Aggressive Channel Scalping Forex Trading Strategy

August 2, 2018

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Aggressive Channel Scalping Forex Trading Strategy

Scalping is not for everybody. Many have tried it but failed. Many traders debate whether scalping still works in this day and age as it used to do in the past. Some “trading gurus” say it works, some say it doesn’t. The way I see it, success in scalping highly depends on the person. Some traders have made their fortune scalping the markets and grew their accounts north of 1,000%, while some who ventured into the world of scalping burned their accounts due to the sheer speed of the lower timeframes. On the other hand, many of those who got burned on the lower timeframes tried the higher timeframes and found success there, preferring stable the stable returns they get on a less choppy timeframe, while others who tried swing trading find that they can’t stomach having overnight risk. With this said, finding your niche in trading is more important rather than listening to “trading gurus”. What may work for them might be a source of pain for you. Each to his own.

So, before I offer a framework you could work on to set you on your scalping path. Let’s discuss first what scalping is. In a real-world sense, scalping basically means buying a ticket to a concert or event at a low price, then selling it at a higher price to the person who is still standing in line wanting to buy the tickets. With this in mind, in my opinion, scalping in the real sense of it is not just looking at charts and patterns, but going deeper. Some call it Level 2, some call it order books, some call it order flow, what we have in the MT4 is depth of market. There we could see the price levels people are trading at. However, MT4 has some limitations, which is that we can’t see the volume behind those pending orders. Something that is very important in this type of scalping. This type of trading is now dominated by the world of high frequency trading algorithmic computers. This, we can’t compete with and is already impossible to do.

However, many traders also consider trading outside of the Depth of Market and just plainly on lower timeframe charts as scalping, based on the fact that after their trade, they quickly turn around and sell it back to the market at a very small profit. In a sense, this is still scalping, only that they are not seeing ahead if there is a demand for what they are buying or selling based on the order books but are basing their decisions plainly on technical analysis. This right here, this could still be done.

The markets are fractal. Things you see on the higher timeframes, you could also see in the lower timeframes, only that it is a whole lot faster. Patterns are still there, trends are still there, supports and resistances are still there. Although many of these are often not as reliable in the lower timeframes due to the fact that it is computers that are dominating these timeframes and not humans. Computers who decide plainly on formulas and algorithms, and not on what they see on the chart. To put it simply, there is a whole lot of whipsaws, fake outs, and noise in the lower timeframes.

So, how do we deal with the noise? We add filters using extremes to leave us with only a few higher probability trades. We could take what we know works in the higher timeframes, add a filter, and scalp.

Channel trading is known to work on the higher timeframes. It is simple, and doable. Many visual traders, even beginners, could easily spot a trending channel even without any assistance. Let’s see if channel trading is something that could work even on the lower timeframes.

The Setup: How to Trade Channels on the 1-Minute Chart

As said earlier, the lower timeframes are very choppy, full of whipsaws and fake outs. To avoid these, we will be adding a simple stochastic as a filter to aid us with our trading. By doing these, we will only be trading overbought or oversold scenarios going the direction of the channel.

Buy Setup:

Identify an up-trending channel
Allow price to touch the support line of the channel
Stochastics should be at the oversold levels
Enter as soon as the fast stochastic line crosses the slow stochastic line

Stop Loss: A few pips below the low of the fractal caused by the bounce.

Take Profit: Target take profit would be the same level as the body of the high of the previous thrust.

The channel below has two valid setups as shown below.

Sell Setup:

Identify a down-trending channel
Allow price to touch the resistance line of the channel
Stochastics should be at the overbought levels
Enter as soon as the fast stochastic line crosses the slow stochastic line

Stop Loss: A few pips above the high of the fractal caused by the bounce.

Take Profit: Target take profit would be the same level as the body of the low of the previous thrust.

There are two more entries that could have been considered and could have profited. But based on the rules, we didn’t take the trades. The first didn’t touch the resistance, so we shouldn’t take it. The second one did touch the resistance, however the stochastic crossover happened below the overbought levels.

Conclusion

This strategy proves to us two things. One, we could use what we know works on the higher timeframes and bring it down to the lower timeframes. This is because of the concept that the markets are fractals. We don’t have to have super complicated strategies to do scalping because the same concepts still work.

Second and more importantly, scalping could and does work. Although some say they don’t, but fact is, if sound strategies are backtested, they could profit. And, many other traders do make money scalping.

Finally, to wrap things up, this strategy is a simple basic strategy that you could use and develop. Sure, there are a lot of noise in the minute charts, but you could always add filters to lessen the noise. If ever you’d want to dip your feet in the world of scalping, do so. Who knows, maybe scalping could be the right fit for you.