Bollinger Stochastic Scalping Strategy
The Bollinger Bands indicator and the Stochastic oscillator are among the most widely used tools in trading, and they appear in more than one scalping strategy. One of them highlights overbought and oversold zones, while the other helps identify support and resistance. These indicators have other uses too, but this is what we need for the Bollinger and Stochastic strategy. This article is split into three parts: getting to know the indicators, understanding scalping, and explaining the strategy.
What is the Bollinger Bands indicator?
It is a trend indicator made up of three lines. The upper and lower lines represent the standard deviation of the middle line (above and below it), and it is usually used to gauge the strength of a trend.
To add the indicator to your chart, follow the steps shown in the image below.
What is the Stochastic indicator?
The Stochastic is a momentum indicator. It compares a closing price with a range of its prices over a given period, and it is used to identify overbought and oversold zones using a set of values from 0 to 100. It is one of the more popular momentum tools traders use in scalping.
To add the indicator, follow the steps shown in the image.
We covered the Bollinger Bands indicator and the Stochastic oscillator in a previous article.
What scalping means
Scalping is one of the harder trading strategies. Mastering this type of trading takes discipline and strong focus, because price movement is very fast.
Scalping has been around for many years, but it has lost some of its appeal recently because of how difficult it is.
Some of the advantages of trading with scalping strategies are:
- Lower exposure to risk
- You can place up to a hundred trades or more per day
- The ability to fight greed, since your profit targets are very small
- A larger number of trading opportunities
How the Bollinger Bands and Stochastic scalping strategy works
In the trading example below, we combine the Stochastic indicator with Bollinger Bands.
We only enter the market when the Stochastic generates an overbought or oversold signal at the same time that price reaches a Bollinger band.
In the chart above, notice that price was moving in a sideways range. After we added the Stochastic and Bollinger Bands, a set of signals appeared.
The first signal is at the start of the chart, when price dropped below the lower Bollinger line and, at the same time, the Stochastic had reached an oversold state, which suggests the trend may be about to change. At that point a buy trade was possible, but it is better to wait for a crossover between the two Stochastic lines.
Price did rise as expected, and we closed the trade as soon as it reached the upper Bollinger band. After that, another sell signal appeared, where price moved above the Bollinger band and the Stochastic reached an overbought state, and a sell trade was possible at that point.
Note: price does not have to move outside the Bollinger Bands; reaching the band can be enough, as in the last signal, where price touched the upper Bollinger band while the Stochastic reached an overbought state, and we entered a sell trade after the two Stochastic lines crossed, as shown in the image above.
Conclusion
Because the Bollinger Bands and Stochastic scalping strategy needs fast trade execution, you will need a broker that can handle that; slow, traditional brokers will not help when it comes to execution speed.
With this strategy there are no large commissions or markups. Scalpers often place hundreds of trades a day, so imagine paying a fixed commission on every one of those trades: your profits would be eaten up quickly by high transaction costs. To profit from this scalping strategy, a commission-free broker is ideal.
Speed and precision are two key factors in this strategy. If you do not have a broker offering direct market access and low or zero commissions, you may face transaction costs too high for the strategy to be worthwhile. So:
- Scalping is one of the harder trading strategies, and mastering it takes discipline and strong focus, because price movement is very fast.
- Price does not have to move outside the Bollinger Bands; simply reaching a band can be enough.
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Frequently asked questions
What is the Relative Strength Index?
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally, the RSI is considered overbought when it is above 70 and oversold when it is below 30.
How do you learn to trade speculatively in stocks?
An investor who trades speculatively buys an asset in an attempt to profit from small market fluctuations. These are high-risk, high-reward investments made over a short period, and once the investor reaches the desired profit, the investment is sold.
What is the best indicator for a day trader?
There are many indicators in the stock market, and the Moving Average Convergence Divergence, or MACD, is probably the most widely used technical indicator.
What are forex strategies?
A forex trading strategy is a technique a forex trader uses to decide whether to buy or sell a currency pair at any given time.
Disclaimer: This article is for educational purposes only and is not investment advice. Trading forex and CFDs involves the use of leverage and carries a high risk of losing money rapidly; you could lose more than your initial deposit. Indicator signals such as the ones described here can fail, and past performance does not guarantee future results. Do your own research and consider your risk tolerance before trading. Some links on this site may be affiliate links, meaning we may earn a commission at no extra cost to you.
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