Reversal Scalping Setup

In this piece, we are going to walk through a simple reversal scalping setup that you can use to scalp in-and-out of the market for 10 pips a piece, or more if you want to let the trade run. To help catch a reversal, we are going to use the Relative Strength Index, or RSI, indicator. This indicator is known as a “momentum oscillator” meaning that it measures the speed and change of price movements. The RSI has absolute values that oscillate between zero and 100.

 

The RSI is a hugely popular indicator and is available on every charting package certainly that I have used. This is where it can be found on MetaTrader 4 (MT4):

RSI on MT4

For this strategy, the indicator settings we are going to use are rather unconventional. If you have used RSI before, you would have often seen a setting of a 14 or 21 period RSI, and the overbought/oversold settings of 70 & 30 respectively. Instead, we are going to use a 2 period RSI setting (yes, 2!) and overbought/oversold settings of 90 & 10 respectively. This is going to give us very quick RSI readings and potential momentum changes.

RSI Readings

The rules for this strategy are very simple. For a long trade, you want the RSI indicator to dip below the 10 oversold level. However, we don’t just jump in and buy. We want to wait for the RSI to “roll-back” up to the 10-level before we go in. Hence, we want to see momentum change and are using the roll-over of the RSI indicator to capture the roll-over in momentum.

Once the RSI level reads 10 or above, we enter with a buy market order.

Make sure that your platform auto-updates the indicator on a live basis; you don’t typically want to wait until the bar closes to get into the trade. This is scalping so you want to enter into the market at the first available opportunity.

For a short trade, we do exactly the opposite: the RSI level must go through the 90-overbought level and then roll-back through it. We then enter a sell market order.

Short trade

We can now manage the trade in several ways. If you are using this strategy in isolation on a 1-minute chart, the simplest method is to have a 10-pip stop and a 10-pip target.

However, the concept is also a way to capture reversals on micro-timeframes such as the 1-minute chart but leverage that in the direction of bigger levels. If you are at a 15-minute or 1-hour support or resistance level, you can use ride the trade for a longer target but with the same stop. A popular method is to exit half the position at 1:1 reward/risk and let the other half of the trade ride to a predetermined target, such as 2:1 reward/risk or a previous high or low.

This is scalping, and any scalping strategy is sensitive to Forex pair, spread, and time of day. You should consider trading this strategy on a major pair, such as EURUSD, GBPUSD, USDJPY, AUDUSD… a pair with a tight spread. Secondly, you want to trade it at times when spreads are low and movement or range is high, such as US Open or London Open. Lastly, avoid trading over major news announcements – check the economic calendar.

Whenever anyone puts a strategy in front of you, you want to test it on demo before using live money. Always.

 
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