Scalping remains one of the strategies that is most attractive to anyone who wants instant profits. Scalping is characterized by churning large numbers of trades in short periods, taking advantage of even small price movements. For traders who want quick profits and do not have to hold a position overnight, a strong scalping strategy is of prime importance.
The Problem of Quick Profits
The most critical issue that many traders face is finding an appropriate strategy that will present an opportunity for benefiting from such a rapid movement in the market. When entering a position, most traders enter very late and are stopped out when prices retrace. Such a market tends to induce emotional decisions with huge losses rather than fast gains. Without a proper approach, scalping is extremely frustrating.
The issues include entry and exit with such a large margin of error. Scalpers are required to have a full system that provides effective entry and exit points. The two indicators, Volume Weighted Average Price (VWAP) and Average True Range (ATR), are the most powerful indicators that guarantee successful scalping.
- VWAP calculates the average price of a security over a trading day, adjusted for volume, to inform traders about the true value of the market.
- ATR measures volatility by calculating the average value of the range between highs and lows for a specified period.
Combining these two allows traders to pinpoint when the market is most favorable for scalping trades.
Best Scalping Strategy
Now that we have defined our tools, let us tackle the strategy itself. This strategy is based on looking for stocks that have made large moves at the open of the market or an in-play stock that has gone up at least one ATR. From this list, one can monitor and track stocks for pullbacks as a reference to ride momentum and gain from swift profits.
1. Identify #the Setup
Start by choosing a stock that has made an impressive move at the open of the market. The key is to locate an in-play stock that has traded at least one ATR from the open and a piece of an ATR from VWAP. This indicates intense buying force and also sets up a possible continuation trade.
2. Waiting for a Pullback to VWAP
Once the stock has traveled some distance, wait for a choppy pullback down into VWAP. At this point, the price falls back into the volume-weighted average price as the big buy program that pushed the price up runs its course. Here, patience is key. Instead of buying immediately, wait for the price to settle back to VWAP, allowing for a lower-risk entry.
3. Focus on Tape or Chart
As the stock pulls back, keep a close eye on the tape or chart to spot a resurgence of buying pressure. This usually occurs when the stock quickly rejects VWAP, as buyers step into the market and take the price higher. If you are not familiar with tape reading, simply watching for sharp moves away from VWAP on the chart can also be effective.
4. Setting Your Stop-Loss and Target
After confirming the buy program, set your stop-loss and target. The stop-loss should be placed two cents below the pullback low at VWAP. If the trade does not go as expected, this small risk ensures minimal losses. Your target should be the prior high of the day. With a 65% probability of success, this strategy offers a favorable risk-reward ratio.
5. Search for a Continuation
If the stock breaks through its day’s high on increased volume and remains above that level for at least 15 minutes, a continuation scalp opportunity arises. You can capitalize on another leg of momentum driven by the big buy program. A continuation scalp is effective when persistent buying pressure is present, offering multiple quick-win opportunities.
Why This Scalping Strategy Works
This scalping strategy has gained widespread recognition due to its simplicity and effectiveness. By focusing on stocks in play and using VWAP as a reliable indicator of market sentiment, traders avoid chasing price movements and wait for the right time to enter. The use of ATR provides an additional layer of precision, enabling traders to quantify potential price movements and filter out low-probability trades.
Key Advantages:
- Accuracy: Trading based on a pullback to VWAP allows traders to enter at better prices with less risk.
- Defined Risk: A tight stop-loss two cents below the VWAP pullback ensures controlled risk.
- High Probability: With a 65% chance of success, this strategy increases the likelihood of making quick profits.
- Scalable: The continuation scalp can be applied to extended moves without significantly increasing risk.
For traders seeking quick profits, this scalping strategy provides a methodical approach. By relying on VWAP and ATR as key indicators, traders can identify numerous high-probability setups and enter trades with great precision. Waiting for a gradual pullback to VWAP before entering ensures that you don’t chase the market. With the continuation scalp, you can take advantage of sustained buying pressure for additional gains.
Once you incorporate this scalping strategy into your trading routine, you’ll increase your chances of consistent success. Whether you are a seasoned trader or just getting started, mastering this strategy will help you navigate the market with confidence, turning volatility into profit opportunities.