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.
Heikin Ashi Candles
These candles are an alternative to using standard candlesticks on charts. They’re called the average bar candles, and they make it easier to spot trends and analyse patterns in the candlestick data. Charts created using Heikin Ashi candles usually look smoother than those created with normal candlesticks, because Heikin Ashi candles take the average of the movement and can easily be used to spot trends and identify when trends are reversing.
The LSMA strategy is a regression indicator, and it applies the least squares method of the regression analysis to create a regression for the previous price movements of the security. Accordingly, this line can then be used to predict the future price movements of the security, and therefore trades can be made based on these predictions. It is mainly used as a crossover signal to identify bullish or bearish trends.
The Chandelier Exit is a volatility-based indicator that can be used to identify the stop-loss and optimal exit points on trades, regardless of whether you are taking a long or a short position. The indicator makes use of the volatility and the Average True Range to construct 2 lines: the chandelier exit long and the chandelier exit short. Long positions should be exited when the price crosses above the chandelier exit long, and short positions should be closed once the price goes below the chandelier exit short line.
For this particular trading setup, the following settings were used on the indicators:
- LSMA: The default settings were used for this indicator.
- Chandelier Exit: ATR Period = 1, ATR Multiplier = 1.85
A long was indicated when the Heikin Ashi candles were green, the current price was above the LSMA, and the Chandelier Exit indicator showed that a long was the right position to take.
A short was indicated when the Heikin Ashi candles were red, the current price was below the LSMA, and the Chandelier Exit indicator showed that a short was the right position to take.
The risk-reward ratio was fixed at 1:2.
Results and Adjustments
After a scalping session over the course of 6 months worth of past data, the overall results were:
Profitability: 226.32% net profit
Number of Trades: 185
% of trades profitable: 71.35%
Profit factor: 1.614
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 EMA200 could be added for additional confluence – longs are only taken when the price is above the EMA200 and shorts when the price is below the EMA200.
- 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.
- Heikin Ashi Candlestick – Investopedia
- Least Squares Moving Average – TradingSim
- Chandelier Exit – Corporate Finance Institute