Thread: Short Term Trading Strategies Using Market Depth

Welcome to Short Term Trading Strategies Using Market Depth. The goal of this thread is to highlight the advantages that traders have by using the Active Trader platform and the powerful Market Depth feature. I am looking forward toward sharing my years of trading experience with you and showing you examples of this exciting feature in real-time action. No indicator is fool proof and past performance is not an indication of future results. However, if you have any comments or questions, please feel free to post them in the Strategy Lab thread.

The eagerly anticipated Non- Farm Payroll announcement should provide a lot of volatility tomorrow morning at 7:30 am Eastern time. That volatility should provide some excellent trading opportunities.

Daily FX Currency Analyst, John Kicklighter wrote a fantastic article on short term Event Risk Trading.

Just a decade ago, scalping was a lucrative form of trading that only pit traders could partake in. With tight spreads and a clear view of the market, the hustle and bustle of the open outcry market was perfectly suited for many quick entries and exits for five or ten basis points at a time.

Now, however, with access to the deep liquidity of the currency market along with improvements to technology and data flow, retail traders have now found their way into the trading space formerly dominated by professionals. However, entry alone does not guarantee success...

Click here to read the entire article and view his charts.

I was scanning charts for setups and came across one using the Swiss Yen. CHF/JPY bounced from Bollinger Band Resistance. CCI was turning down. I checked Active Trader Market Depth and noticed a nearly 2:1 imbalance favoring Offers indicating a greater chance of a successful short trade. I entered short at 85.26 and was able to exit shortly at 85.12 near the 200 period MA.

Thanks for your post.

I am still learning. Today I entered long aud/usd @ 0.6324 and exited @ 0.6334. But my stop was 24 pips. Is this a good trade? How to place stop loss when scalping? Or what profit/loss ratio should be kept in scalping? Does it have to be 1:1 or over?

Very appreciate your comments in advance.

Originally Posted by y_2008

Thanks for your post.

I am still learning. Today I entered long aud/usd @ 0.6324 and exited @ 0.6334. But my stop was 24 pips. Is this a good trade? How to place stop loss when scalping? Or what profit/loss ratio should be kept in scalping? Does it have to be 1:1 or over?

Very appreciate your comments in advance.

Good question. It all depends how close you are to an established longer term support or resistance line. Some scalping strategies have stops 50 to 100 pips with limits of 5- 12 pips. Ideally, a 2:1 or 1:1 risk reward is desirable. I tend to cut my losers really fast because maybe a key support or resistance level has been broken. 24 pips risk to make 10 is pretty good as long as you are 90% accurate as scalping strategies tend to be.

Originally Posted by y_2008

Thanks for your post.

I am still learning. Today I entered long aud/usd @ 0.6324 and exited @ 0.6334. But my stop was 24 pips. Is this a good trade? How to place stop loss when scalping? Or what profit/loss ratio should be kept in scalping? Does it have to be 1:1 or over?

Very appreciate your comments in advance.

Profit loss ratio should be 2:1 and not 1:1. whether you are doing scalping, intraday, swing or whatever. but the ratio should be 2:1...........

Originally Posted by Anne09

Profit loss ratio should be 2:1 and not 1:1. whether you are doing scalping, intraday, swing or whatever. but the ratio should be 2:1...........

This all depends on the accuracy of the system a trader is using. A 1:2 or better risk to reward ratio is an ideal scenario especially if your system is 32% accurate or better. In this case, a trader can lose 70% of their trades and still break even. Up the accuracy to 40% correct and you are making money. You find these type of trades in abundance on longer term time frames due to the increased amount of statistical data factored into levels of support and resistance. 5-minute and less time frames tend to react due to minor fluctuations in the market and are not as reliable. Wider stops are often needed to avoid being prematurely stopped out. While medium term and position trading strategies require risk reward ratios of 2:1 or more to be profitable because of the high probability of failure, day trading strategies rely on high probability trades with a high frequency of correct trades and not on risk reward ratios.

In day trading, traders risk .5% to 2% of their account on any one trade. This means that they are trading a minimum account balance of $25,000 to half million dollars, so the losses will not impact their account and they can let the law of averages work in their favor.

Wow! I will learn a lot from this thread

Originally Posted by Khloris

Wow! I will learn a lot from this thread

Ask any questions that you may have or post your trades, whether they worked or not. I look forward to your participation. I am here to help.

EUR/JPY looked like a good trade for 20 pips. I went short as the 5 SMA crossed below the 13 SMA. I entered short at 128.12 and my limit was hit at 127.84. According to the rules, I would still be in this trade for an additional 28 pips as the moving averages had not crossed.

There is a another setup on the EURJPY today to go short. The 5 simple moving average crossed below the 13 moving average on a 5 minute chart.
Entered at 131.03

My 20 pip stop was hit as the EUR/JPY turned up. The Euroyen is the bull today.

With the ECB rate announcement and G20 meeting in London (the Forex Capital of the World) one would expect some fireworks in the currency markets. Taking my queue from the 4-hour and Daily charts I knew my trend bias would be Long for the EUR/JPY. Market depth was flashing a 2 to 1 imbalance favoring buyers, so I used a MACD crossover to get me into the trade at 132.00 and set a 100 pip limit at 133.00. Because of the increased volatility, I widened my stop from the usual 20 to 41 pips which was just at the last 5 minute swing low. It took about an hour for this pair to hit this target. See the attached chart

Market Depth showed a clear order imbalance in favor of a short-term long position on the Euro. Good for 6 pips in 2 minutes. There was 12 Million on the BID (Buy) side and only 5 Million Offered and this condition remained for several minutes. I quickly entered a market order to take advantage of this and took the quick payout. Without Market Depth, I would not have a clue that this was happening.

Market Depth on the GBP/JPY showed an imbalance favoring the sell side even though we got a 5 minute moving average buy signal when the blue 5 MA moved above the red 13 MA. Market Depth kept us out of a losing trade as price continued to fall. Price was in the 149.50 area but fell sharply to 149.15.