn around. This is one of the signals a scalping trader can use to show a change in direction and potentially enter a position.
Adding the stochastic indicator
Another favoured indicator amongst scalpers is the Stochastic Indicator. For this example, using the Meta Trader 5 basic pre-set of 5/3/3 is fine, and while some people tweak these settings, generally keeping an indicator at the basic pre-set is best. The stochastic shows overbought and oversold areas. The chart above has been highlighted in green for oversold areas where a trader would want to buy the currency off the support zone, and red area where a trader would look to sell off the resistance zone. This indicator can be used to confirm the areas along with the MACD indicator as an effective strategy.
So what about take profit and stop loss levels?
A question that is often asked is how to find the most appropriate stop loss and take profit zones. The best thing about rangebound markets is that they have easy to spot levels that can be used to place stops and take profits.
The chart above has two red highlighted zones. If a sell order is placed, a stop loss should be somewhere above the top of the range, and if a buy order is placed, a stop loss should be below the bottom of the range. A buy order could then target around 70% of the range’s distance, with a profit level somewhere in the yellow highlighted zone, and a sell order could target the purple zone using the same concept.
Thought’s about scalping a rangebound market
The discussion of which trading style is better when it comes to scalping, day trading or swing trading will always be open to debate, but the key to any method is to have a strategy that uses several reasons, rather than just one or two to get into a trade.
When creating any trading strategy, between 3-6 reasons should be required before placing your hard earned money into the markets and over the three part scalping series, the discussion will be focused on having as many reasons as possible to place a trade long or short.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.