A profitable Scalping strategy

Cyclesurfer · #1 (**permalink**) 10-08-2008, 07:40 AM

I've been busy at work for a while trying to make a scalping strategy that would actually be profitable. I've put something together that I'm ready to introduce to the community so that anyone interested can test it.

What you'll need:
*Access to tick charts

*Metatrader

Tick chart indicators:
ADX (14)
DMI (14)

Metatrader indicators:
Damiani signal/noise (on this forum, just search)
Momentum (14)
ADX (14), optional

What to do:

I usually scalp EUR/USD because of the low spread and fairly good volatility. Set the Metatrader chart to 1 min. Apply indicators. Apply indicators to tick chart.

You are looking to take advantage of surges of volatility while keeping losses very slow. Obviously if Damiani says "Do not trade" you will do nothing.
Step 1:
Check if tick ADX is above 20. If it is, AND if Damiani is reporting good volatility ("Trade") then go in the direction indicated by DMI on your tick chart. It is fairly straight forward. The purpose of Damiani obviously is to filter, and trust me, this system needs it. Go for about 4 pips per trade, if you wait for more you are asking to take a loss, this is ultra frequent scalping and trades usually are only open a few seconds. A few minutes at MOST. When you enter the trade you should move into profit immediately, if it goes against you just get out. You'll get plenty of opportunities to make it back. This strategy is designed to get you into the market exactly as the currency pair is moving with power in one direction or another. Again, if it moves against you at all it's allready a bad trade. Take the spread plus the small loss and get out.
I said to go for 4 points and no more BUT very often there is such strong volume that the price will move 20 points for you before you can even close the trade. This also means that you need to be aware of the chart at all times and be ready to get out if it moves against you. This is very important.

MOMENTUM:
If you watch the Momentum indicator with your chart zoomed out you will see that it forms more or less uniform peaks and valleys across the chart. These serve as an excellent guide to determining which signal to take. For instance, the DMI may go above 20 with a signal from ADX to buy and the momentum indicator has just formed a nice upward hook from the bottom of it's range- a valley-this would be a good time to buy. But if the same happens and momentum is in very high ascent you may want to pass on it. It's a good indication that the volume is there but the price is over-bought. Be patient, if the volume holds out you WILL make money on the downside. The price must go up AND down.

BROKERS:
Allot of brokers still frown on profitable scalpers. Not all, but most. You must find a broker that will allow you to do it AND still give you good spreads. A spread of 2 is too high. I trade EUR/USD and the highest I will go with is 1.8. I only trade for 10 to 15 pips a night so it's not an issue for me.

So, I'm half asleep right now if this doesn't make sense let me know. Feel free to test the strategy. I put it together about 3 weeks ago and so far it's profitable by a decent margin and I offer it to you for testing and use.

Cyclesurfer · #2 (**permalink**) 10-08-2008, 07:52 AM

I should have mentioned that time of day is very important here. You need to do this ONLY from 11 PM to 2 PM US/Eastern time. That's say, 3 PM to six Am if your in Japan. this is important because you need the volatility from Japan to lead you into the opening US and European markets. For example, trading from 3 PM through 9 PM US/Eastern time is disastrous. It's a dead zone.

Cyclesurfer · #3 (**permalink**) 10-08-2008, 08:03 AM

Good example:

As I was writing the first post Damiani switched from "Do Not Trade" to "Trade" so I checked my tick chart and in a few moments the DMI breached 20, The positive line was dominant in the ADX (you don't wait for a signal from ADX you go in the direction that ADX is indicating. If the positive line is dominant you buy) so I bought. Four seconds later I was out, having made 10 pips. As I was writing the second post The price still had the volume and 5 times the DMI breached 20 but each time the price reversed immediately, forcing me to take small losses. This ate up my 10 pips and I still had about 6 left over from earlier trades. Then, as often happens, the next time the DMI breached 20 (it was a sell signal this time) the price falls 16 points in about 20 seconds. Now I've reached my profit target and am done

.

Cyclesurfer · #4 (**permalink**) 10-08-2008, 08:07 AM

I just checked my charts to see what would have happened if I'd kept going, and about 3 minutes after I quit there was a buy sale worth 40 points. Total time that the trade would have lasted:
5 min.

It never came anywhere close to my stop. It shot straight up, which is the type of trade that this strategy is designed to zero in on.

Cyclesurfer · #5 (**permalink**) 10-08-2008, 08:10 AM

I just re opened the chart to see what would have happened if I'd kept at it and about 3 minutes after I quit a buy signal appeared that was worth 40 pips. Total time that this trade would have lasted:
5 min

Not once did the price threaten to go anywhere near my stop. This is the type of trade that this system is designed to provide.