Scalping Strategy: How To Successfully Trade With Speed
Scalping is a short-term trading technique where traders conduct trades at lightning speed. Scalp traders don’t hold on to their position for more than a few minutes. They prefer to trade in quick successions when an opportunity lasts, and believe in making small profits instead of waiting for a big trade opportunity to emerge. While scalping, a trader will make between ten and a hundred small trades during a day. Learning about scalp trading can help you decide whether it is your trading style or not. For the reason, we are going to discuss the scalping strategies that work.
Scalp trading works on the principle of limiting market exposure by quickly opening and closing positions. Scalp traders are further categorised as discretionary traders and systematic traders. Discretionary traders base their strategies on instinct. It depends mostly on the trader to decide which market to enter, when to trade, and the size of the deal. Systematic traders, on the other hand, depend heavily on technical trading tools, and little on their instinct, to base their trading decisions. So, if you want to improve your scalping trading techniques, understanding the following trading strategies will help.
Common scalping strategies
Since scalping is a form of high-speed trading, it demands discipline, decisiveness, and analytical prowess to be successful. The main difference between scalpers and other traders is in the timeframe they use. An average scalper may use the 5- and 15-minutes charts. But some others would use 1-minute or tick charts to trade. Let’s discuss the strategies now.
– Stochastic Oscillator strategy
– Moving average strategy
– RSI strategy
– Parabolic SAR indicator strategy
Using Stochastic Oscillator
Scalping can be accomplished using a stochastic oscillator. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points.
Scalping with the use of such an oscillator aims to capture moves in trending market, ie: one that is moving up or down in a consistent fashion. Prices tend to close near the extremes of the recent range before a turning point occurs, such an example is seen below:
In the above chart, of Brent on a three minute timeframe, we can see that the price is moving higher, and the lows in the stochastics (marked with arrows) provide entry points for long trades, when the black %K line crosses above the dotted red %D line. The trade is exited when the stochastic reaches the top end of its range, above 80, or when the bearish crossover appears, when the %K line crosses below %D.
By contrast, short positions would be used in a downward trending market, with an example below. This time, instead of ‘buying the dips’, we are ‘selling the rallies’. So we will look for bearish crossovers in the direction of the trend, as highlighted below:
Scalping Using Moving Average
Another method is to use moving averages, usually with two relatively short-term ones and a much longer one to indicate the trend.
In the examples below, on a three minute EUR/USD chart, we are using five and 20-period moving averages (MA) for the short term, and a 200-period MA for the longer term. In the first chart the longer-term MA is rising, so we look for the five period MA to cross above the 20 period, and then take positions in the direction of the trend. These are marked with an arrow.
In the second example, the long-term MA is declining, so we look for short positions when the price crosses below the five-period MA, which has already crossed below the 20-period MA.
Scalping With Parabolic SAR Indicator
The parabolic SAR is an indicator that highlights the direction in which a market is moving, and also attempts to provide entry and exit points. SAR stands for ‘stop and reversal’. The indicator is a series of dots placed above or below the price bars. A dot below the price is bullish, and one above is bearish.
A change in the position of the dots suggests that a change in trend is underway.
The chart below shows the DAX on a five minute chart; short trades can be taken when the price moves below the SAR dots, and longs when the price is above them. As can be seen, some trends are quite extended, and at other times a trader will face lots of losing trades.
Using RSI for scalping
Finally, traders can use the RSI to find entry points that go with the prevailing trend. In the first example, the price is moving steadily higher, with the three moving averages broadly pointing higher.
Dips in the trend are to be bought, so when the RSI drops to 30 and then moves above this line, a possible entry point is created.
Conclusion
Some people would say that scalping is relatively easy since you remain in trade for a very short period. But scalping successfully isn’t only tricky but demands exceeding amount of discipline from the trader. It is not the preferred style for traders with a day job. To become successful with scalping, you would need to develop abilities to respond quickly to market movements and grab the opportunities before they evaporate. Practicing the technical trading tools is a stepping stone that will help you build a successful scalping trading strategy