Stochastic Scalping System is a simple trading strategy that is used for scalping in the forex market. The trades can be executed in the direction of the trend and in the anti direction of the trend but for the higher winning probabilities you should only trade in the direction of the trend. Scalping is a trading style that is concerned in taking profits on small price movements, basically very soon after a trade has been entered and has become profitable. For scalping a trader has to have a strict strategy because one large loss can easily eliminate the many smaller gains that the trader has worked to obtain. Having the right tools is crucial to be successfully scalp the forex market. A trader also has to use strict money management while scalping. Most of the newbies have the misunderstanding that they should invest bigger lots while they scalp. Such types of beliefs can be very disastrous. The main assumptions of scalping are:
- It reduces the exposure limit risk
- Smaller moves are easier to obtain
- Smaller moves are more frequent than larger ones.
Stochastic Scalping System basically consists of only two types of indicators for two purposes.
- Moving Averages
In this trading system there are three moving averages. Two of them are exponential moving averages while another one is a smoothed moving average. The red color moving average on the above chart is an EMA 144. It moves slowest among the three moving averages because it uses higher numbers of periods. This EMA is used to find out the major direction of the trend. The light blue color moving average is an 89 EMA. It is the second slowest among the three or it is the second fastest among three. And finally pink color moving average is a smoothed moving average of period 21. Since it has the least amount of periods used it is the fastest among all. It works as a support and resistance for our entry decision.
- Custom made Stochastic
It is the customized form of simple stochastic oscillator. The color of the stochastic oscillator changes as the price reversal occurs on the chart. Generally when the prices are overbought the stochastic changes to red color whilst when the prices are oversold the color of stochastic changes to green. As per rule of this system we will be buying at oversold zone and selling at overbought zone.
Buying conditions using Stochastic Scalping System.
- Price should be trading above all the three moving averages.
- The stochastic oscillator should be green in color.
(Note: you can also long the pair when the price is not above the SMA 21 but the price should be trading above the remaining two moving averages. However in order to have higher probability of winning a trade all the moving averages should be below the price.)
Selling Conditions Using Stochastic Scalping System.
- Price should be trading below all the three moving averages.
- The stochastic oscillator should be red in color.
(Note: you can also short the pair when the price is not below the SMA 21 but the price should be trading below the remaining two moving averages. However in order to have higher probability of winning a trade all the moving averages should be above the price.)
Stop loss and Take profit.
Stop loss should be placed just below the recent swing low/high. You can take your profits as soon as the stochastic changes its direction.
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