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.
– Moving average strategy
Using Stochastic Oscillator
The stochastic oscillator is a type of momentum oscillator that compares the current price of an asset to a range of its price over a period. It shows values between the range of zero and 100. Scalping using stochastic oscillator aims at capturing moves in the trend.
When the %K line (the current price of an asset) crosses the %D line (3 periods moving line) from below, along with upper movement in price, the trader opens a long position. Conversely, when the %K line crosses the %D line from above, the trade is exited.
Scalping Using Moving Average
Another process is to use the moving average lines. Traders use two short-term MAs and one long-term 200-period MA for decision making. When the long-term MA is rising, traders take a long position when the 5-period line crosses above the 20-period MA in the direction of the trend.
Conversely, when the long-term MA is declining, traders take a short position when 5-period MA crosses below the 20-period MA.
Scalping With Parabolic SAR Indicator
Parabolic SAR indicates the direction the market is moving and provides entry and exit points. SAR is the short form of stop and reversal, which is a series of dots placed against the price bars. It gives an edge to the trader by indicating the direction the underlying is moving.
A change in the position of the SAR dots signals that a trend reversal is underway. When a stock price is rising, the dots also start to move with price, first slowly but eventually catching up with the price. Dots placed below the price bars indicate a bullish trend, signalling traders to open a long position. Conversely, when the position of the dots flips, it signals that a trend change is underway.
Using RSI for scalping
RSI or relative strength index is a popular oscillator that is used in different timeframes. Scalpers can adjust it for the timeframe they prefer and use it to pinpoint entry and exit within a trend. When the RSI moves close to 30 then climbs upward, it is an indication to open a long position. In an opposite market situation, RSI moves to 70 and then declines to create an opportunity to ‘sell the rally’.
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. Practising the technical trading tools is a stepping stone that will help you build a successful scalping trading strategy.