Momentum Scalp Forex Trading Strategy

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Momentum Scalp Forex Trading Strategy

At the beginning of a new candle, there is often a few minutes wherein price don’t seem to move much. This is because many astute traders know that as a candle forms, other traders would make decisions based on the type of candle that was formed. No one would know what would happen next. Price may either continue the direction of the previous candle, or it may reverse. This few minutes window of indecision by the market is called consolidation.

Many scalpers in slower moving markets use the Depth of Market window or what others call Level 2 order flows to get a feel for where the market might be heading next. However, I seldom find traders who use Depth of Market in forex trading. There may be several reasons for this. For one, there are very few trading platforms that give the complete picture of pending orders based on the Level 2. Another reason might be because of the sheer size and volume of transactions in the forex market, pending orders on both sides are too big, information regarding the pending order’s volume move so fast, it humans couldn’t cope with the speed. Sadly, I think we don’t have a way to assess the direction using the consolidation phase every candle open.

But all is not lost. What we can do however is trade ignored consolidations. There are times when the market seems to skip the consolidation phase every candle opening and continue the direction of the previous candle. This is called momentum.

Momentum plays is one of the most common types of strategies, with varying approaches and styles. The idea behind this is that the force behind the previous candle is so strong, the market would just push through with its current direction.

With this strategy, we will be trading candles that we believe have momentum and that the next candle would ignore consolidation.

To do this, we will be using 7 & 14 Simple Moving Averages (SMA). We will also be targeting only five (5) pips. If the candle really does have momentum, a 5-pip target would be easy.

The Setup: Trading Momentum Using 7 & 14 SMA

Although this is a scalping strategy, we will still be using the 1-hour timeframe. This is because more traders are looking at the hourly candles as compared to the lower timeframes. If the previous hour does have momentum, traders looking at the candle on the next hour would immediately enter based on candle patterns without waiting on the consolidation phase. This volume of traders would push momentum further.

The rules of this strategy will be based on how a candle opens and closes in relation to the 7 & 14 SMAs.

Buy Setup:

  • The 7 SMA should be above the 14 SMA.
  • On the signal candle price should open in between the 7 SMA and the 14 SMA.
  • On the same candle price should close above the 7 SMA.
  • There should only be a little to no wick above the signal candle.
  • The low of the candle should not go below the 14 SMA.
  • Enter immediately at the open of the next candle.

Stop Loss: Stop loss should be 5 pips below the entry price.

Take Profit: Target take profit price should be 5 pips from entry price.

momentum scalp forex trading strategy 01

All our buy entry rules were ticked. If you would notice, on the next candle, price almost didn’t have a lower wick. This signifies that as soon as the next candle opened, price immediately pushed upwards without hesitation. This is a classic momentum play.

Sell Setup:

  • The 7 SMA should be below the 14 SMA.
  • On the signal candle price should open in between the 7 SMA and the 14 SMA.
  • On the same candle price should close below the 7 SMA.
  • There should only be a little to no wick below the signal candle.
  • The high of the candle should not go above the 14 SMA.
  • Enter immediately at the open of the next candle.

Stop Loss: Stop loss should be 5 pips above the entry price.

Take Profit: Target take profit price should be 5 pips from entry price.

momentum scalp forex trading strategy 02

Again, the same scenario. All the sell rules were ticked on the signal candle. Then, on the next candle, only a little upper wick was formed, and price immediately dropped down strongly. This is again a good example of a momentum trade on the sell side.

Conclusion

This momentum strategy is a good place to start trading momentums. However, being on the 1-hour chart, but doing a scalping strategy, this seems a bit counter-intuitive. Many scalpers might find that this is a different way to scalp. While many scalpers take many trades in a day, with this strategy, given that you only take trades at the beginning of an hour, you might find that you have fewer opportunities in a day.

It is also not wise to trade all currency pairs since some pairs are just not good for scalping, due to wide spreads of the bid and offers. Remember, we are only targeting 5 pips and have a stop loss of 5 pips. The spread might ruin your trades since when you open a trade, you begin in the red. A few pips of a negative move might already hit your stop loss.

Another thing to take note of is the type of candle that you are trading. Strong full-bodied candles with little to no wicks on your direction is what we are looking for. This is typical of Marubozu candles. However, some candles that are too hyper extended, overbought or oversold, could mean a probable reversal. Practice this trading strategy and notice how some setups with just the right candle size works, while others that are hyper extended, would reverse. Again, the clue to these reversals are the wicks. Take note also of the distance of price and the 7 SMA. If it is too far, it might already be hyper extended.

Practice this strategy, tweak, and make it yours.

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