Day Trading & Scalping

Suitable Indicators for a Scalping Trading Strategy

Scalpers seek to profit from small market movements, taking advantage of a ticker tape that never stands still during the market day. For years, this fast-fingered crowd relied on Level 2 bid/ask screens to locate buy and sell signals, reading supply and demand imbalances away from the National Best Bid and Offer (NBBO), or the bid and ask price the average person sees. They would buy when demand set up on the bid side or sell when supply set up on the ask side, booking a profit or loss minutes later as soon as balanced conditions returned to the spread.

That methodology works less reliably in our modern electronic markets for three reasons. First, the order book emptied out permanently after the 2010 flash crash because deep standing orders were targeted for destruction on that chaotic day, forcing fund managers to hold them off-market or execute them in secondary venues.

Second, high-frequency trading (HFT) now dominates intraday transactions, generating wildly fluctuating data that undermines market depth interpretation. Finally, the majority of trades now take place away from the exchanges in dark pools that don’t report in real time.

  • Scalpers seek to profit from small market movements, taking advantage of a ticker tape that never stands still during the market day.
  • Scalpers can meet the challenge of this era with three technical indicators custom-tuned for short-term opportunities.
  • You’ll know those conditions are in place when you’re getting whipsawed into losses at a greater pace than is usually present on your typical profit and loss curve.

Scalpers can meet the challenge of this era with three technical indicators custom-tuned for short-term opportunities. The signals used by these real-time tools are similar to those used for longer-term market strategies, but they are instead applied to two-minute charts. They work best when strongly trending or strongly range-bound action controls the intraday tape; they don’t work so well during periods of conflict or confusion.

You’ll know those conditions are in place when you’re getting whipsawed into losses at a greater pace than is usually present on your typical profit and loss curve. Read on for more about such signals.

Moving Average Ribbon Entry Strategy


Source: eSignal

Place a 5-8-13 simple moving average (SMA) combination on the two-minute chart to identify strong trends that can be bought or sold short on counter swings, as well as to get a warning of impending trend changes that are inevitable in a typical market day. This scalp trading strategy is easy to master. The 5-8-13 ribbon will align, pointing higher or lower, during strong trends that keep prices glued to the 5 or 8-bar SMA.

Penetrations into the 13-bar SMA signal waning momentum that favors a range or reversal. The ribbon flattens out during these range swings, and price may crisscross the ribbon frequently. The scalper then watches for realignment, with ribbons turning higher or lower and spreading out, showing more space between each line. This tiny pattern triggers the buy or sell short signal.

Relative Strength/Weakness Exit Strategy

Source: eSignal

How does the scalper know when to take profits or cut losses? 5-3-3 Stochastics and a 13-bar, 3-standard deviation (SD) Bollinger Band used in combination with ribbon signals on two-minute charts work well in actively traded markets, like index funds, Dow components, and for other widely held issues like Apple Inc. (AAPL).

The best ribbon trades set up when Stochastics turns higher from the oversold level or lower from the overbought level. Likewise, an immediate exit is required when the indicator crosses and rolls against your position after a profitable thrust.

Time that exit more precisely by watching band interaction with price. Take profit into band penetrations because they predict the trend will slow or reverse; scalping strategies can’t afford to stick around through retracements of any sort. Also, take a timely exit if a price thrust fails to reach the band but Stochastics rolls over, which tells you to get out.

Once you’re comfortable with the workflow and interaction between technical elements, feel free to adjust standard deviation higher to 4SD or lower to 2SD to account for daily changes in volatility. Better yet, superimpose the additional bands over your current chart so that you get a broader variety of signals.

Multiple Chart Scalping
Finally, pull up a 15-minute chart with no indicators to keep track of background conditions that may affect your intraday performance. Add three lines: one for the opening print and two for the high and low of the trading range that set up in the first 45 to 90 minutes of the session. Watch for price action at those levels because they will also set up larger-scale two-minute buy or sell signals. In fact, you’ll find that your greatest profits during the trading day come when scalps align with support and resistance levels on the 15-minute, 60-minute, or daily charts.

In Summary
Scalpers can no longer trust real-time market depth analysis to get the buy and sell signals they need to book multiple small profits in a typical trading day. Fortunately, they can adapt to the modern electronic environment and use the technical indicators reviewed above that are custom-tuned to very small time frames.

Alan Farley can be contacted on this link: Hard Right Edge

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is author of the McGraw-Hill best-seller "The Master Swing Trader", and popular columnist for The Street.com. Alan has been on the market scene for well over a decade as a trader, advisor, and author. He is a powerful lecturer on swing trading, including the original strategies and tactics found at Hard Right Edge.Alan is a frequent contributor to CNBC. He has also been featured in Fidelity Outlook, Forbes, Technical Analysis of Stocks and Commodities, Barrons, Smart Money, Futures Magazine, Tech Week, Active Trader, MSN Money, Technical Investor, Bridge Trader, Online Investor, America-Invest, the Los Angeles Times, and Trading Markets. He consults regularly with industry leaders on the issues facing today's traders, and is a strong voice for the revolution changing our modern markets.

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term tr...

Tytus_Barnowl

Member
92 7
If you want to scalp just use EMA crossover pullbacks. First have a directional indicator on a slightly higher timeframe, then a confirmation crossover with finally an execution pullback where you can place your order. Not something to set and forget but if you have the time then go for it.
 

NVP

Legendary member
36,599 1,858
just interested to know why are these indicators any more or less useful than any others for scalping ? ......I think personally there are many other far more important influencing factors than the indicators for mastering this genre of trading...especially in say Forex Scalp Trading
 
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