Let me start with a few words on what effective retail scalping is (and is not) and how scalp trades are best managed.
Scalping is any form of trading that plays for a quick “impulse” reaction and generally does not want to sit through large price retracements. The trader will typically hold a position for no longer than 4X the base unit of time the trade was identified on. In fact, this guideline can be used as an effective time-stop for a scalp trade. (A time stop is a time horizon over which the profit target is either hit, or you exit with whatever profit or loss you have at the end of the period).
For example, a swing-trading scalp identified on a daily chart would not hold for more than 4 days. A scalp identified on a 5 minute chart will not hold more than 20 minutes.
Please note this is a different definition of “scalping” compared to what most traders use. Some traders define scalping as going for 1 or 2 ticks profit, or even worse attempting to capture the bid/offer spread.
Be warned: This type of trading does not work for retail traders! Traders who try this will literally be throwing their trading capital down the toilet.
I have found the best way to manage emini scalp trades is to combine a profit target with a time stop. If you pick your entry levels well, the majority of your trades that do not hit your profit target will still be exited profitably via the time stop.
For day trading, I have found it better think of your trading stop as a daily loss limit rather than an individual position trading stop. What happens when you do this is that the majority of your losing trades end up exiting based on the time stop, which I have found on average gives a better price than using a closer price based stop.
There is a myth out there that says retail traders need either fast reflexes or the ability to fully automate strategies in order to be successful at day trading. Nothing could be further from the truth!
I firmly believe that the best way to implement a scalp-trade strategy is no different from the best way to implement any other type of strategy: Plan ahead! Know the levels you want to buy or sell at, and put limit orders into the market ahead of time – before it is clear that the price will hit your entry area.
If price hits your level and looks to be holding, this can be a good time to add to the position. If price crashes through your level like a hot knife through butter, hold off. Perhaps it will rebound, perhaps not. Keep managing the trade with your profit target and time stop.
I have found that the best long scalp trades often occur at points where “price following” shorts have just entered the market. Often, these traders use the prior high as their stop loss level, which immediately creates a target for the market. At times you can almost feel the pressure building on the shorts. At some point they realize they are wrong and begin panic buying, which squeezes price higher. If you sense this type of short squeeze is about to occur, it is a good time to add to your position!
Don’t be overly skittish if the trade does not immediately move in your favor. You need to be willing to hold the trade for your profit target, time stop, or loss limit or else you will simply be selling yourself short. If you find you are trading too skittishly, it could be that you have been spending too much time fighting the longer time horizon pattern of accumulation or distribution (trend). If you feel there is always a gun to your head on every trade, take a break. You are likely trying to surf the wave as it returns to the sea, rather than riding the ones crashing onto the shore (my analogy for fighting the longer time horizon trend).
It is best to use a broker or platform that allows you enter contingent orders, so your profit taking order and loss limit will be placed automatically after entry. Make it easy for yourself! This does more than relieve stress. The sooner you get orders into the market, the better position you will have in the queue and the more likely it is you will be filled. (This is actually very important if you pick your price levels well, as it becomes difficult to buy with limit orders when a trading edge exists) It is a win-win approach!
The best scalp trades buy the market after a period of weakness or sell the market after a period of strength. In other words, scalp trades tend to be fade short term price extremes.
However, please do not consider this the same thing as, “calling a top” or “calling a trend change.” A good scalp trader does not expect the level they are buying at to be a major trend change. There is no reason to stress over such things.
In fact, one of the cardinal rules of scalp trading is to be in alignment with the larger time horizon trend of accumulation or distribution that is occurring in the market. For example: If a market is being accumulated on the 30 minute time frame, I want any day-trade scalps (20 minute holding period or less) to be in that same direction. In essence we are doing two things: Aligning our trades with the direction the big institutions are pushing the market in, and punishing all those who are prematurely calling a trend change by selling short on dips.
A very basic way to understand it is this: Scalp traders get paid to provide liquidity at (short term) market extremes: When market participants are skittish, they will often give up a premium which pays the scalper to take the other side. Now, please understand this does not mean scalpers should be fading huge, unusual price moves. Doing this is typically a huge mistake and is not what scalping is about. By “extreme” I am referring to the types of mini-extremes that occur in the market a number of times during most trading sessions. And as I said earlier, these “extremes” offer the best opportunity when they are against the longer time horizon trend.
The success of the best scalp trades are typically hidden on historical charts. This is because the entry and profit target is often hit within the unit of time (bar) where the trade was triggered, so in hindsight is not obvious that the trade occurred at all. I believe this is why most retail traders do not catch on to the best scalp-type strategies.
We have the basic concepts out of the way!
I will now outline some of the most powerful methods for scalping the emini market that I have ever found. These methods are drop-dead simple, yet counter-intuitive. In fact, I believe these strategies work in part because they turn conventional wisdom on its head!
Go to part to of this article (Click here).
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