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Scalping 101: The Basics of Intraday Trading

Posted on Thursday, February 20th, 2020 by Jea Yu

Scalping is a style of trading that seeks to capitalize on intraday price moves by taking high probability trades with minimal holding times ranging from seconds to minutes. There are many variations on the scalping theme that focus on targeting small price moves to executing a large volume of trades or leveraging large sized positions. All these components center around the core principle of mitigating risk by cutting exposure by limiting the holding time for positions. Most of the trading activity on U.S. exchanges is executed by algorithms (algos) employing scalping methods and strategies. Retail traders can capitalize from the inefficiencies created by algos during fertile periods of the trading day with prudent trade management and discipline.

Trading Methodology

A reliable trading methodology complete with an arsenal of tools to enable on-the-fly price interpretation is key. Start with some core set-ups and add to them as you get comfortable spotting and reacting to them. You will find certain set-ups work exceptionally well in the morning and backfire in the afternoon. The key is identifying the variables that impact good and bad outcomes (IE: trading period of the day, stock behavior, market context, sector correlation, and event catalyst). We’ve introduced many of the tools in prior Marketbeat articles. The rifle chart is our main charting tool composed of simple moving averages as the price road map and stochastic as the momentum indicator. Spotting market structure low (MSL) formations are a key starting point for playing long scalps. Utilizing multiple time frames on the rifle charts and a specific stochastic pattern called a mini pup are core components of our methodology. The final price component is the addition of plotting Fibonacci (fib) price levels to provide additional price inflection points. The culmination of the aforementioned tools can be used to augment or refine your trading methodology. The key is getting familiarized and acclimated to the tools and the stocks you are trading.

Preparing the Playing Field

Prior to the opening bell, it’s crucial to prepare for the trading day with a morning preparation routine that entails laying out the complete playing field for any stock you plan to trade. By mapping out the playing field, the trading game plan materializes. Scalps can be targeted at key overlapping resistance and support levels and factoring in the wiggle room. In most cases, reversion trades will outnumber trend trades since reversions tend to occur more often especially in the morning session. Most retail traders should stick to the morning session action where the momentum and liquidity is at its highest. This is due to the largest number of participants engaging the markets during this trading period. When algos compete with each other for liquidity, they leapfrog over one another causing extensive price volatility resulting to overshoots at price inflection points and quick reversions. Consider these areas as bumpers on a pinball table. Scalpers will look to react on these bumpers utilizing trading methods.

Scalping 101: The Basics of Intraday Trading

Trade Management

Having bread and butter set-ups that repeat is a good starting point. Our Trading Blueprints can be used to pinpoint key price inflection areas to anticipate trades. In our AMD Trading Blueprint, we provide key areas for reversion scalps that can not only be played for earnings reaction, but be used as a daily reference for scalping. There are two clear trade signals on AMD. The first buy signal triggers at 47 composed of the 5-minute pup and mini pup breakout and 1-minute MSL and stochastic cross up resulting in a price spike up towards the sticky 2.50s zone 47.40-to-47.60 price range for nearly a 0.50 price move. Traders could scalp anywhere from 0.10 to 0.40 on this upside price move. If you missed the scalp, the sticky 2.50s zone is always an area to watch for reversions. The second signal is a short-sell after peaking on the 1-minute chart with a doji candlestick at the higher high. The next candle forms a lower high, thereby forming a market structure high (MSH) with the short sell triggering below the low of the lower high candle. This signals a short sell at 47.38 on the 1-minute MSH trigger and 1-minute stochastic mini inverse pup sending AMD shares down to the 47.12 before coiling. Traders could scalp 0.05 to 0.35 on the downside move.

Repetition Build Familiarity

As with all endeavors, repetition is key. It reinforces confidence by building familiarity. Scalpers primarily use smaller time frames like the 5 and 1-minute charts. However, the wider time frames are utilized to gauge what trend formations are lurking, so we’re not taken by surprise being on the wrong side of a larger trend. This doesn’t mean we don’t scalp against the wider trend; it means we don’t stick around too long in a position that may get steamrolled as the shorter time frame charts align with the wider time frame charts to detonate a powerful trend move. Scalping requires full awareness of the playing field and the agility to navigate and execute in a timely manner to avoid stepping on landmines.

A Great Time to be a Scalper

One of the biggest drawbacks for scalping was the commission expenses. However, the advent of the zero-commission era is upon us making it a great time to be a scalper. This enables traders to scale into and out of positions without the hinderance of rising costs that require a certain price gain to breakeven. This alleviates tremendous psychological barriers not to mention the cost efficiencies and improved profit margins. In upcoming articles, we will review ways to refine methods and management for optimal scalping.

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