Getting Started with Forex - www.forextrader.za.

net

Part 3 Looking at Scalping and other systems

Part 3 – First look at Forex After going through some of the more popular
systems indicators, we will go through a few Forex systems and
explain how they are put together. The end goal being
that you learn enough to find or even make your own
systems that suit your trading style.

We aim to introduce you to 3 different Forex systems,

and we will demo trade them on the day.

Now for the interesting part

There are many forex systems out there, and a lot of them work. The bad news is, most of those won’t work for
you. So it’s important that you understand the system and try it out before you put all your eggs in the basket. I will
be introducing you to three very different systems.

In my experience I have found that there are three types of systems out there.

1. Pure indicator systems which work purely on statistical chances of particular market prices being met.
2. Market sentiment systems, where traders rely on interpreting market prices and predicting what the
bigger traders will do. Fibonacci, resistance, support, general trend and pivot lines play on market
sentiment.
3. Hybrid systems, which take pieces from each. In my opinion, these are the more successful of the systems.

So in any system I use I make sure that we have something from 1 and 2 which increases my success rate. So let’s
look at the first one.

Cowabunga System
Yes, that’s it’s real name. This was the first system that I got success from, and I found it on www.babypips.com. It’s
a simple system that if stuck to properly, it can yield decent results.

Let’s setup the indicators used for this.

1. Open a fresh chart, preferably on a pair with a low spread like the EUR/USD or GBP/USD.
2. Load up your template so you’re happy with the look of your fresh chart. No indicators yet.
3. Add a 5 EMA indicator applied to the close. We need different colours here, I recommend RED for this
EMA. I start with the hot colours for fast moving EMA’s and move down to colder colours as a habit.
4. Add a 10 EMA indicator applied to the close. Make this one a slightly colder colour, like a dark orange.
5. Add Stochastic with inputs (10.3.3) Slow and Simple Settings
6. Add RSI (9) Simple
7. Add MACD (12.26,9) Exponential Histogram

You should land up with a chart that looks something like this:

Page: 1 of 7
 Getting Started with Forex - www.forextrader.za.net

Rules for the system

The main trend is your friend. Switch your chart over to a 4 hour and identify the trend direction. If it’s moving short,
then we will only be looking at short positions and visa versa for long positions.

Entries will be taken on the 15m chart, so now that you’ve picked the direction, change the period to 15 minute
chart.

To enter LONG positions

 5 EMA must cross above the 10 EMA.
 RSI must be greater than 50.
 Stochastic must be headed up but NOT in overbought territory (over 80).
 MACD histogram must go from negative to positive OR be negative and start to increase in value. The
Ideal is for MACD to have been negative and turning up.

To enter SHORT positions

 5 EMA must cross below the 10 EMA.
 RIS must be lower than 50.
 Stochastic must be headed down but NOT in oversold territory (under 20).
 MACD histogram must go from positive to negative OR be positive and start to decrease in value. The
ideal is for MACD to have been positive and turning down.

Stop Loss
This is essentially a swing trading system, so stop losses should never be far from entry point. For long trades, you
can set the stop loss at the most recent swing low, and for short trades at the most recent swing high. In a lot of
cases the stop loss will be quite close. If the recent swing is too far to keep your stop loss within the parameters of
your money management plan then you should not compromise your money management.

Exits
You can sit and watch the market and exit on candle information, or EMA crossover. Alternatively you can set
take profit at the next 50 or 00 level (ie 1.2550 or 1.2600). If your target is less than your stop loss, then the risk is not
worth it.

Page: 2 of 7
 Getting Started with Forex - www.forextrader.za.net

Here is a successful entry. The 4 hour showed a strong downtrend so we were looking for short positions there. The
Stochastic was heading down, the RSI below 50, MACD heading down and the 5 EMA went below the 10 EMA.
Ideal Entry. This is best shown in practice, so we’ll spend some time on it during the day.

Stephen’s Simple Scalper

This is a system that came around after trying to figure out a way to use the Zigzag indicator properly. The Zigzag
indicator is fantastic for quickly highlighting highs and lows on your chart, and really helps with deciding which
price levels to use for Fib lines, A fellow trader, Vic, and myself have spent some time on the Zigzag line thinking
that if we could get a reliable way to trade between highs and lows we can grab lots of trades.

After back testing it with several indicators and applying several trading methodologies I believe we’ve come up
with a good set of rules and best of all, it is far simpler than initially anticipated. Here’s the setup.

1. Load a new chart, also with tight spreads like the EUR/USD or GBP/USD.
2. Apply your template with just colours and no indicators; we want this as clean as possible.
3. Add the Zigzag line, you’ll find this in the Navigator window under “Custom Indicators”. I recommend
changing the default colour from red, I prefer using a pale blue colour so it doesn’t get lost in the mix of
red and green candles.
4. Add Bollinger Bands as a standard indicator, with the period set to 20 and shift 0 applied to close. Once
again, change the colour so it doesn’t clash with what’s on the screen already. I go with a darker blue.

Go ahead and save this as a template so you can load it quickly to other charts.

Page: 3 of 7
 Getting Started with Forex - www.forextrader.za.net

You should now have a chart that looks like this.

PLEASE NOTE !!!

Once you’ve loaded the indicators and you look at the chart, it looks too good to be true. And it is. The Zigzag
line repaints itself to new candles if conditions are met. So looking at a history makes it look 100% perfect. This is
NOT the case. The system is good, but nothing is 100%.

Rules for the system

 Only trade in the direction of the general trend on larger time frames. I recommend using the 4 hour
period. Look at the direction of the center Bollinger band. If it’s trending down, then we’re looking for
shorts, if it’s trending up then we’re looking for longs. If it’s moving sideways, change currency pair,
 While this system is a scalping system, it is a slower scalping system but does yield more pips. Do NOT
apply to 5m charts, and avoid 15m charts. After back testing the system, 30m seems to be the most
reliable and highest yield.

To enter a LONG position

 Zigzag must paint on to a new low.
 New low candle must be at least 25% below the low Bollinger Band. Tail is fine, body does not need to be
outside but is preferable.
 Do NOT enter if the candle has a full body with no wick on the top.

To enter a SHORT position

 Zigzag must paint on to a new high.
 New high candle must be at least 25% above the high Bollinger Band. Tail is fine, body does not need to
be outside but is preferable.
 Do NOT enter if the candle has a full body with no wick on the bottom.

Stop Loss
This is a tricky one. On occasion, you will see the perfect setup. Zigzag attaches to a candle that is out of the
Bollinger bounds, candle will finish forming but the next one keeps on going and the Zigzag reattaches. The
temptation is to put very high stop losses so when it does eventually turn you’ll get the trade. Remember, this is a
scalping system, so if you go heavily negative you might not hit break even when it does turn.

My recommendation is to put the stop loss just outside the high of the candle for short entries, or just outside the
low for long entries. You don’t want to risk more than a handful of pips on any trade. Rather let your stop loss get
hit and wait for a better entry point.

Page: 4 of 7
 Getting Started with Forex - www.forextrader.za.net

Exit Points
I have tested several exits, and you have two options. One will give you the highest amount of successful trades
which is to simply take profit at the same value as your stop loss, i.e. if stop loss is 10 pips, take profit at 10. Simple,
done, and usually works.

But you’ll see that this system picks up one or two entries on incredibly good trades each day, and you would not
want to miss out on that. So this is what I suggest.

Close 50% of profit when price crosses the center band, move stop loss of remaining position to break even. So
now worst case scenario and you get hit with a reversal, you’ve already cashed in a few pips and the remainder
closes on 0. Best case scenario, you hold on to that trade until you see an entry point to another direction.

Pivots and Candles

A pivot point is a market price that if crossed will signal a change in direction. Please note that if you are trading
a 15m chart it does not necessarily mean the longer trend will change, so don’t bet the farm and expect to be
rich in one trade.

Many brokers offer advice from Trading Central or other similar services which give pivots and target lines. But it is
a good idea to learn a popular formula to calculate your own pivots and apply them to the chart. Here are the
steps to get started.

1. Load up your chart again and apply the colours (or load your template with only colours).

That’s it for the chart ! Now we need to calculate our pivots and here is how. If you are an intra-day trader then
you will want to use the Daily chart, if you are trading inter-day then you will want to use the weekly for pivots. I
recommend the daily, since you will most likely be trading on time frames smaller than the daily at first. Switch your
graph over to the daily, move the mouse over to the most recently closed daily candle (i.e., not the current daily
candle) and get the figures from the data window.

I have taken sample data from the EUR/USD pair 2nd May 2012

 High – 1.32408
 Low – 1.31215
 Close – 1.31580

Now we want 5 price levels, the pivot itself, and then 2 resistances and 2 supports. And here’s how we get them.

Pivot = (High + Low + Close) / 3 1.32408 + 1.31215 + 1.31580)/3 = 1.31734

Resistance 1 = (2 x Pivot) – Low 1.2 x 1.31734) – 1.31215 = 1.32253
Support 1 = (2 x Pivot) – High 2 x 1.31734) – 1.32408 = 1.31060
Resistance 2 = (Pivot – Support 1) + Resistance 1 1.31734 – 1.31060) + 1.32253 = 1.32927
Support 2 = Pivot – (Resistance 1 – Support 1) 1.31734 – (1.32253 – 1.31060) = 1.30541

Now plot them on your Chart using the horizontal bars. Don’t stress too much if you can’t get the bars on the
exact price, you can press Ctrl+B to load up the objects window, select the horizontal line and edit the value.

Page: 5 of 7
 Getting Started with Forex - www.forextrader.za.net

If you used the same date and figures, you should have a chart like this on the Daily.

Now switch over to a 15m chart and the pivots will still be drawn in, you might need to click and drag on the price
bar to increase the scale so you can see the pivots. You should be able to see this.

The 5 points we have plotted are significant for different reasons. Firstly, the pivot. If the current market price is
below the pivot we would expect the market to continue short, and if it heads above we now consider it to be
long. I really recommend taking a general trend from a bigger time frame and stick with trading in that direction
unless something very significant comes along.

Now bring out that candlestick cheat sheet and get it close by. What we are looking for, are candlestick
formations suggesting a change in direction on one of these 5 lines. You will see plenty of candles in between the
lines, but very often they fail. They are much more likely to work out on these lines and give you a good entry
point.

Page: 6 of 7
 Getting Started with Forex - www.forextrader.za.net

As an example. Let’s use the levels that we’ve charted and stay on the 15m chart. You can decrease the range
to increase the size of the candles and make them easier to read. Scroll the graph right and look for a hammer,
hanging man or shooting star on one of the lines. Have a look what happened over the next few days.

The first highlighted area shows a cluster of weak shooting stars, which did move the market, but not with a lot of
vigour. It would have yielded a few pips but nothing to write home about.

The second highlighted area shows an almost perfect shooting star also crossing the pivot line with its wick, and
that worked out very nicely. You will see a big gap in the market, that was what happened over the weekend. If
you traded that candle down to Friday night before the markets closed you would have gathered 81 pips.
Holding it over the weekend would have yielded another 70 pips on top of that.

Stop Loss
With this system as well, we do NOT enter in a trade that is already happening. This is because the best stop loss is
just above the wick of the turning candle. Remember, these points usually signify a bounce but if the market
crosses through with a decent momentum it will keep running, so trades can go horribly wrong. By entering the
trade early, we can have a tight stop loss and limit losses. If you enter late in the trade, you’ll find your stop loss is
very high.

Exit points
A “safe” (and I use the word “safe” loosely) take profit would be at the next plotted line. A riskier take profit is the
following line. This is where splitting the trade is a good idea. Close 50% at the first line, and close the remainder
further than that. If you have a fair sized account, you could close 33% at the first line, 33% at the second line,
then set a trailing stop on the remainder. Trailing stop should be as large as the difference between the two
plotted lines. Make sure you have set your take profit to at least break even.

Now try using the SSS system with pivots and targets plotted

Closing Statement
Trading foreign currencies carries a large risk, leveraged positions can work against you as easily as for you. We do
not allow live trading during the training course and will only assist with demo accounts. The decision to trade with
real money is yours and yours alone. However, we cannot ethically suggest or recommend live trading until you
have a good understanding of all the risks involved. It is possible to lose your entire investment so never invest
more money than you can afford to lose.

Page: 7 of 7