A 5 Step Scalping Strategy
A 5 Step Scalping Strategy
A 5 Step Scalping Strategy
But what does it mean – Scalping Strategy? A scalper looks to scalp out small profits multiple times a day.
Basically, what a scalper does is they quickly analyse the charts and then they mark the entry and exit levels, and they do
this several times within the day.
In this article, we are going to learn a scalping strategy based on the 5-minute chart that has proven successful for the last
few years. We’ll look at the exact levels of entry; when to buy, when to sell and every other thing that you need to know to
trade profitably.
For example; if you’re trading on the 5-minute chart, you have your confirmation chart which I basically call the “anchor
chart.” An anchor chart is very important here, as it helps you to understand the direction of the trading.
Here, we’ll use the hourly chart (H1) as our anchor chart to dictate trading direction. This chart determines which way you
are going to be trading; it helps you to know the best time to engage in buying or when you’re going to be selling.
On this chart, there are two exponential moving averages (EMA) – the 8 EMA and the 21 EMA. The direction of the moving
averages is an indication of the direction of the market.
Keynote:
When the 8 EMA is below the 21 EMA with both pointing down and prices below both EMAs, then it means we’d be looking
for the SELL trades only.
On the other hand, when the 8 EMA is above the 21 EMA with both up and price above both EMAs, then it implies tha t we’d
be looking for BUY trades only.
Now, let’s look at a slightly different chart;
When the price moves above the moving averages, it means that there is NO trade setting up. Again, when the price moves
below the moving averages, it also means there is NO trade setting up as seen below;
Remember, the price has to be on the right side in the direction of the trend.
Once we’ve confirmed the direction of the trend using the H1 confirmation chart, we can then move down to the 5 minutes
chart. Let’s see a confirmed BUY trade only on the 5 minutes chart below;
The Strategy
Now, we can put in our first take profit target TP1 to be (1 x R).
Say, the prices move up to our first take profit target where we exit 50% of the trade, and we move the balance to the trade’s
stop loss (SL).
Then, we can put in our second profit target to be (2 x R) as we expect prices to move further up.
Here, we are looking for a pullback to the 8 EMA. That becomes our trigger bar. Now, we count back five previous candles
to figure the lowest low. We then count three pips below the lowest bar to form our sell stop. Once we have established
where to enter the trade, we know where we are going to be placing our stop-loss, three pips above the trigger bar. The
distance forms our initial risk (R).
Once we know our initial risk, we can place our first take profit target TP1 – (R x 1). And as price moves down, take out
the first profit target, exit half the position, and move the stop loss of the trade to break even. After that, we can put in
our take profit target 2 TP2 – (R x 2) and then wait for the price to move further down to take the profit target 2 as well.
In order to gain confidence in this strategy before taking it into the live markets and trading with real money, I encourage
you to do some backtesting!
Note: Another way I encourage you to excel in this strategy is to use a trailing stop. A trailing stop means that you are
trailing behind price, which allows you to be in the trade for much longer if the trend, indeed develops into a much stronger
move.
Here, as the price moves up, we simply place the profit target at 50% and move the stop-loss to breakeven once the level is
reached. As the stop-loss is set to break even, we are going to be a risk-free trade from now on, with 50% of the initial
position size.
In using a trailing stop-loss, we are going to be trailing behind the low of the previous three candles, i.e., the lowest low of
the three candles. As price moves up, we count back the three previous candles and the stop moves three pips below the
lowest point of those candles. In this instance, the stop is trailing behind the third candle low as shown below;
Finally, as it pulls back down, the stop-loss, which is now in profit is hit and we exit the second half of the trade, the
remaining 50%. This way, we are kept in the market far longer and taking much more out of the market trailing behind the
third candle; the third candle low in the case of a buy and the complete reverse if you’re selling as you will be trailing behind
the third candle high with a buffer of 3 pips high.
Now, as with any strategy that you wish to deploy in the market, you need to do some backtesting. Backtesting helps you to
know how the strategy performs so that you’d be more equipped and more confident to trade with real money.
So there it is. My 5-minute Scalping Strategy. Try it and let me know how your backtesting will go. I’d be thrilled to hear
about your inputs!