You are going learn a profitable scalping trading strategy / system because in this article I am going to teach you one.
This is a system I’ve been using since 2010 and it has worked ever since then. It will also work in the future.
Don’t rush this article and make time for the video is contains. If you understand this, this can be a game changer for your trading as it has for so many traders I’ve taught and mentored over the years.
Is scalping trading profitable?
It most certainly is!
I love scalping the markets and I can safely say the type of scalping I do, which you are going to learn, has been the foundation of my trading for many years.
The great thing about scalping is there are lots of opportunities on a daily basis to get in the markets and generate profits. There are downsides and risks (more of that later), but if you have the time to look at the markets and the focus and discipline to do exactly what you need to do when you need to do it, then scalping could well be for you.
It is profitable and it can even be quite thrilling to make hundreds of £/$/€ in minutes. That isn’t me ‘selling a dream’, that is the reality when you get winning trades and have the confidence to trade with a large account.
How to scalp trade
Ok, so now you know you can make money scalping, let’s talk about how you are going to do it. Let’s start to get stuck in to the strategies and setups.
If you have an hour, and I mean can actually commit to a full hour of concentration to learn something that could change your whole trading, then I have a video for you that’ll teach you everything you’re going to read.
My recommendation would be to read the whole article and then watch the whole video. Then you’ll be in a position to go away and try it when the markets next open.
So let’s break this down and get it structured.
The markets to trade
If you’re new to trading you’ve probably been exposed to Forex or crypto. You’ll have read some crap about there being ‘X trillion traded per day’ on the FX markets as if that has any relevance.
Who cares?
Your one and only focus is GENERATING CONSISTENT PROFITS. Nothing else matters so don’t get precious about what you trade or what you think you should be trading. When you’re withdrawing profits from your broker it feels the same regardless of which market generated the profit – trust me.
We’re going to be scalping the index / stock markets. Mainly the following:
- The FTSE100 – The UK’s premier stock market.
- The DAX30 – The German stock market.
- The DJIA30 – One of the stock markets in the US of A.
- The S&P500 – The USA’s big-boy containing 500 companies.
So why these markets?
Good question, Simon.
Spreads
Spreads are a significant factor in scalping. Spreads are the difference between the buying and selling price and what you’ll pay when you trade. For example, a broker will typically offer a 1 point spread for the FTSE so you’d be able to buy it at 7500 and sell it at 7499.
Spreads are usually very tight and competitive for indices. This makes a difference over time. Tight spreads = less overall cost for us. If we save a point on each trade over 100 trades, that adds up.
I’ll also add spreads are not the be all and end all. Some brokers who offer very tight spreads will offer poor executions so you end up receiving slippage on your trades. I don’t want to go in to too much detail here but it’s something that needs to be kept in mind.
Reliability and consistency
If you watch the video above (you best make an hour for it!) then you’ll see some of the recorded examples are from 2014. The point of me highlighting this is the markets I trade allow the strategies to work time and time again. Month after month, year after year. The technical behaviour of the markets we’re focused on is very consistent and reliable. Much more than other markets like FX markets.
The scalping strategies
Let’s drill in to how to actually scalp. This is a shorter version of the hour training course above.
Support and resistance
Support and resistance is the foundation of the scalping strategies I use. In fact, it’s the foundation of a lot of the strategies I’ve used over many years. It’s a really is an essential, fundamental skill to identify and use support and resistance.
Here’s a quick guide to S&R.
It should be obvious
Support and resistance should jump out at you. The exercise I teach people is to take a blank chart and mark it up as quick as possible. Take a blank chart:
Then mark the blank chart up quickly. Don’t overly think about it (mistakes can be rectified later), just mark up obvious support and resistance levels and your chart should look something like this:
These become some of the levels we can scalp and trade.
Remember this type of support and resistance is based on previous, historic highs and lows.
Round numbers
These work time and time again. These are the round numbers that have a psychological and algorithmic significance on the index markets (remember I trade the FTSE, DAX, DJIA and SPX). These are the numbers like 12,700, 12,800, 12,900 etc on the DAX. Look how the market reacts from them on the DJIA.
These are both historic and future indicators. If you see a round number has worked recently, then there’s a stronger chance it’ll work again as it’ll have the confluence of the previous historic support and resistance.
Pivot points
Pivot points are calculations (H+L+C/3) taken from the high, low or close (HLC) of the previous time period. This creates future horizontal support and resistance lines we can use to trade from. We are only interested in the daily pivots (not weekly, monthly or yearly).
Confluence
I mentioned confluence earlier. Confluence is when multiple factors we use to make trading decisions from line up for us and come together. For example a pivot may line up with a previous support and resistance level as per this chart.
When multiple things line-up like this it makes it more likely the trade will work out for us.
Reversal price-action
We’re interested in reversal trading. This is sometimes called ‘contrarian trading’. This is where we are looking to make profit by anticipating the market will stop and reverse. As we’re scalping we are looking for quick, sort moves. We do not need major trend changes.
If the market is going up to our resistance level, we are looking to sell short. If the market is going down to our support level, we are looking to buy long.
The stall
We’re looking for the price action to stall at the level. If the market hits the level at speed, that is fine. We don’t want the price action to drift in to it.
This is what that looks like:
This is a round number reversal trade with additional support from a previous low. Our entry is at the orange line.
Look how the price quickly goes in to the level we are looking for and stalls. Once it stalls we take the trade. If it goes straight through the level when we do not take a trade. This is the advantage of manual trading.
Trade management
So we have identified where we want to take our reversal scalps from. Let’s look at how we manage these trades.
Entry
Since we are going to be taking manual trade entries we need to be careful we stick to our plan. It’s very easy to ‘jump the gun’ and get in too early Alternatively, we can be too cautious and wait too long on the stall. It’s a balancing act and your judgement will come with experience.
On tip is to mark up your entry, stop and profit target on the chart. You can see the orange line. Don’t hit that button until the market reaches it!
Stop loss placement
With these strategies I use a fixed stop loss. I usually mirror the profit target. These distances depend on the volatility of the market. Now I don’t have any hard and fast rules or use any volatility measurements. However, looking at the average daily ranges (ATR indicator) can give a good indication as to whether you’d want to do a 20 / 20 (20 point stop and 20 point limit), 30 / 30 or 40 / 40.
This will also come with experience.
The index value of the market is also relevant. The FTSE moves less than the DAX which moves less than the DJIA, for example.
We also look to trail our stop as the trade goes in our favour to reduce risk.
Taking profit
Taking profit is the same distance as our stop. The temptation from a disciplinary point of view is to snatch profit early (cutting winners). You must avoid doing this. Yes, sometimes a profitable trade will turn in to a losing trade or a break even one. Get used to it. This is the nature of trading. Over the long term, taking profit too early will harm your trading.
Risks
I’ve spoken a lot of the benefits of scalping, but let’s look at some of the risks. The combination of short trades and higher leverage present a danger to the less disciplined trader. With longer-term trades you have the luxury to make decisions are a more leisurely pace. With really short trades if you hesitate then you will get hit hard. If a trade needs cutting and you need to take a loss then you need to take a loss. A quick loss, especially if it’s a fair bit of money you’re losing, can present a challenge in itself. If you lose money quickly then the tempted to jump back in and ‘revenge trade’ can be great. You cannot do this.
Scalping can also be seen as a licence to over-trade. Just because there are lots of potential opportunities doesn’t mean you need to take them all.
Scalping is only for those who have solid trading psychology.
Scalping trading example
So let’s expand on the example we used above, which was a trade we took in our live trade room.
A quick reminder of the trade. It was a DAX round number trade with additional support below. We wanted to get long at 05 above the round number as the DAX often turns at 05 and 95.
We’ve seen the price action come in to the level and stall around our entry which is 12,105. We executed the trade because it stalls.
We have our original stop down at 12,075. We leave our stop in place and let the trade develop.
So the trade is consolidating around our entry level and this allows us to bring our stop loss to just under the price action to reduce our risk.
Remember, when moving stop losses in make sure it is justified and you’re not just trading scared / strangling the trade.
Important questions you can ask yourself with stop loss placement is, “Where do I not want the market to go?” “Where is the trade invalid?”
You can see the market breaking back up here. You can see the the profit starting to increase nicely in the top left. The temptation after having the trade break even for a few minutes is to snatch profit once you start to see profit.
You have to resist doing this it’s a major trading error.
And finally we’re rewarded for our patience and the trade goes on to hit the profit target.
And these are the types of profit you can make when hit you have the knowledge and confidence to trade these strategies.
Scalping vs day trading
Day trades are trades that are opened and closed in the same day. Therefore scalps are by definition day trades. Despite this, a distinction is made. Let’s look at the differences in more detail.
Trade length
Day trades are (in my view and those who I know who trade professionally) trades that last for 10s of minutes going in to hours.
Scalping trades tend to be over in minutes.
Execution
The scalping trades I do, and the ones I know others do using different strategies, all use manual executions. The trades are never taken on a market order. Some day trades people take may also be taken manually, but with day trades I expect them to last 10s of minutes to hours which are more suited to market orders.
Stop losses and profit targets
Stop losses are tighter with scalping and so are profit targets (limit orders). I will often trade a ’30/30 trade’ on the DJIA. This means I have a stop loss of 30 points and a profit target of 30 points. A day trade on the DJIA I’d expect to use larger stop losses and profit targets.
Leverage
Due to the tighter stop losses and profit targets the leverage is increased. This means profits are made more quickly and greater profit is made per point, but this also applies to losses.
This can be an issue under the ESMA regulations. Contact us (see right at the bottom of the page) if you want recommendations as to how trade with increased leverage.
Trade frequency
There should be more trading opportunities and therefore more trades when comparing scalping vs day trading. This is because the time frames you are monitoring (sometimes the 1 minute charts!) for scalping are lower. I tend to stick to 5-minute charts as a minimum for day trades.
Summary
Essentially scalping is quicker and more frequent than what most people consider to be ‘day trading’. The number of trades will be greater as will the leverage.
Conclusion
I’ve given you a complete scalping system in this article and the video above. It has worked for years and can generate significant profits. Take your time to learn the system and start to try the trades yourself.
If you want to learn more and watch me scalp live, then you can join us for free here.
If you want to contact me for anything, then you can on WhatsApp or Telegram below.
Great video and plenty to practice. You are right sometimes it feels like standing infront of a train though. Great article and plenty of live trades, something rare in this sector.
Thanks Jon, keep those scalps going!
Good work Simon
Thanks, Rob.
Excellent, great article about Scalping!