Scalping Strategies-Futures trading.
Have you ever wanted to be in and out of a trade within seconds, minimizing your exposure and collecting again? If you said yes to the previous question, then this simple scalping strategy is for you.
Small gains really add up when scalping. Scalping is a trading style that takes advantage of small price movements, getting in and out of a trade for a smaller profit. The exit strategy is tight and small so it accommodates the small profit target. This ensures the trader will not wipe out his wins by incurring a large loss.
The scalping strategy discussed today will be based on futures. The strategy involves a series of small wins throughout the day to generate a large profit.
Scalping strategies- The Basics
Scalping trading requires a very disciplined entry and exit process. The slightest shift in a price change, volume change, inventory change can make or break your trade.
The scalper will usually have a decent amount of size backing his trading. In futures that may be anything over 4 lots per trade on the ES E-mini futures. This ensures the small profits will accumulate due to size. Alternatively, the risk for this trade will be so tight that they will allow a maximum of a tick or two of the downside before exiting the trade.
Momentum is a scalper’s best friend, and order flow when it comes to futures. In the following section, we will dissect the intricacies of scalping strategies with ES E-mini futures.
We will use order flow, inventory, and correlations as our three main studies.
Scalping Strategies-The short term money maker
The three proponents we are going to discuss today revolve around momentum and order flow trading.
The two strategies we will discuss are the break out scalp trade and the fade scalp trade.
Both require a quick trigger finger and hawk eyes, to watch the smallest of discrepancies in the market and order flow.
When scalping the ES futures market, a scalper usually risks a maximum of two ticks, at $12.50 a tick, two ticks is $25 of risk per contract. In the hope of making anything more than two ticks. In the three to five tick range. This is equal to $37.50 to $62.50 per contract. However, if a scalper has the size behind the trade the profits can be substantial.
The break out scalp trade
When trading ES futures, you want to see high volatility around previous lows and previous highs for a break out a trade to either side.
This is visible when one tracks momentum and build of inventory at the key level. The break out scalp trade could lead to substantial gain but there is no room for error. Again average risk would be around two ticks, with the hopes of three to five ticks of profit. However if one has substantial size on the trade, such as 5 lots. They would look to take 3 lots off at three ticks which brings in $112.50 for the three while letting the other 2 lots run while moving stop eliminating the potential for loss. Meaning the minimum the scalper will take home off that one trade is $112.50. If the trade goes south, the loss will only be $125.00 on the full 5 lot stop.
The image below outlines an upside break out a trade using a 5-tick footprint chart on Sierra Chart.
There is a lot to consider in this chart for the break out trade. The resistance level outlined in the large yellow rectangle that was tested time and time again, which is the level at which the break out scalper is looking carefully for his entry.
The second portion of this is the buy imbalance levels that form at the bottom of the structure and continue higher, outlined with blue boxes. That is aggressive buying coming in from the support drawn. Finally, the large buy imbalance that happens at the considered break out level at the top of the resistance band forms.
This is a scalper’s ideal entry position and he looks to offload 60% of their size just a few ticks higher with a trailer for the rest to squeeze out maximum profit. That is the order flow portion of the trade idea, in which a lot of buyers come in at level laddered up to the break.
The second portion of this trade relies on momentum and inventory build-up displayed in the two charts below.
The chart on the left is a correlation chart between four listed equities. ES E-mini futures (green), NQ E-mini futures (purple), DOW E-mini futures (yellow) and Russell 2000 E-mini futures (orange). This represents momentum in equity markets. As momentum presses highs as it was during that proposed break out time, one would expect the upside to crack.
The chart on the right represents a constant volume bar char that suggests aggressive buying right at the break out level. This is mapped out by an inventory overlay (blue rectangle) just before price broke to the upside. The aggressive buyers coming into the market pressed price to break resistance.
All of these indications together formed a break out trade idea, which is what a scalper looks for in such a move. Looking for a small profit while minimizing exposure.
The fade scalp trade
The fade, like the break out trade, is a more advanced trading strategy. Scalpers love the fade after a huge up move or down move. In doing so they take a position in the opposite direction of the large move in hopes of getting a few ticks of pull back profit.
The fade trade is probable when momentum begins to fade at the bottom of a huge bear move or at the top of a large bull move. In either case as a scalper, you would want to see the large move stall at a key level, that you have either drawn or have been created from a study.
The risk and reward structure in the fade scalp is very similar to that of the breakout, however, in the fade, you are not looking to let runners go. This is a position that requires a very quick in and out. This is because this pullback could very well only last one point before dropping another seven.
The target on the fade is again three to five ticks on the full size. The chart below is an example of the ES E-mini. This is a fade trade based on momentum, order flow, and inventory yet again.
The image above outlines a massive drop (long vertical candle) which comes to an end just before the VWAP (a key support level and yellow box). Momentum dries out at this level and a smaller green candle prints (blue box). The green candle has many buy imbalances stacked up, this is a pivotal entry position for the long scalper. This is aggressive buying, and the blue arrow suggests the entry of the fade scalp trade. This is trade is only held for a few ticks as there is a good chance the downside will continue.
The longer target could be the US session VWAP outlined by the purple box above. But the fade scalper would have typically taken out his full position before that resistance could have been tested.
The chart on the left represents the correlation momentum we mentioned before. In this scenario, after having dropped so much it found a point of reversal in which it started up ticking. All equity markets started moving higher together. The Nasdaq leading other equities up.
The chart on the right represents the constant volume bar inventory overlay which displays the stall to the downside. Which presents the opportunity for a small move higher. The support on this chart holds really strongly and the inventory outlined by the blue box (again) holds inventory support as buyers look to get in right at a key support level. The fact that the price did not even attempt to test that level, scalpers insinuated that this was a fade opportunity.
The two scalping strategies outlined in this article are futures-based strategies. A scalper is a trader who is not restricted to any one market, whether its futures, Forex or stocks. The scalper looks for a slight move in a market for pure profit. They do not fall in love with the idea and keep their risk and potential losses very tight.
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