Scalping is one of the styles of trading wherein quick, speedy actions have to be taken with extreme precision. This style is very challenging as most traders cannot find a system under which they can consistently make profits in an extremely short period of time with reduced risk. Most traders go haywire because they know when to enter a trade but miss some crucial exit signals or do not recognize an ideal trade setup. This means that sometimes you win, and sometimes you lose, with frustration growing throughout.
A tried scalping technique based on strong technical indicators, such as VWAP (Volume Weighted Average Price) or ATR (Average True Range), will surely reveal clarity and structure for the profitable trading of the market. And that is exactly what you will learn in this article—to obtain the best scalping strategy with guidelines on how to use these instruments to take advantage of price movements and raise your success level.
Understanding the Best Scalping Strategy
Scalping is fast and slow profit earning through minor price movements. The secret to success will lie in an accurate entry and exit, with a great understanding of risk management. For this scalping strategy, we will use two main indicators: VWAP and ATR.
What Is VWAP?
VWAP, or Volume Weighted Average Price, is a crucial indicator that helps traders gauge the average price at which a stock trades in a day, based on volume as well as the price. Often, it becomes the primary benchmark because it typically indicates the point at which institutional buyers or sellers are active.
What Is ATR?
Another must-have tool for scalpers is ATR, or Average True Range. It measures the market’s volatility, giving a trader an idea of the average range for price movements over a specific time period. Hence, the trader will receive an idea about how far he can move the price from one point to another, and that’s why it becomes easier to set appropriate targets and stop-loss levels.
Key Steps in the Scalping Strategy
1. Setup Your Chart
The first step is to ensure that your trading chart displays both the VWAP and ATR indicators. You’ll be looking for a platform with these add-ons, and an ability to view pre-market data. It’s crucial to pay attention to action during pre-market hours because that often sets the tone for the balance of the day when using VWAP.
2. Identify an In-Play Stock
Choose a stock that is “in-play.” Here, the stock is moving unusually large, likely on a news item, earnings report, or massive buying by a large institution. You want to see a move of at least one ATR off of the open and at least 50% of an ATR move off of VWAP.
Why is this important?
- ATR from the open: The stock is volatile enough to allow for trading opportunities.
- ATR from VWAP: This represents a considerable price movement away from VWAP that allows for a possible pullback trade.
3. Wait for a Pullback to VWAP
Once the stock has gone up by one ATR from the open and half an ATR from VWAP, we await a pullback. A choppy and gradual pullback is what we are looking for. This tells us that the stock is slowly going back to VWAP. That’s where we begin making our entry plans.
4. Find a Buy Program
The beauty of this strategy is identifying that exact point in time when a larger institutional buy program is going to kick back in. At the open, a big buyer may have pushed the price up, but as the stock pulls back into VWAP, it’s often that same big buyer that’s coming in to support the price again.
To catch this, you can either look at the tape (Level 2 data) and see if it’s building buying pressure or you just watch the chart for a rejection at VWAP. Then, when you notice that the stock is stabilizing at VWAP, it is a sign that the buy program has restarted, which creates a good probability entry point.
5. Set Your Stop-Loss and Target
Once the buy program is initiated, place your stop-loss two cents below the pullback low at VWAP, which allows you a controlled amount of risk, while still giving the trade a chance to come together.
Target: The first target is the previous high of the day. The statistical data shows that this trade has an ongoing 65% success rate; therefore, it’s a good “B” trade. In order to get a better risk/reward ratio, you can calculate your EV. For this trading strategy, an average 1.6 on your EV usually means you have a good setup.
6. Continuation Pattern
Part of the appeal with this scalping strategy is the ability to follow through trades. If the stock breaks the high of the day on higher volume, and can remain above that level for at least 15 minutes, it probably will continue to be under buying pressure.
Here, you would go with a continuation scalp, seeking incremental profits as the stock pushes higher. This “base hit” scalp is the kind of scalp that will give you a multiple succession of profitable trades within the same trading session, assuming the buy program stays live.
Why This Scalping Strategy Works
The beauty of this strategy is its simplicity and reliance on high-probability setups. It focuses on the relationship between VWAP and ATR, marking exactly the right time to get in and, consequently, limiting your risk. You are also privy to how large institutional buyers behave so you can latch onto their momentum and minimize losses.
This strategy performs well under high-volatility situations as well as in somewhat low-key market positions. It’s versatile enough to be able to shift according to the changes in market behavior, and thus, it is one of the best scalping strategies that can be applied by both newbie and professional traders.
Conclusion
Scalping requires a lot of fast thinking and decision-making as well as excellent control over risks. Blending VWAP and ATR allows you to come up with a good scalping plan that will consistently help you out in trading practice. Whether you want to take advantage of the early market momentum or find some more trades for the later half of the day, you have a systematic way of determining high-probability trades under this strategy.
Scalping is not that big, fat profit on every trade but rather the accumulation of a series of small gains that compound over time. With this kind of strategy and approach, you can improve your trading performance and increase your chances of becoming successful.