Thursday, July 29, 2010

Scalping Strategies & Proven Techniques for any trader

Hi guys! 
One of the most profitable skills ive learned as a trader is to be able to scalp the markets for points at a time in any market condition.
I wanted to share my thoughts on this topic with you, and your feedback is always appreciated.
-          Experienced traders
Scalpers need to have a lot of trading experience because the need for understanding market sentiment is vital.
I need to be able to ‘feel’ or ‘sense’ the market is going to move ahead of time using technical indicators such as momentum, volume, and tape reading, and these skills take time to develop, especially because they move very quickly sometimes when conditions can be best for scalping.
Many traders I have worked with can pick up scalping immediately by using simple entry patterns that can be used on faster time charts and range charts.

One of the reasons I was successful in scalping was putting in a lot of screen time watching live market action, and getting used to seeing what happened on the tape, with momentum, and how my scalping was responding to certain conditions.
We can use easy patterns to identify excellent entries for scalpers, but you need a strong foundation of price action knowledge to get started, so use a simple method like the ‘Fast Track’ to learn the basics, and work towards becoming a scalper in the near future.

-          Lots of action & emotions
One of the biggest obstacles that a scalper faces is the fast pace of action during the trading day.
We love the action, but it can be our own demise as scalpers.  Our emotions can sneak into our trading, so we need to be careful not to get carried away when we have a few winning trades.
Ive had trading days that began with HUGE profits and ended in HUGE losses, just because I was supposed to be invincible. J
Handing losses is a big issue with scalping because you take a lot of trades, and if you get emotionally attached to your trading you will have a rough ride on the emotional rollercoaster after half a day of trading.
My daily routine as a scalper is my secret weapon for trading success.
One thing that I recommend to scalpers is a well defined routine and diet.  By calculating a daily routine you put your mind in a calculated state, and that gets a scalper in the ‘mood’ to follow entry rules and trade systematically.

Suggested Reading:  Discipline Cycle Workshop

Common mistakes:
-          Risk/Reward Ratio (targets/stops)
A common misconception among new traders is that s scalper can use a wide stop to avoid losses and can simply use a tight target and rack up all the money.

Your trade management for scalping futures contracts will be the difference between success and failure.
It it were only that simple…I need to keep my stop and my target equal distance from my entry (or as close to that as possible) so that I can keep the money that I earn when I have a winning trade.
Wide stops cost you more money than your winning trades, so keep a tight stop when you use a tight first profit target to make sure your ratios in are line.
For more information on trade management strategies just ask me for help

-          Over-trading / Lack of Discipline / Lack of Confidence
All traders are human (well most of them at least) and us humans have emotions that make it difficult to stick to our plan of attack when we are trading.
I need to have a strong command over my rules, and I need to know when to AVOID trading when I am scalping.
Trading with specific entry rules, and the ability to follow those rules will be vital to a scalpers long term success because little losses quickly add up if you are taking dozens of trades every hour at some times.
-          Trading an illiquid market
Picking the correct market can be tough to a new trader because there are so many options.  Trading stocks there are literally millions of companies to consider, and trading futures can be just as diverse when it comes to options for different contacts to trade.
The key to being a good scalper is to understand the personality and trading range of the futures market you are trading.
For example, if you are trading Crude Oil Futures you need to know the personality is significantly different then the E-Mini ES.  Neither of these is ‘better’ to scalp than the other, but their differences in LIQUIDITY, and in turn, personality, means we need to use slightly different approaches for each.
Our goal as scalpers is to find a market that provides a combination of liquidity and volatility, giving us plenty of opportunity to trade, and when we do take a trade there is a high likelihood that the move will go a fair distance in our direction and makes us some money.
Look for a market moves enough to see decent profits, and make sure there is enough volume in that market to show you consistency in the moves it produces.
Crude Oil Futures would be a great example of a market that has just enough liquidity to provide good fills, but not too much volume to make it slow and sluggish like the ES, ZB, ZN, or FESX.

-          Tape Reading
Scalpers must have a command over tape reading, and the ability to determine market sentiment based on the size and the speed of the orders coming into the market.
The invention of the Pace of Tape indicator is an effective resource for scalpers to define the speed of the market, and therefor, should be considered when learning to scalp the futures markets.

Tape Reading in general is vital to a scalpers success because it is the purest form of price action, and our goal as a scalper is to find small moves in the market and take advantage of those moves with limited risk.
Reading tape tells me when to enter, when to avoid the trade, where to take profit, and when to call a trade dead in the water.
Tape reading is a skill that is more empowering to a scalper than being able to read the minds of other traders in the pit, but it can be hard to learn without the time committed to watching the time & sales window along with price action on your charts to see the battle between the bulls and bears develop right in front of you.
-          Too much with too little
Don’t make the same mistake that I did when learning to become a scalper; try to make too much, too fast, with too little.
I have to remind myself sometimes that I spent 10 years learning this process, and I spend less than 2 weeks with a client and they are making money J  If I only knew then…what I know now. J
It’s a beautiful thing to be given this great opportunity to learn and earn QUICKLY, but reading the tape has NO SHORTCUT, you need to listen to the market, and don’t be afraid to ask me questions.

Tools we use:
-          Liquid Market
In order to be an effective scalper you need a market that has a combination of liquidity and volatility. I want enough volume to fill my rapid entry orders, but I don’t want too much volume to slow down the pace of the market.
The 30-year Bonds and E-Mini S&P are examples of futures markets that have a little too much volatility.  Crude Oil futures, gold and the Euro are great examples of markets we look for when scalping.
-          Larger trade accounts
One of the most common misconceptions among new traders is that scalping only requires a small trade account because you aren’t taking that much risk on each trade.
Yes, there is very little risk per trade as a scalper; however, there will be more trades every day so your risk for the day is still relatively similar to many other trading styles.
It is preferred that scalpers have larger accounts so they can have confidence in their calculated entries throughout the trading day.
If you have a small trade account I encourage our clients to begin with our day trading strategies to learn with a more flexible and simpler approach, with the intention on building confidence and experience to become an excellent scalper in the future.
-          Fast connection
One of the most important aspects of scalping is your data connection; it’s your lifeline to the market and you need this to be fast and consistent.
As a member of our trading community you will be provided with the fast data connection you need to be a scalper, one of the most common mistakes I see is a trader using filtered tick data for their charts.
Filtered tick data or level 2 data will not give you the most recent price information from the exchange, which is vital to a scalper.
-          Stable Charting Package
Have you ever missed a trading day because your charts wouldn’t load?  We all have, and you cant be a trader without consistent charts and trading DOM.
Scalping requires the very best charting software you can find, and we provide it with membership to our trading community as well.
-          Live News Data (here's the service I prefer)
Easy access to live news data is one of the most significant advantages to scalpers in the last decade, and I rely on a accurate news information to show me trading opportunities as a scalper.
-          4-Range
-          8-Range
-          89-tick
-          1-min
-          2-min
Futures Markets to Watch for Scalpers:
-          Crude Oil Futures (CL) (3am-6am & 8am-12pm EST)
-          Gold Futures (GC) (3am-6am & 8am-12pm EST)
-          Euro Futures (6E) (3am-6am & 8am-12pm EST)
-          Aussie Futures (6A) (3am-6am & 8am-12pm EST)
-          CAD Futures (6C)(8am-12pm EST)
-          Mini Russell Futures (TF)(930am-12pm EST)
-          E-mini S&P (ES)(930am-12pm EST)
-          Dax Futures (FDAX) (3am-6am & 8am-11am EST)
-          Eurostoxx Futures (FESX) (3am-6am & 8am-11am EST)
-          US 30-Year Bonds (ZB) (3am-6am & 8am-11am EST)
-          Wheat Futures (ZW) (10:15am-12pm EST)
-          Corn Futures (ZC) (10:15am-12pm EST)
-          Soybeans Futures (ZS) (10:15am-12pm EST)
Scalpers need to have a very precise and fully-automated trade management strategy ready to be used with every trade because the markets we look for move quite quickly at times.
Our trading DOM we use in our live trade room, and included with membership, has automated trade management strategies that are set-up ahead of our trading to precisely what our profit targets, stops, and trade management will be.
Its important to remove the emotions of trading as a scalper because your emotions will cause you to make poor trading decisions, so automating your trade management is something we do first.
The key to quality trade management for scalping is to understand how the market really moves.  In my opinion the market moves in 3 phases:
1.      Initial Noise
2.      Follow-Thru
3.      Exhaustion

If we understand how the market moves, we can plan our trade management accordingly.
As a scalper, my trade management will be set up ahead of time, but I will need to know my final profit target, assuming I am using a 3-target approach, which is most common among traders.
We have standard techniques and strategies for determining the final profit target as a scalper, which include support and resistance levels we have determined ahead of time.
My goal as a scalper is to get into a trade before the move begins, look for a quick profit target to earn some money, and at the same time I want to remove the risk on my trade so that I can lock that profit up tight in case the market reverses.
I’m going to move my stop loss to my point of entry when I fill my first profit target, which will be within 10 ticks of my entry point in most situations.
With my first target filled, and my stop at entry I’m now in a great position; I have no risk, and I am in the trade before the market really takes off.
This technique of managing a scalp trade is highly effective at allowing a trader to avoid losing money on winning trades, which preserves trading CONFIDENCE, which is one of the most valuable commodities a trader can posses.
Every trader wants to take large winning trades, and this management strategy gets me into scalp trades confidently, removes my risk quickly, and gets me into a trade so that I can capitalize on the larger move of the day.
-          4/8/Runner
o   Take ½ off at first profit target and move your stop to entry point
-          6/12/Runner
o   Take ½ off at first profit target and move your stop to entry point

The best way to make money Scalping Futures:
I really like to show my clients how they can use these techniques to make money.  This isn’t for having fun, or impressing friends of your futures information…this is for PROFIT, so lets get down to business on how we make money with these scalping strategies.
Here’s what I’m looking for when scalping the futures markets I trade….
-          Check the time of the day, we cannot trade around the news events. 
o   I use a live news feed, and I can give you info if you email me.
-          Identify the pattern on the slower timeframes
o   I’m watching 30-min, 34-range charts to see the BIG PICTURE patterns
-          Zoom in and use a faster timeframe for a more precise entry
o   When I see a pattern on the slow timeframes I find the location of the entry trigger, and then look for a precise entry pattern on a 1-min, 2-min, 4-range, 8-range chart, 89-tick chart
-          Check your entry rules for this pattern
o   Now that I can plan my entry on my fast timeframe, I scan my specific entry rules for this trade, making sure that I check them all.
-          Plan your final target, your first 2 targets and your stop will be standardized
o   Assuming my entry rules are ok, I then plan my trade management ahead of time so I am prepared for battle
-          Read the tape looking at size and speed of the orders coming into the market.
o   Once the trade is about to trigger, I’m paying close attention to the SIZE and the SPEED of the orders coming into the market
o   I check the Pace of Tape indicator and make sure the speed is rising, not falling.
-          Look for momentum to confirm
o   I check momentum on the fast timeframe AND the slower timeframe to trigger your entry.
o   In trending markets I only need 1 timeframe to confirm, but in slower sideways markets like we see during the summer or the end of the first quarter each year we should look for additional confirmation from a second timeframe.
-          Time is not on your side,
o   I need to see the move happen quickly.  The longer it takes the more risk on this trade.
§  Good rule of thumb is 5 minutes from when the pattern forms and when the pattern actually triggers.
§  The longer it takes we have to wonder.. “whats missing?”
-          Be confident in your entries, and be confident in your exits if you make a mistake.
o   This comes with experience, and experience comes from consistency
o   You will get confidence when you consistently trade according to your scalping rules of entry.
o   Keep it simple, focus on YOUR pattern, and don’t get distracted by things around you.
-          Record Your Data
o   After each trade I complete my analysis of the trade
o   Very important NOT to over trade and lose track of the trades you have taken, especially while you are learning.
o   Learning from losses is the most efficient way of developing your skills, so take the time to finish your day with the proper recap of your trading day.
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  1. AnonymousJuly 31, 2010

    once again, incredible information, and thanks JJ for teaching us how to scalp the futures markets to well.

  2. Thanks Joseph for the article, impressive for its great content and by the help offered to all traders we started our adventure in the stock markets

  3. CassandraJuly 31, 2010

    Awesome article! JJ, once again, you have "won me over" with your market wisdom. You are truly a great educator & leader...Keep it going!

  4. Great info JJ. As clearly mentioned in this article, I´d like to emphasize the importance of a fast connection when considering scalping the futures market. As a european, I´ve experienced that first hand. The nice thing about the SoT is that - even though a substantial part of their daily trading activity is scalping - they also trade longer timeframes.

  5. Nice Article

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