Traders employ a variety of strategies in order to be able to consistently beat the markets and profit – however, there are few methods of trading as effective as scalping. Scalping refers to a form of trading that relies on making a series of small profitable trades, focussing on quantity rather than quality in order to boost profits. The primary focus of such strategies is to utilise trading volumes rather than performing a lot of complex technical analysis. There are several such trading strategies, and one of them has been discussed in this article. Read on to find out more.
There are 3 main indicators used in this trading setup, and each of these indicators has been explained below in detail.
The EMA is simply the exponential moving average of the stock’s closing price over a given number of trading sessions. It works in a very similar way to the SMA (Simple Moving Average), except it gives more priority to more recent data as this is considered to be more relevant than old data. The parameter that you have to enter for the EMA is the time period. Usually, traders only go long when the current price is above the EMA, and short when prices go below the EMA.
The Triple EMA indicator was created in order for traders to be able to identify trends without the lag of viewing multiple EMAs at the same time. Therefore, it takes multiple EMAs of the original EMA and then subtracts some of the lag to give a much clearer picture of the trend. Therefore, it can be used to identify when trades should be made and the general direction in which the market is heading.
Traders Dynamic Index (TDI)
This indicator makes use of a variety of different tools in order to be able to provide a better picture about the current price situation of the stock. This includes identifying the strength of a trend through the RSI, the general trend direction using EMAs, as well as the general volatility associated with the price of the security through Bollinger Bands. It can be used to identify potential entry points for trades in a strategy.
For this particular trading setup, both the EMA and the TEMA were set to 200. Default settings were used on the TDI.
A long was initiated when the current price was above both the EMA and the TEMA, and the TDI showed that the security was below the lower Bollinger band.
A short was initiated when the current price was below both the EMA and the TEMA, and the TDI showed that the security was above the upper Bollinger band.
The risk-reward ratio was fixed at 1:2.
Results and Adjustments
After a 15-minute scalping session over the course of 3 years worth of past data, the overall results were:
Profitability: 447.81% net profit
Number of Trades: 314
% of trades profitable: 78.34%
Profit factor: 2.098
Some additional indicators and settings that could be added in order to increase the win rate and reduce the risk employed are:
- Different levels of leverage could be employed to boost the profitability and/or the win-rate associated with the strategy.
- The take-profit and stop-loss levels could be tweaked to further affect the percentages of trades that were profitable.
- Multiple take-profits or stop-losses could be added to change the profitability or the win rate.
- The ADX could be added to weed out bad trades that would have been made whenever the market was flat or the trend was about to reverse.
Scalping has been proven to be one of the most profitable trading strategies out there, however, even when you’re scalping, you need to ensure that you have a high win rate so that the strategy is fruitful and profitable. Using the strategy discussed above, you will be able to profit in both bull and bear markets consistently. You can even tweak the settings to suit your level of risk and trading style, finding the right balance between the win rate and the net profit.
- Exponential Moving Average – Investopedia
- Triple Exponential Moving Average – Investopedia
- Traders Dynamic Index (TDI) – EarnForex