This technique is ideal for those traders who only have little time to operate in the market during each session. In fact it is a strategy developed for operators who prefer to perform short-term operations in which they enter and leave the market in a matter of minutes and not hours. Normally, this type of traders, known as scalpers, use the one-minute charts to get in and out of their positions.
Traders operating on the Forex market in an intraday time frame can take advantage of the small movements that occur in the different currency pairs by observing the 1 minute candela charts.
Like any scalping strategy, it requires an active surveillance and management by the trader as it must be attentive to cut losses and take profit quickly.
As always, it is advisable to practice this strategy on a demo account before operating with real money.
System settings
The chart type and indicators for this system are as follows:
A 1 minute candle graph of the EUR/USD currency pair.
Bollinger bands indicator, with a simple moving average (SMA) or exponential (EMA) of 18 periods as the centerline.
A 3-period EMA, fixed at the closing price.
A MACD histogram with standard configuration.
Relative Strenght Index (RSI) with standard configuration.
Note: The system was originally designed to operate on the EUR/USD currency pair, but can be used to operate with other trading instruments, such as other pairs and precious metals. Other parameters can also be used in the above indicators which we will see later on.
System signals
Bollinger bands function as an indicator of impulse and market volatility. Since this is a system based in part on mobile means crosses, it is necessary that the market has sufficient impulse for the price to rise or lower with force and the operations can generate a good amount of pips. In markets with little impulse and low volatility (markets in ranges or side), this system can produce many false signals, hence we only have to use the signs of purchase and sale that occur when there is a strong impulse and high volatility (markets with strong directional movements). Based on this, we have to:
Valid signals: Wide or widening Bollinger bands, indicating high volatility and market impulse.
Invalid signals: Narrow Bollinger bands, indicating low volatility and market impulse.
The signals for this trading system are as follows:
Signs of purchase
We have a sign of purchase when:
The line of EMA 3 crosses the middle line of Bollinger 18 bands upward.
The line of the RSI (14) crosses above level 50 (bullish market impulse).
The histogram MACD crosses above the zero line (bullish market impulse).
We open the purchase position once the three previous conditions are produced. Since the crossing of the MACD histogram of the zero line is usually the last to occur, this condition can be used as a signal for opening the position.
-Stop loss: For the loss stop we can use two options:
The loss stop is placed below the minimum before the opening of the position.
The position is closed if the price falls and reaches or exceeds the lower Bollinger band, which can be used as a dynamic loss stop.
Signs of sale
We have a sales signal when:
The EMA line 3 crosses down the midline of the Bollinger Bands 18.
The RSI line (14) crosses below level 50 (bearish market momentum).
The MACD Histogram crosses below the zero line (bearish market momentum).
We open the sales position once the three previous conditions are produced. Since the MACD histogram crossing of the zero line is usually the last to occur, this condition can be used as the position opening signal.
-Stop of losses: For the stop of losses we can use two options:
The loss stop is placed above the maximum before the position is opened.
The position is closed if the price rises and reaches or exceeds the upper Bollinger band, which can be used as a dynamic loss stop.
Profit making
It is necessary to remember that you have to take small profits, because it is a trading system of scalping. Based on this, we recommend the following options for taking benefits:
The position is closed if the price moves in favor of the operation and a benefit/risk ratio equal to 1:1 is reached.
The position is closed once the EMA 3 crosses the middle line of the Bollinger bands in the opposite direction.
The position is closed once the price reaches the top Bollinger band (purchase position) or the bottom Bollinger band (sales position).
recommendations
When using the 1-minute charts you must take into account that it is a system designed to take advantage of the rapid movements of the market, since it is a scalping system. This may not be the ideal trading style for many traders.
The trader can also handle slower moving averages combinations in 1-minute charts that are more suited to your trading style, such as the following:
EMA 7 and Bollinger Bands with midline 18.
EMA 5 and Bollinger Bands with midline 20.
EMA 10 and Bollinger Bands with midline 20.
Another possibility is to apply the strategy (along with the variants indicated above) in price charts of 5 minutes, which have the potential to generate more profitable signals and are slower in price action.
Real example
The following image shows a 1 minute chart capture for the EUR / USD currency pair in which the strategy configuration described above has been applied. In this case, we can see two signs of purchase and a sale. In all three cases, both the MACD and the RSI serve as filters for the signals produced by the bullish and bearish crosses of the EMA 3 and the central line of the Bollinger Bands.
As a filter we can also use the Bollinger bands themselves as an indicator of volatility. In a period of low volatility, the bands of this indicator have little amplitude, which also indicates under impulse in the market. In the period when the Bollinger bands indicated a low volatility (see image), EMA 3 repeatedly crossed the midline of this indicator in short, bullish movements of few pips. If these crosses were used as signs of purchase or sale, they would have caused losses due to their short duration (false signals).
In the three signs of the example that produced winning operations, Bollinger's bands showed greater breadth.
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