This strategy is a basic scalping strategy that aims to make quick gains off of the day’s high or low. The rules for entry are very basic and easy to follow. Exit, on the other hand, requires you to make a judgement call and/or to use a stop-loss. This technique was developed by Avery Horton, a computer programmer. The name of the strategy is based on an experiment where rats outsmarted Yale students by always going in the same direction (cheese was located in the left area 60% of the time – Yale students tried to reason where the cheese would be next whereas the rats just tried going left first). Avary recommends that you either specialise in going long or short.
Here’s how the “rat reversal” works:
1) Use a 5-minute candlestick chart of whatever currency pair you want to trade.
2) When price is within 20 pips of the day’s low, that is your window of opportunity.
3) Wait for a black (bear) candle to close.
4) The following candle must be white (bull) and close – pay attention to the HIGH of this white candle.
5) Enter long at the white candle’s high.
6) It is recommended that you use a stop loss of 9 pips, and “take” whatever profit you can each time (2 or 3 or more pips). Pay particular attention to the “price action”, if it looks like price is going to go back down, it probably is, so bail out before your stop is hit. Just because price has hit a new low for the day doesn’t mean it won’t hit some new lows, so be careful.
7) Final rule, never trade against the 1-hour candle colour. If you are looking to go long, make sure the hourly candle is white!
The above rules applied to the day’s low. When dealing with the day’s daily high, just do the opposite!
Here is a visual example of when you want to go long:
There are six arrows here, the entry point would be at the very bottom of each arrow. On some of the runs you can quickly make 10 pips. On the last run, you would have made 30 pips (you could have actually made much more than that by keeping your position open over the weekend but that would have been risky as the market can sometimes hit you in the wrong direction on Monday morning’s open).