Top Indicators for a Scalping Trading Strategy

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Top Indicators for a Scalping Trading Strategy

Scalpers benefit from minor market moves by taking advantage of a ticker strip that never stops moving. For years, this quick-fingered day trader depended on Level 2 bid/ask screens to find buy and sell signals, reading supply and demand mismatches away from the NationalBestBid and Offer (NBBO)—the bid/ask price that the typical person sees. They would purchase when technical circumstances drove the ask price lower than usual and sell when technical conditions pushed the bid price higher than normal, recording a profit or loss minutes later when the spread returned to balanced conditions.

However, that paradigm no longer works as well in contemporary electronic marketplaces for three reasons. First, following the 2010 flash collapse, the order book was permanently empty since deep standing orders were targeted for destruction on that chaotic day, requiring fund managers to keep them off-market or execute them in alternate venues.

Second, high-frequency trading (HFT) currently dominates intraday trades, resulting in dramatically shifting data that makes market depth analysis difficult. Finally, the bulk of transactions are now conducted outside of exchanges in dark pools that do not report in real time.

Key Takeaways

  • Scalpers strive to benefit from modest market changes by capitalizing on the market’s continual activity.
  • Scalpers may tackle the challenges of this period by using three technical indicators designed specifically for short-term opportunities.
  • Scalping tactics operate best when the intraday tape is firmly trending or range-bound; they don’t perform so well when there is disagreement or uncertainty.

Scalpers may tackle the challenges of this period by using three technical indicators designed specifically for short-term opportunities. These real-time tools employ signals similar to those used in longer-term market strategies, but they are applied to two-minute charts.

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They operate best when the intraday tape is firmly moving or range-bound; they don’t perform so effectively when there is disagreement or uncertainty. You’ll know such circumstances are there when you’re being whipsawed into losses at a faster rate than is common on a profit-and-loss curve.

1. Moving Average Ribbon Entry Strategy

Image by Sabrina Jiang © Investopedia2020

On the two-minute chart, use a 5-8-13 simple moving average (SMA) combination to identify strong trends that may be purchased or sold short on counter swings, as well as to receive a heads-up on impending trend shifts that are unavoidable in a normal market day. This scalp trading approach is simple to learn. During strong trends that keep prices attached to the 5- or 8-bar SMA, the 5-8-13 ribbon will align, signaling higher or lower.

Intrusions into the 13-bar SMA indicate decreasing momentum, favoring a range or reversal. During these range fluctuations, the ribbon flattens down, and price may regularly crossed it. The scalper then looks for realignment, with ribbons rising or falling and spreading out, indicating greater space between each line. The purchase or sell short signal is triggered by this little pattern.

2. Relative Strength/Weakness Exit Strategy

Image by Sabrina Jiang © Investopedia2020

How does a scalper decide when to grab gains and when to reduce losses? On two-minute charts, 5-3-3 Stochastics and a 13-bar, 3-standard deviation (SD) Bollinger Band used in conjunction with ribbon signals function effectively in actively traded markets such as index funds, Dow components, and other widely held items such as Apple Inc. (AAPL).

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When Stochastics goes higher from the oversold level or lower from the overbought level, the finest ribbon trades form. Similarly, when the indicator crosses and rolls against your position after a profitable shove, you must exit immediately.

You may timing the departure more accurately by observing the interplay of the band with the price. Profit from band penetrations since they anticipate that the trend will stall or reverse; scalping techniques cannot afford to wait for any kind of retracement. Also, if a price push fails to hit the band but Stochastics rolls over, this is a signal to leave.

Once you’re satisfied with the process and interplay of technical aspects, you may increase the standard deviation to 4SD or decrease it to 2SD to accommodate for daily fluctuations in volatility. Better still, superimpose the extra bands on top of your present chart to acquire a wider range of signals.

3. Multiple Chart Scalping

Finally, open a 15-minute chart with no indicators to monitor background variables that may have an impact on your intraday performance. Add three lines: one for the beginning print and two for the high and low of the trading range that formed between 45 and 90 minutes into the session. Keep an eye out for price activity at those levels, as it will build up larger-scale two-minute buy or sell signals. In fact, you’ll discover that your best trading days occur when scalps coincide with support and resistance levels on the 15-minute, 60-minute, or daily charts.

The Bottom Line

Scalpers can no longer rely on real-time market depth research to provide the buy and sell signals required to generate several tiny gains in a normal trading day. Fortunately, they can adapt to today’s technological world and employ the technical indicators discussed above, which are tailored to extremely short time periods.

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