Hello guys, in the following minutes we’lldiscuss about scalping trading, we’ll see what are the main requirements of this tradingstyle and we’ll also talk about the best indicators to use when adopting this technique.
So, scalping is a popular trading method usedby experienced traders and especially by market beginners.
The main aim is to obtain small incrementalgains that add up to a large profit, rather than big gains from a small number of trades, as in the case of swing trading or position trading.
This method involves holding trades for justa few seconds or minutes, at the most.
Scalpers generally choose to trade on highlyliquid markets, because this allows them to get in and out of positions very quickly.
If you want to engage in the fast-paced worldof scalping, you need the right tools to maximize your success.
First you need, a good computer and a fastinternet connection.
As a scalper trader, you need your tradingplatform to execute a trade as fast as possible.
You don’t want to work on a slow computer, with little ram, just to see your pc frozen when you want to enter a trade.
Also, a slow internet connection speed couldmake the difference between a successful scalping trade and a bad one.
Remember, you want to get in and exit themarket promptly and 1-2 seconds could be crucial to your results.
Second, you need a professional and reliablebroker.
When you are scalping in real time for severalhours, it can be an intense experience.
If you practice scalping with a poor broker, it is very likely that they will not allow you to make short-term profits.
Most brokers use dirty practices to stop scalperssuch as stop-loss hunting, spread widening or slippage.
In order to be successful while scalping, a high-quality broker must offer instant execution.
Your broker must provide a live data feedfor charts and must have very competitive spreads for the instruments you will be tradingon.
Also, the trading software must be easy touse and fast to execute trades with.
I’ve tested a lot of brokers in the lastyears and all of them have their pros and cons.
In the recent year I’ve settled with onebroker and so far this is the best one for my needs.
I’ve put a link in the description if youwant to research more about the ECN broker I’m trading with.
The third requirement is instruments withlow spreads.
Because of the nature of scalping you needto open and exit a number of positions in a day.
The cost of the trades will become an importantfactor.
As a scalper, by default you’ll use tighterstop-losses, aiming for small profits.
The higher the spread, the lower your stop-losswill become.
For example, if you scalp with a 10 pointsstop-loss order, a spread of over 3 points will leave room only for 7 more points inorder to exit the trade.
That’s a small margin.
In scalping, every point counts so you needto trade with low-spread instruments.
I personally never scalp an instrument thathas a spread higher than 2 points.
The risk/reward ratio is not worth it.
My favorite low-spread instruments on whichi apply scalping techniques are Dow jones index, Dax 30 index, eur/usd, gbp/usd eur/jpyand usd/jpy.
Now that we saw the requirements and toolsof scalping, let’s see what are the best indicators I use when I’m scalping the market.
One of the best indicators for scalping themarket is the parabolic sar.
The parabolic sar is an indicator mainly usedto identify the market direction and the beginning of reversals.
Parabolic sar allows scalpers to evaluatethe trend direction, to pinpoint entry and exit points and also placing trailing stops.
The indicator is displayed as a series ofdots.
Unlike other trend-following indicators, parabolicsar formula can spot short-term price changes, which is ideal if you want to scalp a fewpoints from the market.
So, parabolic sar indicator provides greatsignals that the market trend on lower timeframes is about to change.
A dot appears below the price when the trendis upward (this indicates a buy signal), and above the price when the trend is downward(and this indicates a sell signal).
The PSAR trails the price until the trendhas finished and begins to reverse (which is why is also known as stop and reverse indicator).
The parabolic sar provides excellent exitpoints, as it provides a stop loss level that moves closer to the price, regardless of themarket direction.
The rule is that you should close buy positionswhen the price moves below the sar and close sell positions when the price moves abovethe sar.
The parabolic sar works best in trending markets, helping the trader to ride trend waves for a good period of time and capture substantialprofits.
However, in ranging markets the parabolicsar will generate a lot of false trading signals, as will whipsaw back and forth.
Another indicator suitable for scalping themarket is the stochastic.
The stochastic oscillator compares where theprice closed in relation to the price range over a given time period.
Here is why the stochastic is an excellentindicator for scalping.
↑ first, because it works both in trendingor range market condition ↑ also, this oscillator identifies cycleturns ↑ stoch is also good at identifying overboughtand oversold areas on the chart ↑ plus is useful at identifying strong momentum, in conjunction with support and resistance levels on lower timeframesWhen scalping, traders use two types of stochastic: fast stochastic and slow stochastic.
The fast stochastic oscillator is very volatile, its reaction to market price will generate many signals.
In a strong trending market, the fast stochasticisn’t able to filter noise and will offer a lot of false signals, which will lead tobad trades.
Which is why the slow stochastic is more suitablefor scalping because it reduces the volatility by a notch.
I will release a video soon with a scalpingstrategy involving the stochastic oscillator, but for now let me quickly explain how i takesignals when I’m scalping.
I prefer to use the stochastic oscillatorwith 8.
5 settings for spotting divergences on the 1-min chart and i also look for thecrossover between the 2 lines of the indicator.
But more on this in following videos.
Another indicator excellent during scalpingconditions is the ADX.
Basically, the ADX tells traders whether thebulls or the bears are in control on the market.
A common scalping technique to take entrieswith the ADX indicator is by spotting the DMI crossovers:The positive DMI line crossing above the negative DMI line, indicates a buy scalping opportunity.
The positive DMI line crossing below the negativeDMI line, indicates a sell scalping signal.
Because the market is in a continuous movementand trading opportunities on lower time-frames develop quickly, the ADX must be used in combinationwith other tools or price action.
Scalping with these indicators may seem easyin theory, but the reality is that it’s an advanced trading style.
It requires very quick decision making, quickreflexes to react when setups are spotted, and the scalper trader must be skilled atquickly executing a trade.
And more important, if you want to make moneyfrom scalping, it’s imperative to have a disciplined approach to trading and to keepthings simple and don’t over-complicate your scalping setups with lots of indicators.
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Until next time.