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 4 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.
Average Directional Index
The ADX indicator is often called the ultimate trend indicator, as it helps traders to identify when prices are flowing strongly in one direction. It does this by using a moving average of a given number of bars and therefore helps to reduce the risk associated with trend-based strategies such as scalping. It is a line and gives a value between 0 and 100. The ADX gives the strength of a given trend irrespective of whether the trend is a bullish or bearish one. The higher this value, the stronger the trend.
Bollinger Bands are an indicator that combines the use of a Moving Average with Standard Deviations. There are 2 Bollinger Bands, which are a certain number of standard deviations above and below the moving average. Generally, when the price is below the lower Bollinger Band, a long trade is initiated. A short is initiated when the price is above the upper Bollinger Band.
The Awesome Oscillator is an indicator that is used to confirm the trend in the market. It makes use of 2 moving averages, one for a shorter period and another for a longer period. It is a boundless indicator anchored around 0 and displayed as a histogram. If the smaller SMA is larger than the longer SMA, then the histogram will show values above 0, indicating a bullish market and longs can be initiated. Similarly, if the longer SMA is larger than the shorter SMA, then the histograms will be below 0 indicating a bearish market. Here, shorts can be initiated.
For this particular trading setup, 4 EMA’s were used: EMA5, EMA21, EMA50, and EMA200.
A long is initiated whenever the 5EMA is above the 21EMA, the 50EMA is above the 200EMA, the ADX value is above 15, the Bollinger Bands show a value of above 0.75, and the Awesome Oscillator is a value above 2.
A short is initiated whenever the 5EMA is below the 21EMA, the 50EMA is below the 200EMA, the ADX value is above 15, the Bollinger Bands show a value of below 0.25, and the Awesome Oscillator is a value below 2.
The risk-reward ratio for this strategy is 1:2.
Results and Adjustments
The overall results were:
Profitability: 41.26% net loss
Number of Trades: 384
% of trades profitable: 64.06%
Profit factor: 0.809
Some additional indicators and settings that could be added in order to increase the win rate and reduce the risk employed are:
- You can adjust the stop-loss and take-profit levels to boost profitability.
- You can also try and adjust the risk-reward ratios in order to increase the riskiness and potentially increase the profitability of the strategy.
- You can reduce the lookback factor to increase profits.
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.
- Crazy 78% Win Rate Proven Trading Strategy PROFIT TESTED – ADX + BB %B + AO + EMA – YouTube
- TradingView Strategy
- Settings Used in Video
- Exponential Moving Average – Investopedia
- ADX: The Trend Strength Indicator – Investopedia
- Bollinger Bands – Fidelity
- Awesome Oscillator – City Index