We are recommending you to test a very simple scalping system based on a pretty interesting indicator – Directional Movement or you will also find it as ADX.
This indicator has three elements: +DI, -DI and the ADX. The most important characteristics of these elements are:
- When +DI crosses above –DI then the trend is up;
- When –DI crosses above +DI the trend is down;
- The ADX shows the strength of the current trend.
We tested this system on different time frames, currency pairs and periods for the ADX and we concluded that it works best on medium volatility pairs like AUDUSD, EURUSD, GBPUSD and others. The time frame with the best results was an M5 and as for the indicator we use a 28 for smoothing the ADX and 28 for the DIs.
Why do we say it is simple? Well we observed that the volatility of the market rises after a hiccup was drawn on the Directional Movement.
Chart: AUDUSD, M5
First you will have to look for a crossover between +DI and –DI. For better understanding let’s take:
+DI dropped under –DI and in a relatively short period of the time +DI went back over –DI (we call this a hiccup). When this happens wait for the 5 minutes candle to close and confirm the crossover. Open a buy on the opening of the next candle and place a Stop Loss under the confirmation candle (just like in our example.)
This time –DI dropped under +DI, but in a short period of time it went back over. Sell on the opening of the next candle and place a Stop Loss above the confirmation candle (you can put it several pips above the high of the candle to take into consideration also the spread).
From our tests we observed that as for the profit level it is best to set it two times the risk. So the risk/reward ratio would be of 1:2. You can play a little with your money management system so that the first target to be set at this reward level, the second at 1:3 and so on.