Main indicators for a Scalping trading strategy

scalpers seek to capitalize on small market movements, taking advantage of a ticker tape that never stops. For years this quick-fingered daily trading crowd relied on Level 2 bid / ask displays to locate buy and sell signals, reading supply and demand imbalances away from National Best Supply and Supply (NBBO), the bid / ask price that the average person sees. They would buy when demand settles on the supply side or sell when supply settles on the demand side, recording a profit or loss minutes later as soon as balanced conditions were back on the sidelines.

Today, however, that methodology works less reliably in our e-marketplaces for three reasons. First, the order book was permanently emptied after the sudden crash of 2010 because deep orders were targeted for destruction on that chaotic day, forcing fund managers to keep them out of the market or execute them in secondary places.

Second, high frequency trading (HFT) now dominates intraday trading, generating highly fluctuating data that undermines the interpretation of market depth. Finally, most trades now take place outside of exchanges in dark groups that do not report in real time.

KEY TIPS

  • Resellers seek to profit from small market movements, taking advantage of constant market activity.
  • Resellers can meet the challenge of this era with three technical indicators that are tailored for short-term opportunities.
  • You will know those conditions exist when you are affected by losses at a faster rate than is usually the case on your typical profit and loss curve.

scalpers can meet the challenge of this era with three custom technical indicators for short-term opportunities. The signals that these real-time tools use are similar to those used for longer-term market strategies but are instead applied to two-minute charts. They work best when a strong trending or range-bound stock controls the intraday tape; they don’t work as well during periods of conflict or confusion. You will know those conditions exist when you are affected by losses at a faster rate than is usually the case on your typical profit and loss curve.

  1. Moving Average Ribbon Entry Strategy

Place a 5-8-13 Simple Moving Average (SMA) combination on the two-minute chart to identify strong trends that can be bought or shorted on counter swings, as well as to receive a warning of impending trend reversals which are unavoidable on a typical market day. This scalp trading strategy is easy to master. The 5-8-13 tape will line up, pointing up or down, during strong trends that keep prices glued to the 5- or 8-bar SMA.

Penetrations at the 13-bar SMA signal a falling momentum favoring a range or reversal. The tape flattens during these range swings and the price can cross the tape frequently. The reseller then observes the realignment, with the tapes turning up or down and spreading out, showing more space between each line. This small pattern triggers the short buy or sells signal.

2. Relative Strength/Weakness Exit Strategy

How does the reseller know when to take profit or cut losses? 5-3-3 Stochastics and a 13-bar 3 standard deviation (SD) Bollinger band used in combination with tape signals on two-minute charts work well in actively traded markets such as index funds, Dow components and for others it celebrated themes like Apple Inc. (AAPL).

The best tape trades are established when the stochastic rises from the oversold level or falls from the overbought level. Also, an immediate exit is required when the indicator crosses and rolls against your position after profitable momentum.

You can time that exit more precisely by observing the interaction of the band with the price. Take advantage of band penetrations because they predict the trend will slow down or reverse; Scalping strategies cannot afford to keep setbacks of any kind. Also, take a timely exit if a price push misses the band but the stochastic turns around, signaling you to exit.

Once you are comfortable with the workflow and interaction between technical elements, feel free to adjust the higher standard deviation to 4SD or lower to 2SD to account for daily changes in volatility. Better yet, overlay the additional bands on top of your current chart to get a wider variety of signals.

3. Multiple chart scalping

Finally, pull up a 15-minute chart with no indicators to keep track of the background conditions that may affect your intraday performance. Add three lines: one for the opening impression and two for the high and low of the trading range that was established in the first 45 to 90 minutes of the session. Keep an eye out for price action at those levels because they will also set two-minute buy or sell signals on a larger scale. In fact, you will find that your biggest gains during the trading day come when your scalp lines up with support and resistance levels on the 15-minute, 60-minute, or daily charts.

The bottom line

Resellers can no longer rely on real-time market depth analysis to get the buy and sell signals they need to record multiple small gains on a typical trading day. Fortunately, they can adapt to the modern electronic environment and use the technical indicators reviewed above that are customized for very small time frames.

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About the author

Nafees Saifi // entrepreneur, author, trainer, and stocks and FX trader. 
Nafees Saifi is a professional FX trader from, India. Nafees has extensive experience trading commodities, bonds, and equity futures in the Asian, European, and US markets. Nafees holds a Bachelor of Finance and Economics degree and is focused heavily on Investment Finance and Quantitative Analysis.