Scalping Strategies, Advanced Techniques and using Algo Trading for Scalping.

Today, we'll look at one of the most well-known but misunderstood strategies: scalp trading, commonly referred to as scalping. If you prefer to enter and exit trades quickly, these methods are ideal for you. We'll go over the fundamentals of scalp trading before diving into Scalping Trading Strategies. Finally, we'll go over more complex scalp trading tactics including Algo Trading for Scalping, which will improve your chances of success.

What is Scalping?

Scalp trading is one of the most complex methods of trading to learn. It takes extreme discipline and trading attention. Despite the current trend of high frequency trading, scalping has been around for quite some time. Traders are generally drawn to scalp trading for the following reasons:

• Reduced exposure to longer-term danger. • High-frequency trading allows for several trades per day.

• Small profit targets prevent greed.

• More trading chances available.

How to Scalp Trade?

A scalp trader may seek to make money in a variety of ways. One technique is to set a profit target amount for each trade. This profit target should be related to the security's price and can range from 0.1% to 0.25 percent.

Another strategy is to follow equities that break out to new intra-day highs or lows and use Level II to maximize profit. This method necessitates a great deal of concentration and precise order execution. Finally, some scalp traders may monitor the news and trade on anticipated or present events that may generate heightened volatility in a stock.

Scalp Trading Strategies

1. Pullbacks to the Moving averages

It is a scalping method that aims to capitalize on a trend in either direction by entering a stock as it approaches a popular moving average. Legendary traders such as Linda Raschke helped popularize this strategy. The criteria you should look for in this technique are the following: 1. Strong momentum in both directions. 2. A definite trend. 3. Pause the trend with a constructive/light pullback volume. 4. Ability to enter at the 20th moving average. 5. Reclaiming the prior trend. Here's an illustration of how it may look with the ticker symbol SGOC.

As you can see, the stock has been tracking the 20 moving average throughout the day, reaching a high around 11:15. Profits can be made along the way by adding and selling around a core position.

2. Scalp Trading with the Stochastic Oscillator

One of the most appealing ways to scalp the market is to use an oscillator as the signal that drives price activity. Yes, it sounds simple, but it is perhaps one of the most difficult trading strategies to master. Because oscillators are leading indicators, they generate several erroneous signals. The reality is that if you scalp stocks with a single oscillator, you would most likely correctly predict price action 50% of the time. This is basically the same as flipping a coin. While 50% may be a successful ratio for other methods, scalping requires a high win-loss ratio due to higher commission fees.

Stochastics

The slow stochastic consists of two levels: lower and higher. The lower level is the oversold area, while the upper level is the overbought area. When the indicator's two lines cross upward from the lower area, a lengthy signal is generated. When the indicator's two lines cross downhill from the upper region, a brief signal is generated. The graphic below further shows these trade signals.

This is a 5-minute chart for Paypal. We can see the stochastic oscillator at the bottom of the screen. The circles on the indicator represent trade signals. In this situation, we have four profitable and six incorrect alerts. The four profitable indications earn $16.00 per share of PayPal. However, the losses from the six false signals result in a loss of over $10.00 per share. You are probably wondering what went wrong. To summarize, the stochastic oscillator is not intended to be used as a solo indication. Before acting on a trading opportunity, you should seek further validation to reinforce the signal.

3. Scalping (Stochastics and Bollinger Bands)

In the next example, we'll combine the stochastic oscillator and Bollinger bands. We will only enter the market if the stochastic produces a suitable overbought or oversold signal, which is corroborated by the Bollinger bands. To gain confirmation from the Bollinger band indicator, the price must cross the red moving average located in the center of the indicator. We'll stick with each transaction until the price reaches the opposing Bollinger band level.

The PYPL 5-minute chart shown above is the same. This time, we've added the Bollinger bands to the chart.

Trade Signals

We begin with the first signal, which indicates a short trade. Notice how the stochastic provides a bearish signal. Also, the price breaks the Bollinger band's 20-period moving average. Therefore, the signal is good. The second stochastic signal is bullish, so we'll go long until the price reaches the upper Bollinger band. For our third signal, we receive a brief signal from the stochastics when the price reaches the top level of the Bollinger bands. A price fall happens, but the Bollinger bands' moving average does not break to the downside. After a series of fake outs, the stochastics finally cross for the fifth time, this time with confirmation from the bollinger band as well. You may be thinking, but what about the one crossing over the median during the chopfest? Depending on whether or not you entered this deal, you may have suffered a minor loss. In that situation, the second signal indicated re-entry. The third transaction presents a brief opportunity following the standstill at the highs. We receive a short signal confirmation and open a deal.

This continues until the double bottom reversal long signal. The stochastic gives a bullish signal, and the moving average breaks to the upward, so we enter a long bet. We will hold the trade till the price reaches the upper Bollinger band level.

False Signals

As you can see from the graphic, there are several false signals in a row. Talk about a money pit! The fact that the price never breaks the middle moving average of the Bollinger band allows us to overlook all but one of the stochastic oscillator's false signals. When we examine the two trading strategies, we can see that using Bollinger bands greatly reduced the number of erroneous signals.

Profits

With a $10,000 bankroll and a day trading leverage of 1:4, we have a purchasing power of $40,000. If we invest 15% of our buying power in each deal ($6,000), the results are as follows:

• First trade: 23 shares x $3 = $70 profit.

Total bankroll: $10,000 + $70 = $10,070.00

• Second trade: 23 shares x $2 = $50 profit

Total bankroll: $10,070 + $50 = $10,120.00

• Third trade (Stop Out): 23 x -$0.50 = -$11.50 profit

Total bankroll: $10,074.52 – $11.50 = $10,108.50

• Fourth trade: 23 shares x $5 = $115 profit

Total bankroll: $10,108.50 + $115 = $10,223.00

• Fifth trade: 23 shares x $1 = $23 profit

Total bankroll: $10,223.00 + $23 = $10,246.00

We made $246.00 profit with four scalp trades and one stop loss. Each of these trades took 20 to 25 minutes. While some trades saw higher percentage gains due to greater volatility in Paypal, the average scalp transaction on a 5-minute chart is likely to yield a profit of 0.2% to 0.3%. As you can see, the stochastic oscillator and Bollinger bands compliment each other well. The stochastic oscillator screams "get ready!" while the Bollinger bands say "pull the trigger!"

4. Scalp at Support and Resistance

This is a widely popular approach based on Richard D. Wyckoff's trading range beliefs. Simply put, you sell highs and purchase lows.

You require the following two items: (1) low volatility and (2) a trading range.

When you first start learning to scalp, the low volatility decreases the danger of things going horribly wrong. The trading range offers a straightforward approach for determining where to position your entry, stops, and exits.

In the following example, we will look at the S&P Futures E-mini contract to discover scalping possibilities. Why the E-mini contract? Well, it has low volatility, so you have a smaller danger of blowing up your account if you use less leverage, and the E-mini offers a variety of trading range opportunities throughout the day.

Advanced Scalping Techniques

Risk Management for Scalp Trading

We talked about a profitable scalp trading approach with a relatively high win/loss ratio. We also recommended using 15% of the buying power for each scalp trade. Now we'll look at risk management for each trade in your trading portfolio. As a scalp trader, you aim for lesser returns per trade while achieving a greater win/loss ratio. As a result, your risk per trade should be low, thus place your stop loss order near to your entry. To this point, try not to risk more than 0.1% of your purchasing power on a trade. Let's observe how a tight stop affects the stochastic/Bollinger band scalp trading method.

Example: ORCL

For this case, we had three trades. For the first trade, the stochastic crossed below the overbought area, while the price crossed below the Bollinger band's middle moving average. We shorted Oracle at $39.06 per share, with a stop loss of $39.09, which is 0.1% higher than our starting price. The price proceeded to fall, and 14 minutes later, ORCL hit the lower Bollinger band. We closed the trade at 38.95, making a profit of 0.28%.

After hitting the lower Bollinger band, the price began to rise. The stochastic lines crossed upwards from the oversold area, and the price crossed above the Bollinger band's middle moving average. We went long on this signal at $39.04. Our stop loss is set at $39.00, 0.1% below the entry price. This trade proved to be a false signal, and our.1% stop loss was triggered two minutes after we entered the transaction. The third and final signal took more than 40 minutes to form.

We initiated a long position after the price passed above the oversold region and closed above the middle moving average. We entered the market at $38.97 per share, with a stop loss of $38.93, or 0.1% below our entry price. This time, Oracle climbed, and we concluded a profitable trade 2 minutes after entering the market when the price hit the upper Bollinger band, resulting in a 0.17% increase.

Profitability

So, if we had a $10,000 bankroll leveraged to $40,000 buying power, here are the results of a 15% investment each trade:

• First Trade: 6,000 x .28% = $16.80 profit.

Total bankroll: 10,000 + 16.80 = $10,016.80

• Second Trade: 6,010.08 x -0.1% = $6.01 loss

Total bankroll: 10,016.80 – 6.01 = $10,010.79

• Third Trade: 6,006.47 x 0.17% = $10.21 profit

Total bankroll: 10,010.79 + 10.21 = $10,021

So, if we had a $10,000 bankroll leveraged to $40,000 buying power, here are the results of a 15% investment each trade:

Scalping and Commissions

When you scalp trade, you will typically engage in multiple deals within a trading session. Scalp traders will occasionally trade more than 100 deals every session. What is the one factor in our previous trading outcomes that might absolutely reveal our theory? Commissions, as you guessed.

If you have a flat charge of even $5 per trade, the exercise of scalp trading in our prior instances is essentially pointless. This is why, while scalp trading, you need a large bankroll to cover the costs of the company. After accounting in commissions and taxes at the end of the year, it will be incredibly tough to build a tiny account by scalp trading. After thousands of trades, all you'll be doing is lining your broker's pockets.

Monthly trading with no limits

Simply having the option to execute online trades in the late 1990s was regarded as a game changer. Now fast forward to 2021, and there are companies cropping up that offer unlimited trades for free.

So, if you want to scalp trade, you should seriously consider signing up with one of these brokerage services. Assume you trade on average 10 times every day. This equates to over 2,400 day trades every year. Assuming the average commission each trade is $4, this might cost you more than $12,000 per year. Most brokerage businesses do this, so you shouldn't have a problem locating one.

Concentrate on Profit to Risk Ratios and Limit Your Number of Trades.

This is going to sound contrary to the entire concept of scalp trading. What comes to mind when you hear "scalp trader"? You are most likely thinking of a trader who makes 10, 20, or 30 deals per day. What if scalp trading refers to the amount of reward and risk you are willing to accept, rather than the number of trades?

Another item cites an FXCM study that found that profitability was often achieved by trading less. Furthermore, if traders set adequate risk-reward expectations, they will make more money in the long run. So, as a scalper or someone interested in scalp trading, you should consider reducing the number of trades and hunting for trade chances with a reward to risk ratio larger than one to one.

Scalping using Algorithmic Trading

Algorithmic trading improves the accuracy and effectiveness of scalping tactics. Alphabots' user-friendly interface enables traders to implement algorithms without substantial coding experience. Scalpers can benefit from algo trading in the following ways:

• Algorithms execute transactions quickly and automatically, ensuring timely entry and exit points. • Automated systems can incorporate risk factors to properly manage exposure.

• Backtesting: Algo traders can use previous data to refine and optimize their methods before deploying in real markets.