Scalping is a popular Forex method based on short-term trading. It is aimed at making small profits from each open trade. Scalpers use minor price impulses and during the trading session, they always have the same problem — lack of time to analyze situation. Traders have to make decisions instantly. That is why it is so important for them to choose appropriate indicators and strategy for trading. One of the strategies designed for trading on the five-minute chart is Combined Forces Intraday or CFI.
Indicators and settings
According to CFI strategy traders search signals using three indicators. Each of them gives a signal confirming the signal of the other indicator. First of all, we will place trend indicator Parabolic SAR on the chart. We do not need to change its default settings of 0.02 and 0.2.
Parabolic SAR shows current trend direction. It is the first indicator, which gives the first signals. A trader shall not wait when the indicator starts to form points on the other side of the price. It is much more important to know general market direction and use it for trading. Points displayed below the price indicate uptrend; points above the price level show downtrend.
After that we place RSI oscillator Note that a trader shall slightly change its default settings. First of all, instead of the period 9 we set the period 14. In this case the indicator will give more conservative signals and filter out most of the false signals. It is also necessary to change overbought and oversold zones. They should have the values of 35 and 65.
RSI should be placed outside these zones, that is, the moving average should be between the levels of 35 and 65. If RSI goes beyond these levels, a trader shall cancel a trade, as the signal is considered false.
The third and last indicator used in CFI strategy is Stochastic Oscillator with the settings of 5, 8 and 3. Unlike RSI, the lines of this Oscillator shall be inside overbought or oversold zone, as it will serve as a confirmation of a signal.
We know that when the price goes to one of the Stochastic zones, it does not a signal of the price reversal, as the price may continue to move in the same direction for a long time. However, the developers of the strategy based the strategy on the fact that probability of the price reversal increase when the price goes to the overbought/oversold zone. So, we have installed all the indicators and now, we can start to search signals.
Let’s see what conditions shall be met for forming a buy signal in accordance with CFI strategy:
- Parabolic SAR points shall be below the price level.
- Moving average of RSI shall be in the channel between the lines 35 and 65.
- Stochastic shall be in the oversold zone and start to reverse.
- Last candlestick shall close higher that the last sell point of Parabolic.
Note that the latter condition is very important. The chart shows that the first candlestick, which changed the location of points in Parabolic SAR indicator, has closed above the last point for sale, which means that the signal was given at the moment of opening of the second candlestick. This is a moment for placing a buy order.