Top Technical Indicators For A Scalping Trading Strategy
That methodology works less reliably in our modern electronic markets for three reasons. First, the order book emptied out permanently after the 2010 flash crash because deep standing orders were targeted for destruction on that chaotic day, forcing fund managers to hold them off-market or execute them in secondary venues. Second, high-frequency trading (HFT) now dominates intraday transactions, generating wildly fluctuating data that undermines market depth interpretation. Finally, the majority of trades now takes place away from the exchanges in dark pools that don’t report in real time.
Scalpers can meet the challenge of this era with three technical indicators custom-tuned for short-term opportunities. The signals used by these real-time tools are similar to those used for longer-term market strategies, but are instead applied to two-minute charts. They work best when strongly trending or strongly range-bound action controls the intraday tape; they don’t work so well during periods of conflict or confusion.
You’ll know those conditions are in place when you’re getting whipsawed into losses at a greater pace than is usually present on your typical profit and loss curve. Read on for more about such signals. (For related reading, see: Introduction to Trading: Scalpers, Understanding the Ticker Tape and The Basics of the Bid-Ask Spread.)
Moving Average Ribbon Entry Strategy
Place a 5-8-13 SMA combination on the two-minute chart to identify strong trends that can be bought or sold short on counterswings, as well as to get a warning of impending trend changes that are inevitable in a typical market day. This scalp trading strategy is easy to master. The 5-8-13 ribbon will align, pointing higher or lower, during strong trends that keep prices glued to the 5 or 8-bar SMA. Penetrations into the 13-bar SMA signal waning momentum that favors a range or reversal. The ribbon flattens out during these range swings and price may crisscross the ribbon frequently. The scalper then watches for realignment, with ribbons turning higher or lower and spreading out, showing more space between each line. This tiny pattern triggers the buy or sell short signal. (For more, see: Market Reversals and How to Spot Them.)
Relative Strength/Weakness Exit Strategy
How does the scalper know when to take profits or cut losses? 5-3-3 Stochastics and a 13-bar, 3-standard deviation (SD) Bollinger Band used in combination with ribbon signals on two-minute charts work well in actively traded markets, like index funds, Dow components and for other widely held issues like Apple (AAPL). The best ribbon trades set up when Stochastics turn higher from the oversold level or lower from the overbought level. Likewise, an immediate exit is required when the indicator crosses and rolls against your position after a profitable thrust. (For more insights, see: What Are the Best Indicators to Identify Overbought and Oversold Stocks?)
Time that exit more precisely by watching band interaction with price. Take profit into band penetrations because they predict the trend will slow or reverse; scalping strategies can’t afford to stick around through retracements of any sort. Also take a timely exit if a price thrust fails to reach the band but Stochastics rolls over, which tells you to get out.
Once you’re comfortable with the workflow and interaction between technical elements, feel free to adjust standard deviation higher to 4SD or lower to 2SD to account for daily changes in volatility. Better yet, superimpose the additional bands over your current chart so that you get a broader variety of signals. (To learn more about other band indicators that can guide your trades, see: Capture Profits Using Bands and Channels.)
Multiple Chart Scalping
Finally, pull up a 15-minute chart with no indicators to keep track of background conditions that may impact your intraday performance. Add three lines, one for the opening print and two for the high and low of the trading range that set up in the first 45 to 90 minutes of the session. Watch for price action at those levels because they will also set up larger-scale two-minute buy or sell signals. In fact, you’ll find that your greatest profits during the trading day come when scalps align with support and resistance levels on the 15-minute, 60-minute or daily chart. (For more, see: Trading With Support and Resistance.)
The Bottom Line
Scalpers can no longer trust real-time market depth analysis to get the buy and sell signals they need to book multiple small profits in a typical trading day. Fortunately, they can adapt to the modern electronic environment and use the technical indicators reviewed above that are custom-tuned to very small time frames. (For more, see: Scalping as a Novice Trader.)
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