T2W Trading Community

Given my background as a scalper in the equities market for eight years I am often asked if those same techniques are applicable to the FX market. First, it is important to define how one defines scalping. First, recalling my days as a floor/screen based trader of equities in 90’s the definition was a technique whereby a trader could profit from very short-term moves in the marketplace by using a combination of 1 & 5-minute charts as well as a keen sense of tape reading. When I made the transition to the FX markets exclusively back in 2001-02 I was keenly aware that this type of hyper strategy had 2 shortcomings:

1.  It was not scalable
2. A scalping technique may not be conducive to the FX markets

While point 2 may be open to debate, one cannot argue that short-term strategies have a finite amount of capital you can deploy at any point in time without disrupting the market.

So with that in mind, the angle I decided to take on this article was to illustrate how some of the techniques and indicators used in a scalping strategy can still be overlaid on to a swing trading approach in order to maximize entry and exit points. First some assumptions for the forthcoming analysis:

• Trade selection is done using one of or a combination of a 60 & 240-min charts as well as a daily chart. A weekly chart is used merely as a way to identify long-term support and resistance areas.
• I will discuss several indicators, mainly stochastics, fibonacci retracements and extensions, trend-lines and RSI, Elliot Wave analysis
• Trade duration average is several days
• I rely upon not only the G10 pairs but also several crosses
• Risk is defined in advance of each trade and lot size is calculated based on stop-loss

There are limitations, as with any technical approach that combines a fair degree of discretion as rigid entry guidelines may prevent a trade from being executed. However the effectiveness and precision of the entry techniques will typically avoid costly draw-downs while the trade is playing out.

Here is an ideal example of using a big picture viewpoint/analysis, but drilling down to a lower time frame in order to pinpoint the entry in an attempt to execute at a price that will perhaps provide immediate validation.

In this instance I am anticipating that a retest of the bull trendline will fail, however, the ‘ideal’ scenario is to have the daily stochastic pointing down in order to have bearish momentum at our back. As you can see from the daily chart above, this is not the case. However, what if we could speed up the analysis in terms of drilling down a time frame or two and essentially forecast the turning of that stochastic lower?

I rely heavily upon on the 60 & 240-minute in order to execute trades while frequently doing the analysis on the daily chart. Referring to the 240-minute chart below, it provides an ideal example of using the lower time frame for execution. Note the following:

• Spinning top suggests a reversal is imminent
• Stochastic cross lower igniting bearish momentum
• Trend-line break (115.53) triggers ideal entry

If there is one question mark on this entry it is that the current trend on the 240-minute chart that is up. Trend is defined by 2 parameters:

1. What is the slope of the 20-period ema over the last half a dozen bars?
2. Are price bars above or below the ema?

Ideally, for shorts, price bars are below a downward sloping moving average and vice versa for longs.