144 Trend Shift Scalping Forex Trading Strategy

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144 Trend Shift Scalping Strategy

Moving averages are probably one of the most popular indicators among traders. Almost all traders use some sort of moving average as part of their strategy. However, there are many different approaches in using moving averages, and even more moving average parameters that are used as variations of different strategies.

Moving Average Crossover Strategies

Probably one of the most popular uses of the moving average as an entry and exit strategy is the moving average crossover. This is basically a trading strategy that makes entries and exits based on the crossover of two moving averages.

Now, although there are many crossover strategies that do not work, there are also others that do work. To address this and improve on our trading stats, let’s try to understand what the idea behind the strategy really is, so that we may approach crossover strategies the right way.

The concept behind crossover strategies is the idea that we could assess shifts in trend biases based on moving averages. Many traders identify trend directions based on where price is in relation to their main moving average. Let’s say for example, a trader uses the 200 Exponential Moving Average (EMA) to identify the long-term trend bias. That trader would usually theorize that if price is above 200 EMA, then the long-term trend is said to be bullish. If on the other hand, price is below the 200 EMA, then the market is said to have a bearish bias for the long-term. What crossover moving average strategy does is that it allows a confirmation of the shift of trend bias by waiting for a faster moving, shorter period moving average to crossover the main moving average.

So, why is a crossover needed, if the location of price is the main basis of a trend? Because another contradicting way to use the moving average is as a dynamic support or resistance. Sometimes, price could just touch, pierce, or breach a moving average for a few candles before bouncing off it. Much like this bounce off the 200 EMA on the chart below.

144 trend shift scalping strategy 01

If you were trading off crosses of price and moving averages alone, you would lose on these scenarios. By using another shorter-period moving average, we lessen being involved in the market during these scenarios.

However, because of the slower response of waiting for the moving average crossover rather than waiting on price alone, moving average crossover strategies tend to be a little too late on the entry and exit. It is fine to be late on one end but being late on both might not be good for your account.

Strategy Concept

This strategy tries to capitalize on the strength of moving average crossover strategies, which is the confirmation of a shift of trend direction bias, while trying to eliminate the delay on one end of the trade, which is the exit. In essence, we are accepting the delay on the entry in order to have the confirmation of a trend bias shift, but we are trying to eliminate the delay on the exit by not waiting for another crossover.

To do this, we will be using one of the most popular longer-term moving average, the 144 Linear Weighted Moving Average (LWMA). I’m not sure why this is popular, but it is probably because this moving average setting seem to work.

Then, for our shorter-period moving average, we will be using the 5-period Smoothed Moving Average (SMA). This is a very fast moving average, so we are expecting lesser delays on our entries. However, there will still be some moves that would make strong momentum in just one candle, causing price to be too far off from the 144 LWMA. As much as possible, we should try to avoid these entries as there might be lesser room for price to move going our direction.

Timeframe: 5-minute chart

Currency Pairs: GBP/USD, EUR/USD

Buy Trade Setup

Entry

  • 5 SMA (green) should cross above the 144 LWMA (brown)
  • Price should not be more than 10 pips away from the 144 LWMA

Stop Loss

  • Set the stop loss at the fractal below the entry

Take Profit

  • Set the take profit at 2x the risk on the stop loss

144 trend shift scalping strategy 02

On this particular trade sample, price easily reached the take profit on the first price thrust. It even continued further for higher possible gains. Now, we could be a little creative and squeezed in more profits, but since this is a scalping strategy, we will be content with the 2:1 reward-risk ratio on the stop loss. This will allow us to be a little bit more consistent with our profits rather than wait for the market to reverse, which may sometimes be on the negative.

Also, if you are a price action or candlestick pattern trader, three consecutive red candles after the take profit was hit, plus the long red candle after that. At that point, we wouldn’t really know if the market would reverse or continue to rally in our favor.

Sell Trade Setup

Entry

  • 5 SMA (green) should cross below the 144 LWMA (brown)
  • Price should not be more than 10 pips away from the 144 LWMA

Stop Loss

  • Set the stop loss at the fractal above the entry

Take Profit

Set the take profit at 2x the risk on the stop loss

144 trend shift scalping strategy 03

Again, you would see on this sample that price could have continued further for bigger gains. But again, there were several scary moments after our take profit was hit. On the candle where our take profit was hit, a sudden upward spike occurred which was fought back down by the bears. Also, on the succeeding sequence of candles, there was a point where price pierced back above the 144 LWMA before bouncing off it. Although we could have pocketed bigger gains, it still pays to take your profit right away as a scalper.

Conclusion

This strategy is a sound crossover strategy, which lessens the probability of exiting at a worse price. This is because of our filter which doesn’t allow for trades that have taken off prior to us entering the market, and because of the conservative approach taken by exiting the trade on a fixed reward-risk ratio of 2:1. This should give this strategy a higher win ratio.

However, what it forgoes is the ability to squeeze profits from the beginning of the trend until it ends. If this was the case, we could probably have a higher reward-risk ratio, but a lower win ratio.

You could also be a little creative on this and exit partial positions as you go in profit. But this would also mess up the reward-risk ratio, as some of the position would earn more than the others.

Another important thing to do is to trail the stop loss. This would further improver the reward-risk ratio. But trail it too tightly and this might hurt your win-loss ratio.

Learn it, tweak it, test it, and make it your own.

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