Some currency traders are extremely patient and love to wait for the perfect setup, while others need to see a move happen quickly, or they will abandon their positions. These impatient souls make perfect momentum traders because they wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in the hope of an extension move.
However, once the move shows signs of losing strength, an impatient momentum trader will also be the first to jump ship. Therefore, a true momentum strategy needs to have solid exit rules to protect profits, while still being able to ride as much of the extension move as possible. The 5 Minute strategy does just that.
1. Range Trading
Range trading is a popular strategy among crypto scalers. It involves identifying a specific consolidation range that an asset is likely to fluctuate within. Scalpers aim to buy at the lower end of the range (support) and sell at the upper bound (resistance).
To get started with range trading, traders first need to identify a ranging market on a low timeframe, like the 5 minute charts. Then, support and resistance levels near the highs and lows of the range are identified. These levels then serve as entry and exit points, with a trader entering at support looking to exit at resistance and vice versa.
Some will look for reversal candlestick patterns, like hammers or shooting stars, at support or resistance, respectively, before entering with a market order. Others will simply set limit orders at their chosen entry point.
Stop losses are typically placed beyond the range’s high or low, depending on the direction of trade. Scalpers usually use a 1:1 risk/reward ratio or don’t place stop loss orders, but the latter is a highly risky approach.
2. Breakout Trading
Breakouts occur when a level of support/resistance is broken through, often indicating the start or continuation of a trend. There are several ways you can take advantage of breakouts, but it’s not uncommon for a false breakout to occur. We can use a filter to increase our chances of success.
To start, we need to identify a support or resistance level. The easiest way is to look for relatively equal highs or lows forming. When the level is broken with a strong impulsive move, we can enter on the close of the breakout candle. However, if the move isn’t particularly strong, then we could wait for a pullback. Traders can place a stop order to enter as the pullback itself breaks out, as marked by the dotted lines.
Profits can be taken at an opposing support or resistance level. However, some scalpers may prefer to attempt to ride the trend and trail their stop loss above or below swing points as the move progresses. Similarly, stop losses can be placed above or below the nearest swing points.
3. Chart Patterns
Chart patterns can be a powerful tool for scalping, helping traders to identify potential trend continuations and reversals. While there are many different chart patterns out there, it’s best to stick to just one or two to avoid confusion, at least until you master their use. Will use rising and falling wedges in this example, as they often lead to strong moves.
There are two ways to enter: either on the breakout or on the retest of the broken trendline. entering retests might be a more accurate method, but it’ll mean you miss out on some trades. Conversely, entering on the breakout is riskier, as it could just as easily be a false breakout.
Your profit target and stop loss will depend on the pattern you’re using. Given that wedges typically prompt a prolonged trend, you could look for significant areas of support/resistance to start taking profits. For a more conservative approach, you might take profit at the most extreme point of the pattern. Likewise, stop losses can be set at the most extreme opposing point. For example, you may set a profit target at the high of a bullish wedge and a stop loss beneath its low.
4. Bid Ask Spread
The bid ask spread refers to the gap between the maximum price a buyer can offer (bid) and the minimum price a seller can accept (ask) for a specific asset. Scalpers can take advantage of the bid ask spread to generate quick profits.
When spreads are wide, traders place buy orders and sell orders simultaneously. They buy at the bid price and sell at the ask price, capturing the spread as profit. This strategy can be particularly effective in less liquid cryptocurrencies where spreads are naturally wider.
5. Using the Relative Strength Index and Bollinger Bands
Some scalpers rely heavily on technical indicators to help them determine entries and exits. One popular combination is the relative strength index (RSI) and Bollinger Bands.
Relative Strength Index (RSI): The RSI measures the strength of price movements and can be used to identify overbought/oversold conditions and divergences. RSI can be particularly valuable for pinpointing short-term reversals.
Bollinger Bands: Bollinger Bands help traders identify periods of high or low volatility and potential price reversals using standard deviations. Scalpers often look to short when price reaches the upper band and go long when it touches the lower band.
When RSI crosses 70, indicating overbought conditions, or below 30, showing the asset is oversold, traders can look to confirm a reversal entry with Bollinger Bands. If an asset is overbought and crosses above the upper band, a short position can be considered. If the asset is oversold and price breaches the lower band, a long position could be entered.
As for exit conditions, some scalpers may prefer to take profits at the midpoint of the Bollinger Bands or the opposing band. Others take profit when RSI crosses above or below 50, depending on the direction of trade. In terms of stop losses, above or below a nearby area of support or resistance is often suitable. Alternatively, you could choose a set distance for each trade.
