ALL YOU NEED TO KNOW TO START SCALPING
Trading is actually very simple. It is the brain that is complicated. Many times, I realized the problems do not revolve in mastering the trading strategy but rather it is the mindset or emotions that we need to conquer. Therefore, follow the steps in this book closely.
* APPLY, APPLY and APPLY: Knowledge and actions are the keys to success! After you have learned the concept, apply these methods on a daily basis. You have to be involved in the market. This is how our brain muscles learn. Our concentration will increase by recalling what we have done physically every day. When I first started trading, I was very determined and I practiced trading every night during US market open. In two months, I achieved consistency in my practice account and then, I took a leap of faith to start trading live until now. Give yourself a timeline and follow the plan strictly.
* Summary on ALL YOU NEED TO KNOW to get you started in trading:
* Identify the Currency Pair and Trading Time Zone
* Identify the Trend based on the Market Condition
* Identify the Timeframe according to your Strategy
* Identify Support and Resistance Levels and Trading Range
* Identify your Scalping Strategy: Dip or Breakout?
* Open a trading account and keep practicing. Focus to be a consistent profitable trader. Start small and slowly increase your lot size once you have achieved the confidence in trading
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* If you enjoyed this book and found it useful, I’d be very grateful if you had post a short review. Your support really make a difference and I read all the reviews personally so I can get your feedback and make this book even better. Thanks and cheers!
Contents
Why You Should Read This Book
About the Book
Chapter 1: Introduction on Should You Consider Scalping?
Chapter 2: Identify the Currency Pairs
Chapter 3: Identify the Market Condition
Chapter 4: Identify the Timeframe
Chapter 5: Identify the Support and Resistance Levels
Chapter 6: Identify the Trading Range
Chapter 7: Identify the Right Scalping Strategy
Chapter 8: Identify a Successful Scalper Mindset
Conclusion
Chapter 1: Introduction on Should You Consider Scalping?
* Scalping is one of the many methods in trading. Scalping is an act of entering and exiting positions many times in one day during high volatility moves. Scalping has been very popular in forex trading due to the high liquidity in many major currency pairs. With the high speed internet nowadays, this provide a good platform for scalpers to execute trades within seconds.
* Question, should you consider scalping as your trading strategy? Does this scalping strategy suit your personality?
TIPS 1: Personality of a Scalper
* Scalpers are spoilt with choices in trading. They can trade both ways, selling and buying throughout the trading session. Scalpers have many opportunities to make a profit. However, it is a double edged sword. As much as you can profit from the market, you may lose them all in a short time too. Therefore, are you a person who plan a trade and trade the plan? If it is, please read on.
* While intraday traders focus to close a position at the end of the day, scalpers aim to close their position within minutes. Thus, scalpers must have great concentration and patience to wait for high probability entries. They have to be precise in their entry as every pip makes a big difference in their profitability. They fight against time and they must react fast when price turns against them. Therefore, scalpers are trained to be good decision makers as they always face with tough choices when scalping the market.
* Scalpers have to be discipline when to stop trading. Scalping requires alertness and they must believe there are always opportunities in the market. If they are on a losing streak, they need to know when to take a break. They must not trade with emotions. They must always live to fight another day.
Chapter 2: Identify the Currency Pairs
Table 2.1 showed the list of commonly traded currency pairs in the forex market. Currency Pair Name
EUR/USD
Euro-Dollar
USD/JPY
Dollar-Yen
GBP/USD
Sterling-Dollar
USD/CHF
Dollar-Swiss
USD/CAD
Dollar-Canada (Dollar-Loonie)
AUD/USD
Australian-Dollar (Aussie-Dollar)
NZD/USD
New Zealand-Dollar (Kiwi-Dollar)
EUR/USD
Euro-Dollar
TIPS 1: Currency Pair at Different Time zones
* What is the right currency pair to trade? Remember the most important considerations during trading are the volatility and liquidity. This does not only affect your strategy but your profitability too.
* How do you choose the right currency pair? Liquidity refers to the amount of market supply and demand present in a particular market at any given time. Traders experience liquidity in terms of volatility of the price movements.
*Take a look at Table 2.2 which showed different trading sessions in the forex market. High liquidity such as during the Europeans and London markets overlapping with Asian sessions in their morning will give a more gradual price movement. New York market open overlapping with London market is another window of trading opportunities until the liquidity drops during the close of European trading overlapping with the New York lunch time.
Table 2.2 showed different trading sessions in Singapore timing
* Forex market is a 24-hour round the clock market from Mondays to Fridays. Each trading session has its unique characteristic, as each session’s liquidity is different. Therefore, do not rush. There are always trading opportunities in the forex market.
REMEMBER:
* Liquidity is lowered during public holidays as most major banks are closed. The void of liquidity causes a risk in abrupt volatility and larger price increments. Thus, you are exposed to an increased risk. Price volatility may easily hit your stop losses. There may also be higher probabilities of price breakouts or reversals without any certain directions.
* Trading session will vary by one hour due to daylight savings time (DST) throughout the year. It is the practice of advancing clocks during summer months by one hour so that in the evening hours day light is experienced later. Beginning of DST, New York market opens at 2230 hr SGT instead of normal hours at 2130 hr SGT.
Chapter 3: Identify the Market Condition
* Identifying the market condition is the utmost important decision in scalping. This helps scalper to set their scalping strategy that best fit the current market.
* Trend of a market is characterized by the general direction of its price. There are two types of a trending market, namely an uptrend or a downtrend market. By identifying key levels in the chart, scalpers can easily spot a trending market.
* Range market is known as a sideway market where there is no clear direction of the market.
TIPS 1: Trending Market
* Uptrend: An uptrend or a bullish trend is formed where the direction of price is pointing upward. This can be characterized when each successive peak and trough are higher than the ones earlier. Refer to Figure 3.1.
Figure 3.1: Uptrend with higher highs (#2 and #4) and higher lows
* Downtrend: A downtrend or a bearish trend is formed where the direction of price is downward. This can be characterized when each successive peak and trough are lower than the ones earlier. Refer to Figure 3.2.
Figure 3.2: Downtrend with lower highs (#3 and #5) and lower lows (#2 and #4)
TIPS 2: Drawing a Trendline and Channel in a Trending Market
* TRENDLINE: A trendline is drawn by connecting previous swing highs and previous swing lows. Two parallel trendlines form a channel. A channel that points upward is an up channel and vice versa, a channel that points downward is a down channel.
* Many scalpers will trade with the trend until the trend reverses. First signal of an uptrend becomes exhaustive is the break of the up trendline. The more significant signal is the break of the previous low.
* However, breaking of trendline is not the only factor to look out for bullish exhaustion. A scalper also looks at the key support and resistance levels. As long as the key support holds, market will likely to retest the upside again. Figure 3.3 shows that an up channel can always be redrawn at different angle. A healthy up channel is best formed at 45 degrees.
* A trendline can be used as a support or a resistance. The top of a trendline often act as the resistance while the bottom of a trendline often act as a support. Usually market will trade within the up or down channel until it is ready for a breakout. The price action within the channel will help a scalper to prepare for a swing or a breakout trading opportunity. Read on to understand more.
Figure 3.3: Redrawing of an up trendline. The steeper the trendline, the more likely the angle will change
TIPS 3: Trading in an Up Trending Market
* Figure 3.4 below showed an uptrend market. On 28th August 2012, half an hour before New York market open, price found support above 1.2535 and rallied up to cross above the resistance zone at 1.2550-51. After New York market open, price stayed above 1.2550-51 support zone with a series of higher lows forming an uptrend in the chart.
Line 1
For an upchannel, most important is to look out for key support level to hold.
Line 2
Figure 3.4: 1 Min chart showing an uptrend with higher lows and higher highs formation
* Figure 3.5 showed ample buying opportunities within the four trading hours. Although a scalper may trade both ways. However, do not try trading both ways especially in an uptrending market. This is to train your mind to stay focus on one direction. In an uptrend market, stick to the buying rather than selling. From the chart, you may see that the upwards momentum was stronger and thus, it was easier to make a profit from the market.
Figure 3.5: 10 Sec chart showing potential buying opportunities in an uptrend (Numbers in circles represent potential profit in pips)
TIPS 4: Trading in a Down Trending Market
* On 29th August 2012, market traded from the high of 1.2565 to the low of 1.2520. Before New York market open, price found resistance at 1.2545. Market recognized the downtrend and this was the 3rd lower high formation in a down channel. As soon as New York market open, the bears took over the market and sold down towards 1.2520.
* Figure 3.6 showed that in this downtrend, there were at least 2 selling opportunities in the market to make a quick profit.
Figure 3.6: 10 Sec chart showed potential selling opportunities in a downtrend (Numbers in circles represent potential profit in pips)
TIPS 5: Range Market
* Figure 3.7 showed a characteristic of a ranging market. A range market is identified when price moves sideways with no significant highs or lows in the chart. In a range trading, one cannot be greedy as holding a position will be of high risk for a scalper. The low volatility may cause any unforeseen spikes that may result in a losing trade.
Figure 3.7: A range bound market
TIPS 6: Trading in a Ranging Market
* In a range market, scalpers look to buy at the support and sell at the resistance. Figure 3.8 showed a sideway market between 1.2880 and 1.2930 on 13th September 2012. One of the benefits of scalping is even though market does not have a clear direction, scalpers can still diligently trade off the sideway market with quick profit.
* Many traders were cautious ahead of the FED FOMC meeting to be held later on that night, thus it was not surprised for market to trade in a tight range. Despite a range market, there were many selling and buying opportunities. Since the higher timeframe was still an uptrend and price was trading near the bottom of the range, scalpers focused on buying opportunities.
No significant highs or lows
Figure 3.8: 10 Min chart showing a range market on 13th September 2015
* Figure 3.9 showed ample buying opportunities in the market. Ahead of New York market open, buying interest came in and a double bottom key reversal pattern (small blue circles) was formed at the support zone of 1.2880-90. Price broke out of the down trendline (red dotted line) as well as the current resistance at 1.2890. The retracement of this up-move stayed above 1.2890 and formed a second double bottom, signaling a strong buying interest in the current market.
* If you zoomed out of the chart focusing at the bottom of the range, you will be able to see an inverted head and shoulder in the making (big blue circles). Thus, there were many buying opportunities as highlighted in grey boxes in Figure 3.9 below.
Figure 3.9: 10 Seconds chart showing buying opportunities in a range market on 13th September 2015
TIPS 7: Trading the Breakout of a Range
* Price will eventually breakout of a range market and scalpers will continue to trade off the trend again. Once the ceiling is broken, scalpers can take an opportunity to buy. Vice versa, if the support is broken, scalpers may take a quick profit by taking a short position to exploit the downward momentum.
* On 30th August 2012 during the London market, market was consolidating in a 30 pips range between 1.2530 and 1.2560. As seen on the chart on Figure 3.10, there was pressure on the upside and price kept trying to break the resistance but failed. As soon as New York market came in, the sentiment changed. Eventually, price broke out of the range and traded below the support zone of 1.2535-40. Figure 3.11 showed the potential downmove for scalpers to take a quick profit after market broke out of the range.
Figure 3.10: 1 Min chart showing the price consolidation and breakout of range on 30th August 2012
Figure 3.11: 10 Sec chart showing the potential scalping trades for the downmove on 30th August 2012 (Numbers in circles represent potential profit in pips)
TIPS 8: Falsebreak
* Falsebreak: A move that did not follow through which caused many traders in either a long or a short position.
* Insufficient liquidity in the market may cause a falsebreak of the support and resistance levels. Traders in the market maybe anticipating news, thus they sit back and take out their orders causing a void of liquidity in the market. Some market makers use this liquidity void to temporarily push prices.
* In this market condition, the break sometimes does not truly represent the trend of the market as the trend will not follow through.
Figure 3.12: 1 Min chart showing a falsebreak which occurred at the resistance level on 3rd May 2012
* Figure 3.12 showed a typical example of a falsebreak after an attempt to break the resistance at 1.3176. There is no formula to identify if the breakout is true or false. However, these are some tips that you may look out to prevent getting caught in a falsebreak.
A: Market broke the resistance at 1.3176-80 but there was no follow through to continue the upside. Price retraced sharply as seen with the red candle.
B: The up-move had been validated right if market continued to stay above support 1.3168. This level was significant as it was the level where market started to push prices towards the upside aggressively. However, price continued to slide downwards sharply and confirmed the falsebreak at point A. Many traders would have caught long for now.
C: The worst scenario was market broke back below 1.3157 and formed a lower low. This confirmed the bullish exhaustion with a potential downchannel in the making. Sellers clearly took control of the market and stopped out many buyers who were caught in the falsebreak earlier.
* Having said that, one of the benefits of a scalper is the privilege to trade both ways of the market. Take a look at the chart in Figure 3.13. A total of 8 trades were scalped, out of which were 7 winning trades. Even as a beginner, if you were patient and only traded on the buy side, you would had also executed 6 trades with 5 winning trades. That was 83% winning rate!
1.3176
1.3157
1.3168
A
B
C
Figure 3.13: 10 Seconds chart showing the false break for an attempt to break above the resistance at 1.3180
REMEMBER:
* For beginners, trade only one direction. Practice only executing high probability winning trades. The key word is patience. Trade with the trend and keep your losses small. After a loss, wait for at least 10 to 15 minutes before triggering another trade. This is to prevent you from taking revenge against the market. Remember that market is always right.
* Take note of the news release timing for the pair you are trading. Many times, news may cause irregular volatility in the market. During news release, the trend may change without any clear direction. Do close any open position and reenter after the news release.
Chapter 4: Identify the Timeframe
* Scalpers are famous for their high frequency trading. In one trading session, a scalper can easily execute at least 10 trades. Warning: Do not overtrade. From my past experiences in scalping during the New York session, the number of higher probability winning trades range from 4 to 5 trades. In a trending market, the number of trades may easily hit at least 10 to 12 trades. In this chapter, we will learn the correct timeframe to identify the current market trend. We will also take a look at which execution timeframe is best for a scalper.
TIPS 1: Trend Timeframe
* A timeframe simply denotes the number of bars displayed for a selected period of time.
* A trend is identified from a higher timeframe starting from the daily, hourly to the 10 minutes chart. 10 minutes chart is sufficient to trade for one trading session. In a 10 minutes chart, there will be 24 candlesticks which have enough data to identify the short term market condition.
* Figure 4.1 showed the hourly downtrend but in the 10 minutes chart, it is an uptrend. Therefore, as a scalper, you will be buying as we follow the 10 minutes short term trend. At the back of our mind, be cautiously bullish when price is trading near the resistance of the hourly downchannel.
Figure 4.1: Hourly timeframe showing a downtrend but 10 Min chart showing a short term uptrend
Hourly Downtrend
10 Min Uptrend
TIPS 2: Execution Timeframe
* Once you have identified the direction from the higher timeframe following the steps above, now consult the 1 Minute or 10 Seconds chart for orders execution. In a 1 minute chart, there are 60 candlesticks in an hour. Lower timeframes will guide you precisely on when and which level to place an order. A higher timeframe can never be able to do this. As a scalper, precision of entry is very important. Every pips count. Precision of entry also helps a scalper to be the first to enter and the first to exit a position for a quick profit.
* Remember, your goal is to execute 4 trades within a four hours New York trading session.
TIPS 3: Trading with a 3-Dimensional Mindset using Different Timeframe
* Trading with a 3-D mindset means combining all the rationale of the price action as seen in different timeframes.
* On 24th September 2012, the trend in the hourly chart (blue line) as shown in Figure 4.2 contradicted with the trend in the 10 Minutes chart (red downchannel). The overall market sentiment was bullish but there were lower highs (red circles) as shown in the 10 minutes chart.
* This downmove was a short term retracement and potentially a bearish sentiment for the next four trading hours. A scalper would firstly look for selling opportunities to trade in accordance to the 10 Min price action with a cautiously bearish mindset as price traded near the support zone between 1.2890 and 1.2920 (blue box).
Figure 4.2: Hourly timeframe showing an uptrend but 10 Min chart showing a short term downtrend
* Next, during the New York market open, a scalper used the price action in the 1 Min chart to confirm the bearish sentiment at that point of time. As much as the 10 Min chart was bearish, Figure 4.3 showed the 1 Minute chart formed a double bottom at the support 1.2890 which indicated buying interest in the New York market.
* Market fought out at 1.2908, figuring out if this could be the 3rd lower high to retest the downside. However, the market demand was higher than the supply, and price successfully held a higher low at 1.2904 support and eventually broke the resistance or the previous high at 1.2908.
* Therefore, as much as 10 Min chart was bearish which should set the short term trend but the hourly was an uptrend and price was also trading into a support zone, you should be cautiously bearish. Thus, it was best to consult the 1 min chart once the New York market open to confirm your view of the market.
Figure 4.3: 1 Minute timeframe showing buying interest at support 1.2890
* On this trading session, market traded a 30 pips tight range. It was supported above 1.2890 and resisted below 1.2920. If you did not sell into the support zone, you had made the right decision to be cautiously bearish. Indeed, there were many buying opportunities as long as price stayed above the support at 1.2890.
* Figure 4.4 showed potential buying opportunities that were executed using the 10 Seconds chart. Just by focusing on the buy side, you would have executed 6 trades with 100% win rate.
Double Bottom
1.2890
1.2920
3rd Lower High
1.2908
Figure 4.4: 10 Seconds Chart showing execution of buy orders above support 1.2890
REMEMBER:
* Don’t over analyze. Price seems to be very volatile at times when you are too engrossed looking at the 10 Seconds chart. When you are confused of the trend, zoom out to the hourly time frame to get a bigger picture of where the market is positioning itself.
* Do not overtrade. Less is more. Do not force a trade and sit it out until you are sure about the next move in the market.
* Scalpers tend to be quick and sharp. They are like snipers. They focus, aim and then trigger with confidence to give it a shot. 4 trades within 4 hours are more than enough. Keep practicing and quoted from Bruce Lee, “I fear not the man who has practiced 10000 kicks once, but I fear the man who had practiced one kick 10000 times.”
1.2890
1.2920
1.2908
Chapter 5: Identify the Support and Resistance Levels
* Identifying key support and resistance levels are critical skillsets for scalpers. The price actions at these levels for both lower and higher timeframes, give an idea of the current market supply and demand.
Support is the level where buyers are more than sellers and often act as the bottom of a trading range. Resistance is the level where sellers are more than buyers which act as the price ceiling during a trading session.
TIPS 1: Drawing Support and Resistance Levels using Price Action
* How to draw support and resistance levels? Firstly, identify all key levels and draw a horizontal line connecting all the lows and highs. Refer to Figure 5.1. These are the levels where bulls are protecting the bullish market by buying whenever the price dips, expecting the price to trade back to the upside. The more the prices bounce at these levels, the more significant these support levels will be. Vice versa, at resistance levels, bears will sell whenever prices rally to protect the bearishness of the market.
Figure 5.1: Drawing Support and Resistance Levels based on the Price Action
TIPS 2: Understanding Psychology between Bears and Bulls at Key Levels
* Technical trading is a psychological game. It is always a constant fight between the bears and the bulls in the market. Once you understand the psychology between the bears and the bulls, as a scalper, we benefit both ways. A scalper is patient and only trade when one side of the parties wins.
* What is the psychology behind the previous resistance turn support levels? Figure 5.2 showed when a resistance level was broken, this signified that buyers were more than sellers. Thus, at this point of time, market was bullish with more demand than supply. At these key levels, when a resistance was broken, you will observe higher highs and higher lows were formed and an uptrend was established in the market.
* Vice versa, when a key support level was broken, this signaled a bearish sentiment in the market where sellers were more than buyers. Lower highs and lower lows were formed and a downtrend was established with more sellers in the market.
Figure 5.2: Identifying Key Levels to determine current Market Supply and Demand
TIPS 3: Drawing Support and Resistance Levels using Fibonacci Retracements
* Leonardo of Pisa, also known as Fibonacci, was an Italian mathematician born in 1170. Traders believe that the market tends to follow the Fibonacci number to identify if there is any continuous buying or selling pressure in the market after a rally.
* According to the Elliot Wave Theory, prices move in a zig zag pattern. Whenever there is a price rally, market will take some profit. Some called this as pullbacks or a price retracement. Profit taking is a signal of market taking a breather before the preceding trend continues. How far the profit taking can
Support turn Resistance (Bearish)
Resistance turn Support (Bullish)
Higher Low
Lower High
Higher High
Lower Low
go before the preceding trend continue? It is believed that when the market retraces, the retracement will usually hold at the key Fibonacci levels of 38.2%, 50 % or 61.8%, before resuming the main trend. These are the levels that we should look out for.
* Figure 5.3 showed price rallied from 1.2122 to 1.2390 during a trading session on 20th July 2012. Fibonacci retracement was used to identify potential buying interest in the market before market continued its preceding upmove. 61.80% Fibonacci retracement was seen at 1.2225. This level was a significant level to watch out for buying interest as this level was also in confluent with the previous support level (as shown on the left side of the chart).
* On the 10 seconds chart in Figure 5.4, price found support above 1.2225 and there were many buying opportunities in the market to scalp for a quick profit.
Figure 5.3: Price was supported at 61.80% Fibonacci Retracement level at 1.2225
1.2122
1.2390
Figure 5.4: 10 Seconds chart showing potential buying opportunities to scalp the upmove (Numbers in circles represent potential profit in pips)
REMEMBER:
* Support and Resistance levels are important to determine the market trend, market supply and demand. By mastering this skillset, it helps you to identify safe stop loss level and take profit level diligently. Setting stop loss level is important to protect your capital and to stay in the game for long run.
* Support and resistance horizontal lines are also seen in lower timeframe such as in the 1 min and 10 seconds chart. Lower timeframe support and resistance levels are easily broken. These levels in lower timeframe besides identifying the market supply and demand, they also guide scalpers for precised entry to make a quick profit from the market.
* Ideally in a retracement market, if prices hold at 50% retracement level, the preceding trend is likely to follow through. Usually, 61.8% Fibonacci level is the last defense of the price retracement. If prices fail to hold at 61.8% Fibonacci level and go further to 100% level, be careful as the market is no longer as bullish or bearish. Market is simply stuck in a range or a sideway market.
Chapter 6: Identify the Trading Range
* In earlier chapters, we have learnt how to identify market condition using support and resistance levels. Identifying trading range is as important as determining the market condition. More often than not, prices move in blocks, rather than trends. Infact, 80% of the time, market ranges. Scalpers must master how to narrow down the trading range to stay alive in the game. Once a trading range is identified using the higher timeframe, scalpers can look to employ the scalping strategy that best fit for a trending or a ranging market.
* On 1st August 2012, market was trading between 1.2285 (low) and 1.2325 (high). Figure 6.1 showed that a 40 pips tight trading range was identified during this trading session. As expected, many traders were seen cautious ahead of the FOMC meeting.
Figure 6.1: 40 pips trading range was identified between 1.2285 and 1.2325 during the New York Trading Session on 1st August 2012
REMEMBER:
* Trading range is only a guide on where the market is potentially heading. Do not blindly use these levels to short at resistance and to buy at the support level.
* Scalping strategy has the advantage of trading both ways of the market. However, until you master identifying the market condition and the trading range, do stick to one side of the market. Do not trade countertrend until the bulls or bears give up.
Chapter 7: Identify the Right Scalping Strategy
In earlier chapters, you have learnt how to identify market condition, support and resistance levels and the trading range. Now, let’s put all these knowledge into action. Let’s learn how to apply different scalping strategies that best fit the trading session. A scalping strategy involves only 3 steps; identifying the direction of the market, levels of entry and timing of exit.
TIPS 1: Identifying the Direction; Buy, Sell or Stay away?
* Firstly, you need to decide a direction; to buy or to sell. Do not predict the market’s direction because market is always right. In an unsure situation, deciding to stay away is also as important.
* Scalpers only trade when the big players are in the game as they only care about quick profit when the price moves.
* For beginners, trade only when market is trending. After using the higher timeframe to narrow down the trading range, a scalper will buy when the market is buying and sell when the market is selling.
* How to identify when market is buying or selling at the key levels? A scalper uses the candlesticks and chart pattern formations in the lower timeframe as a guide. Refer to charts below in this chapter.
* It is advisable not to scalp against the trend. This is a counter trend strategy. Build your confidence in focusing in only one direction. Remember, you just need to execute 4 trades in the next 4 trading hours during the New York market. There are ample opportunities to scalp. So, be patient, discipline and focus to identify the highest winning probability trades.
TIPS 2: Identifying Level of Entry by using the Trading-a-Breakout-Strategy
* Once you have determined the direction, next, what levels should you look out for buying or selling opportunities? Position traders and scalpers buying strategy often differ. Position traders buy when the prices dip in an uptrend or sell when price rally. On the other hand, scalpers buy at a breakout of resistance and support levels when there is a momentum in buying or selling respectively.
* Trading a dip offers a lesser risk reward ratio than trading a price breakout. This is because position traders will buy low and sell high while scalpers will buy high and aspect price to go higher for a profit.
* Trading a breakout is exciting and usually it is a momentum trading. For example in an upside breakout trading, many sellers would turn buyers and scalpers will exploit the buying momentum for a quick profit. Therefore, in terms of risk with reference to holding time, scalpers tend to have lower risk as they would have exited their position within minutes while a position trader may still be holding on to a trade, exposing their trades to any unforeseen spikes in the market.
*As a scalper, you must have great confidence in trading a breakout. At times, scalpers may be trapped in a falsebreak where price did not follow through after a breakout. How to prevent a falsebreak? There is no 100% method to prevent a falsebreak. To offer a higher probability winning trade, scalper may place a buy stop or sell stop order a few pips above the resistance or below the support to trade the breakout respectively. Some scalpers may wait and only execute the trade after a clear breakout.
TIPS 3: Identifying Timing for Taking Profit Strategy
* Taking profit is as important as setting stoplosses. More often than not, traders know how to cut loss but they do not plan for their take profit level. Psychologically, this is known as loss aversion. Most studies suggest that losses are twice as powerful as gains. Traders has a tendency to strongly prefer avoiding losses than to acquiring gains.
* Profit taking levels depend on the market condition, support and resistance levels. In an upmove with strong resistance ahead, do not be too ambitious. Take your profit before others do. Always remember to master making small profit with consistency.
* Then, when should you maximize your profit? Knowing when to ride on a trend, helps a scalper to reward more, relative to what being risked through the placement of a stop order. During times of high volatility, scalper may decide to hold on to their position a while longer.
* In a sideway market, knowing not to be greedy is very important. When prices do not move, it may be because there is a major news upcoming. Scalper either stays out or take a smaller profit.
TIPS 4: Putting all Together
* On 1st August 2012, market was trading within a 40 pips range between 1.2285 and 1.2325, ahead of the FOMC meeting. Figure 7.1 showed that within the 4 hours trading session, there were both buying and selling opportunities using different entry and exit strategies. Different scalping strategies were chosen based on the market condition at that point of time.
Part 1: Buy in an uptrend after price pullback and held above 1.2298 support
Part 2: Buy in a range market to retest the upside
Part 3: Sell when market was selling below 1.2307
Part 4: Range trading when price stayed below 1.2307 and 1.2301 to retest the downside
Figure 7.1: Identifying direction, entry level and exit scalping strategy based on the current market condition (Numbers in circles represent potential profit in pips)
Part 1 (Buy in an Uptrend): Figure 7.2 and Figure 7.3 showed that half an hour before New York market open, price was supported above 1.2298. Market maintained higher lows to retest the upside. Price continued to rally from 1.2301 to 1.2315 in a steep angle, showing strong buying interest in the market. Within this period of time, 2 trades could have been easily executed for at least 3 pips profit.
Part 2 (Range Trading): Figure 7.4 showed that eventually market consolidated in an 11 pips range for over an hour before price broke out on the upside again. If you would have identified the trading range correctly before trading, you would not have applied the holding exit strategy as there was a strong resistance ahead of you. In other words, there was not much room on the upside. Many profit takers who bought earlier will sell back to the market ahead of this level. Thus, in the chart, the buying was indeed resisted at 1.2325 and did not follow through as many were cautious ahead of the FOMC meeting.
Part 3 (Sell in a Downward Momentum): Before London market close, price sold down aggressively. In this move as shown in Figure 7.5, many buyers earlier would have been caught in long positions and were stopped out below 1.2310.
Part 4 (Range Trading): Before London close, market consolidated again in an 11 pips trading range between 1.2293 and 1.2304 as illustrated in Figure 7.6. Taking small profits like 2 to 3 pips would have been a perfect exit strategy for a quiet market ahead of FOMC meeting later in the night.
Figure 7.2: Buying in an uptrend after price pullback and held above 1.2298 support
Part 1: Uptrend
Figure 7.3: Buying in an uptrend when price supported above 1.2301 to crossover the resistance at 1.2307
Figure 7.4: Buying in a range market to retest the upside
Part 1: Uptrend
Figure 7.5: Sell when market was selling below 1.2307
Figure 7.6: Sell in a range trading when price stayed below 1.2307 and 1.2301 to retest the downside
Part 3: Downtrend
REMEMBER:
* Identify the direction, level and timing to best fit the market condition. Within one trading session, price can be trending as well as ranging. Do not hold a trade and always keep your profit and protect your capital. Only ride your profit when market is trending.
* Do not try to do countertrend until the buying or selling is over. Always trade with the general trend as shown in the higher timeframe.
* Trading breakout is exciting. Note that breakouts occur during times of high volatility.
* Plan your strategy before you place an order. Once an order is executed, trade with your plan.
Chapter 8: Identify a Successful Scalper Mindset
There are generally two types of traders, namely position traders and scalpers. Position traders always enter a market based on their risk reward ratio. If the risk is much higher than the rewards, they will reduce their position size to accommodate to their losses. Thus, position traders rank their confidence based on the risk reward ratio of a trade.
On the other hand, scalpers rank their confidence based on their winning rates. The higher the winning rates of a scalper, the bigger their position size will be. Scalpers aim to take small profit as many times as they could. They practice to perfection in taking as many trades as possible, focusing on small profits each time they enter the market.
TIPS 1: Having a Successful Scalper Mindsets
* Zero risk with no position, infinity risk once there is an open position: The main reason time is a risk factor for scalpers because they believe when scalpers are in a position, they are exposed to probability of running into an adverse event. Thus, having an open position is putting a scalper into an infinity risk. Therefore, taking profit in the shortest time is the first aim to build a successful scalper mindset.
* Smaller moves are easier to obtain: Scalpers believe that there are many 3 pips profit to make than to make a 100 pips profit all the time.
* Scalpers can trade both ways of the market and in any market conditions, as long as they have mastered how to identify the market conditions correctly.
* Align your decision making before entering a trade. Figure 8.1 showed the justification of each entry, taking into consideration of the market direction, entry level, stoploss level and timing before placing an order.
* Do not trade with emotion: Many times, scalpers ask themselves these questions; “Why am I always so impulsive?”, “Why I did not hold the trade?” or “Why I did not cut loss?” Successful scalpers always plan their trade before they enter into the market. They do not allow themselves to trade with emotion. The moment you have an open position is the moment where emotions start to overshadow your decision making. Stick to your scalping strategy, with a method that dictates the entry as well as the exit strategy. This will help to remove all unnecessary moves that may cause an emotion trading.
* Do not be greedy: Scalpers must stick to their scalping strategy, even if that particular trade would have made even more. It requires a scalper to have a strict exit strategy because one large loss could
eliminate the many small gains that a scalper has worked to obtain. This is very heartbreaking as all the hard work may have gone back into the drain.
Figure 8.1: Justification of direction, entry and stop loss levels, take profit target and timing of entry before placing a trade
TIPS 2: Focus on Consistency
* The above example clearly showed that achieving consistent small profit is not impossible. The key to become a successful scalper is to focus in achieving consistency in your winning rate and to keep your losses small.
* This is your ultimate goal. Target to achieve 100% winning rate, 4 trades per day with an average of 4 pips per trade in a 4 hours trading session. Yes, of course with consistency. The keyword here is consistency. Once you have achieved the consistency, you will gain the confidence to trade bigger position size as shown in Table 8.1.
** Table 8.1: The table below showed that if a scalper made a 100% win rate, doing 4 trades per day and each trade profits an average of 4 pips, with different positon size
Position Size
$ per pip
Total pips / day
Total pips / month
Total $ / month
10000
all that matters. Thank you.
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