In recent times, the scalping style of trading has gained a lot of attraction from all types of traders. These strategies are characterized by high-volume trading, which is designed to enter the market frequently to make just a few pips.
Most scalping strategies are built using indicators that can make it extremely tough for beginners who are new to the markets. This is one of the reasons why scalping is not recommended for new traders. Whichever scalping strategy we use, we need to make sure that the broker’s platform allows us to employ the strategy on the lowest time frames.
The two scalping techniques we will be discussing are – Rapid-fire and Piranha. These strategies are developed on the 1 minute and 5 minutes time frame charts, respectively. These two time-frames provide ample opportunities to enter in and out of the market several times a day.
Although scalping can be exciting, it can lead to fatigue and loss of concentration due to constant monitoring of the markets. Therefore, besides just knowing about the strategy, one should meditate and learn to be away from the markets when not required. Overtrading does not profit all the time.
The rapid-fire strategy has two basic requirements:
Highly liquid currency pair | Lower timeframe
This criterion led to the development of the strategy on the 1-minute time frame chart using the EUR/USD currency pair. With this strategy, one can find around 30 to 40 trading opportunities every day.
The rapid-fire strategy works well with the 1 minute and even 2 minutes time frame charts, where each candlestick represents one minute of price movement.
We use two indicators for the rapid-fire strategy with the following settings.
- Parabolic SAR – Step size 0.02 | Maximum 0.2
- A simple moving average (SMA) with period 50 and apply to close.
The strategy is designed specifically for most liquid currency pairs as EUR/USD, GBP/USD, USD/JPY, and a few others. However, the EUR/USD pair is the most preferred pair for the strategy.
The rapid-fire is basically a trend trading strategy. So, we will be applying the strategy on the pullback of a major trend. The strategy combines two trend indicators, SMA 60 and Parabolic SAR, with the appropriate setting. The SMA is used to identify the major trend of the market. This means we look to buy the currency pair when the price is above the SMA, and similarly, we look to short the pair when the below the SMA.
The Parabolic SAR is used to give the exact entry signal after identifying the market direction and pattern. Once we identify the direction, when the price moves above or below the parabolic SAR, we take a trade based on the current position of the price. Let us understand this in detail.
In order to explain the step by step procedure of the strategy, we have considered the EUR/USD currency pair where we will be applying the strategy on the 1-minute time frame chart. It is advised not to switch to a time frame any lower than 1 minute as it is very hectic.
Since it is a trend trading strategy, the first step is to identify the major trend of the market and wait for a retracement. If the retracement comes close to the SMA, it is the ideal case of a pullback. The longer the price remains above or below the SMA, the stronger is the trend.
In our example, we see the market is in an uptrend, as shown in the below image, where the price is well above the SMA for a long time.
We can see that there are two dotted lines of the parabolic SAR, an upper one, and another is the lower. The next and most crucial step of the strategy is looking for the entry signal. In case of an uptrend, when the price retracement comes in from the highest point, the price is below the parabolic SAR, which means the price is still in its retracement frame. When the price goes above the upper dotted line of the parabolic SAR, it signals a continuation of the trend, and we enter right at the close of the candle above the SAR.
In the below image, we can see how the price crosses the parabolic SAR and signals an upward price movement.
This is the final step of the strategy, where we determine our take-profit and stop-loss levels for the strategy. The stop loss is placed below the previous ‘low,’ or in some cases below the second previous low if the previous low is too close. In case of a downtrend, it is above the previous ‘high.’ As the stop loss is not too big, the risk to reward ratio is more than 1 for this strategy. The take-profit is set at 15-20 pips above or below the entry price, depending on ‘long’ or ‘short’ position.
In our case, the risk to reward of the trade was 1.5, where the market moves further above the take-profit point. Since we are trading with the trend, the trade has the potential to move much further, and thus, one can use trailing stop loss to maximize the gains.
The rapid-fire strategy could also give another entry signal during the course of current trade. It is common to encounter consecutive trade signals one after the other, simply because of the low time frame being used. However, it requires a lot of practice before one can spot them. One should know how to manage the trades, especially when the setups come in fast and furious. The rapid-fire strategy works best in trading markets, which requires quick thinking and swift reactions.