Band-Wagon Scalping Forex Trading Strategy

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Band-Wagon Scalping Forex Trading Strategy

One of the better ways to scalp the forex markets is by riding trends. This is called momentum trading. However, it is sometimes quite difficult to catch and ride these momentum trades. Sometimes you see a strong momentum market scenario, so you decide to get involved. Then, as you enter the trade the market reverses. This is because we are chasing price. Momentum traders are usually guilty of this. We fall victim to the big whales because of greed, because of that fear of missing out. But this shouldn’t always be the case.

Sure, it is dangerous to chase price around. But there is a way to join in on these types of market without chasing price around. We could do this by identifying strong momentum followed by a quick and short retrace. Then we enter on the retrace.

There are several ways to join in on the retrace. But today we will be discussing the use of Bollinger Bands to enter on a retrace.

The Setup: Band-Wagon Scalping Strategy

This strategy is best used on the 1-minute chart. This is because price movements on the 1-minute chart is very incremental. You could see price action taking place on each candle. Yet it is not too long of a timespan to cause us to enter late. This allows us to wait for the confirmation on the close of the candle. Yes, this could be done on the 5-minute chart, but often you would end up seeing price take-off before you made a move. The variation on the 5-minute chart would be to not wait for the close of the candle, or even to set pending limit order entries, which is somehow a wild guess. With that said, I prefer the 1-minute chart.

Bollinger Bands are typically used to identify overbought and oversold market conditions using its outer bands, but the same outer bands that is used to identify potential reversals, could also indicate strong momentum.

For our setups, we will be using two sets of Bollinger Bands. Both would be a 20 period Bollinger Band, but the difference would be that one is a 1 standard deviation Bollinger Band (gold) and the other a 2 standard deviation Bollinger Band (green).

To identify strong momentum market conditions, we will be looking for currency pairs where price is keeping close, even hugging or going over the 2 standard deviation Bollinger Band. Having price hugging or going above the upper outer green Bollinger Band would mean a strong bullish momentum. On the other hand, if price is hugging or going below the lower green Bollinger Band, then the pair is said to be in a strong bearish momentum.

To enter the trade, we will be looking for short retracements. This is where the 1 standard deviation Bollinger Band comes in. In a bullish momentum market scenario, we will be looking for price to come back to the upper outer gold Bollinger Band, pierce it, then reject the price below it. This will be signified by a long wick at the bottom of the candle and a close above the upper outer gold Bollinger Band. In a bearish momentum market scenario on the other hand, we will be looking for price to again come back to the lower outer gold Bollinger Band, pierce it, then reject price above it. This time the long wicks will be above the lower outer gold Bollinger Band and price should close below it. These will be our long and short setups.

Buy Entry:

  • Price should hug or have closes above the upper outer green Bollinger Band
  • Price should retrace to the upper outer gold Bollinger Band, pierce it, then reject price below it
  • Price should close above the upper outer gold Bollinger Band
  • Enter a buy market order at the close of the candle

Stop Loss: Set the stop loss at the bottom of the candle

Take Profit: Set the take profit at 1x the stop loss

band wagon scalping strategy 01

Sell Entry:

  • Price should hug or have closes below the lower outer green Bollinger Band
  • Price should retrace to the lower outer gold Bollinger Band, pierce it, then reject price above it
  • Price should close below the lower outer gold Bollinger Band
  • Enter a sell market order at the close of the candle

Stop Loss: Set the stop loss at the top of the candle

Take Profit: Set the take profit at 1x the stop loss

band wagon scalping strategy 02

Conclusion

This is a simple working scalping strategy. Having momentum and price action on your side should allow for a high win-loss ratio. Plus, the low take profit multiple even raises the win-loss ratio a bit higher. Taking all this into account, this strategy could be at around more than 60% accuracy.

The onus of this strategy though is the low take profit multiple. It was set a little low because this is a scalping strategy and a momentum strategy that has lost a little steam causing the retrace. However, based on the sample charts, you could see that there could be some more squeezed out of these trades. The take profit multiple though could be the area that you could tweak to your own liking.

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