This trading system is ideal for traders who only have little time to trade in the market during each session. In fact, this is a strategy developed for traders who prefer to carry out short-term transactions in which they open and close positions in minutes and not hours. Usually these types of traders, known as scalpers, use one-minute charts to enter and exit their positions.
Intraday traders in the Forex market can take advantage of the small movements that occur in different currency pairs by watching the 1-minute candlestick charts.
Like any scalping strategy, it requires active monitoring and management by the trader as he must be alert to cut losses and take profits quickly.
As always, it is advisable to practice this strategy on a demo account before trading with real money.
The type of chart and the indicators for this system are as follows:
- A 1-minute candlestick chart of the EUR/USD currency pair.
- Bollinger Bands Indicator, with a simple moving average (SMA) or an exponential moving average (EMA) of 18 periods as the central line.
- An EMA of 3 periods, 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 trade on the EUR/USD currency pair, but can be used to trade with other trading instruments such as other pairs and precious metals. Other parameters can also be used in the previous indicators which we will see later.
Signals of the trading system
The Bollinger Bands serve as an indicador of momentum and market volatility. Since this is a system based in part on moving averages crosses, it is necessary that the market has the necessary momentum for the price to rise or fall hard so that the transactions can generate a good amount of pips. In markets with low momentum and low volatility (markets in ranges or sideway markets), this system can produce many false signals, hence we should only use the buy and sell signals that occur when there is strong momentum and high volatility (markets with strong directional movements).
Based on this, we have to:
- Valid signals: Bollinger bands broad or expanding, indicating high volatility and market momentum.
- Invalid signals: Narrow Bollinger bands, indicating low volatility and market momentum.
The signals for this trading system are as follows:
We have a buy signal when:
- The EMA 3 line crosses up the midline of the Bollinger Bands 18.
- The RSI (14) line crosses above 50 level (bullish market momentum).
- The MACD Histogram crosses above the zero line (bullish market momentum).
We open the long 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.
- The stop loss is placed below the price minimum before the position is opened.
- The position is closed if the price goes down and reaches or exceeds the lower Bollinger band, which can be used as a dynamic stop loss.
We have a sell signal when:
- The EMA 3 line crosses down the midline of the Bollinger Bands 18.
- The RSI (14) line crosses below 50 level (bearish market momentum).
- The MACD Histogram crosses below the zero line (bearish market momentum).
We open the short 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.
- The stop loss is placed above the price 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 stop loss.
You need to remember that you have to take small profits as it is a scalping trading system. Based on this, we recommend the following options for taking profits:
- The position is closed if the price moves in favor of the transaction and a Profit/Risk ratio of 1:1 is reached.
- The position is closed once the EMA 3 crosses the midline of the Bollinger Bands in the opposite direction.
- The position is closed once the price reaches the upper Bollinger band (long position) or the lower Bollinger band (short position).
When using the 1-minute charts you must take into account that it is a system designed to take advantage of fast market movements, since it is a scalping system. This may not be the ideal trading style for many traders.
Traders can also try slower moving averages combinations in 1-minute charts that are more suited to their 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.
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 buy signals and one sell signal. 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 centerline 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 show little amplitude, which also indicates a low momentum in the market. In the period in which the Bollinger Bands indicated a low volatility (see image), EMA 3 crossed the midline of this indicator several times in short bullish and bearish movements of few pips. Had these crossings been used as trading signals, they would have caused losses due to their short duration (false signals).
In the three signs of the example that produced winning trades, the Bollinger Bands showed a greater amplitude.