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Scalping involves placing numerous small trades within minutes, so it needs a strong trading strategy. Here are some of the scalping strategies used by pro traders.
Little drops of water make the mighty ocean. That’s the power of numerous little things coming together, which also describes the mindset of scalpers. Rather than risking a lot of capital on a few trades and waiting for the market to move significantly, experienced scalpers may open as many as a hundred trades a day to take advantage of the smallest of moves. Even winning trades result in very small profits, but cumulatively the gains may be significant, or at least that’s what scalpers aim for.
You may have been trading for a while and even tried your hand at scalping. However, before identifying the right strategy, here are a few things you need to know.
Scalping helps build a well-diversified portfolio with much less capital. Since each trade is very small, the capital can be spread across multiple trades in a single asset as well as across various asset classes. This is why scalping is used for hedging not just an intraday trader’s portfolio, but also the portfolio of longer-term investors.
Although scalping inherently involves lower risk than holding bigger trades for longer, it is not for the fainthearted. A trader needs to work hard to control emotions, to not hesitate risking money but avoiding being ego-invested in their trades, to view the market very objectively and to quickly discard trade ideas that are not working. Developing a winning mindset is critical for scalpers.
Moreover, since so many trades are opened simultaneously, a very strong and well-tested trading strategy is needed. Continuously learning about different asset classes and backtesting are equally important.
Scalping is not everybody’s cup of tea. It requires good knowledge of the markets, a high level of concentration, and experience to make quick decisions.
The News tab on MT4 is very important for scalping, but being organised is equally critical. If your terminal receives several categories of news, you may hide a category by removing the check near it. You can even use the Customize command to add your preferred subcategories to sort the news.
You’ll be entering and exiting trades at lightning speed. Apart from ensuring you have a fast internet connection and a robust machine, you can boost the speed of your MT4 trading platform by reducing the number of maximum bars displayed, deleting assets that you won’t be trading from the Market Watch section, and closing charts that you’re not actively using.
Assets that have very low spreads are best for scalping.
Bollinger Bands typically comprise of a 20-day moving average line, a two-standard-deviation line above the moving average and a two-standard-deviation line below the average. Scalpers usually change the settings to use a 10-day moving average with 1.5 standard deviations and use a 5-minute chart.
The closer the gap between these, the more stable the market. The wider the gap, the more primed the market is for movement. Experienced scalpers typically use the double Bollinger Band strategy, which uses two additional lines that are one standard deviation in either direction.
A squeeze occurs when the gap between the bands contracts. Although this happens when the market is relatively stable, it indicates a potential period of high volatility. Scalpers apply double Bollinger Bands to various asset charts to enter positions for those that reflect a squeeze. When the bands widen, it’s a sign of the market heading for a period of stability, which is when scalpers exit their trades.
What’s even better is when the price breaches the outer bands, indicating the asset has hit an extreme value. This is seen as an opportunity to enter a trade in the reverse direction.
Since any indicator can produce false signals, a popular strategy for scalpers is to combine Bollinger Bands with Stochastic Oscillator. This does not follow the price or volume like most indicators, rather it measures the momentum of price changes. The Stochastic Oscillator ranges between the 0 and 100 levels. A reading above 80 is seen as an overbought signal and below 20 as oversold.
If the price hits the lower Bollinger Band, the Stochastic being in the oversold area confirms the signal to go long. Conversely, when the price hits the upper band, the Stochastic being in the overbought area, confirms the signal to go short.
RSI is another momentum indicator that is popularly combined with Bollinger Bands for scalping.
This indicator is popular among seasoned scalpers as it offers multiple tests on the price action. The indicator shows two lines. The Tenkan Sen is a red line and the Kijun Sens is a blue line by default. These are read the same way as moving average crossovers to identify a trend change. The most important component of this indicator is the Ichimoku Cloud, which simultaneously shows trend direction, support and resistance, and momentum.
The red line (Tenkan Sen) crossing above the blue line (Kijun Sen) and both lines as well as the price being above the cloud is seen as a buy signal. The red line crossing below the blue line when both the lines and the price are under the cloud is seen as a sell signal.
Scalpers typically change the Ichimoku settings to 12-24-120, where 12 is the Tenkan Sen, 24 is the Kijun Sen and 120 is the Senkou or the midpoint.
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