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 RSI is a momentum indicator that is used to analyse the stock and identify if it is overbought or oversold at any point in time. It does this by monitoring the magnitude of recent price changes. The RSI is presented as a number between 0 and 100, wherein a number below 20 represents an oversold stock (ripe for a long position) and a number above 80 represents an overbought stock (ripe for a short).
Engulfing Candle Pattern
An engulfing candle pattern is a candlestick pattern that can be used to spot reversals in trends. There are two kinds of engulfing patterns: a bearish engulfing and a bullish engulfing. A bullish engulfing appears when a bearish candle is followed by a much larger bullish candle that appears to engulf it. Likewise, a bearish engulfing appears when a bullish candle is followed by a very large bearish candle that appears to engulf it.
For this particular trading setup, the following settings were used on the indicators:
- EMA: Period = 200
- Bullish and Bearish Engulfer: Detection set to no trends
- RSI: The 50-line was marked clearly.
A long position will be initiated when the current price is above the 200 EMA, there is a bullish engulfing pattern, and the RSI is above 50.
A short position will be initiated when the current price is below the 200 EMA, there is a bearish engulfing pattern, and the RSI is below 50.
The risk/reward ratio was set at 1:2.
Results and Adjustments
After a 1-minute scalping session over the course of 6 months worth of past data, the overall results were:
Profitability: 166.98% net profit
Number of Trades: 67
% of trades profitable: 61.05%
Profit factor: 1.211
Some additional indicators and settings that could be added in order to increase the win rate and reduce the risk employed are:
- The ADX indicator could be added to weed out bad trades that would’ve been made when the trend was about to end.
- Reduce the EMA period from 200 to 50 or 100 for better results.
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
- Relative Strength Index – Investopedia
- Bullish Engulfing Pattern – Investopedia