Scalping is a style of intraday trading that concentrates on taking high probability set-ups to profit off short-term price moves. Traders tend to use larger sized shares for smaller price gains. This style of trading requires high-probability strategies and disciplined execution. Over 70-percent of all daily trading volume on U.S. exchanges are performed by algorithms, that scalp the markets all day. Proper scalping is risk-averse since the core principle is to eliminate exposure by closing trades quickly rather than holding positions overnight or longer. The “rifle charts” are an effective tool that can improve the execution of trading strategies. it utilizes common chart indicators synergistically to gain an edge on gaming price action.
The Rifle Chart
The basic rifle chart is a candlestick chart with three common chart indicators: simple moving averages (SMAs), Bollinger Bands (BBs) and the stochastic oscillator. The SMAs illustrate price trends. Bollinger Bands (BBs) provide the nominal upper and lower price ranges as well as price compression and expansion phases. The stochastic oscillator signals overbought and oversold price conditions. The SMAs and BBs are the price indicators that operate like a road map and the stochastic is the momentum indicator that operates as the engine.
The beauty of the rifle chart lies in the synergies between the price and momentum indicators working together to translate price action. While the stochastic usually rises and falls with the underlying price, the real “tell” comes from understanding why some oscillations result in minor price moves while others result in larger price moves. This inconsistency is one reason why many traders mistakenly assume the stochastic is a “weak” indicator. By adding the SMAs, it becomes apparent that the larger price moves occur when the stochastic is oscillating with the five-period SMA. Smaller price moves occur when stochastic moves against the five-period SMA. Understanding this simple concept is key to identifying high probability set-ups.
The MSL Buy Strategy
The market structure low (MSL) buy trigger strategy involves entering longs above the MSL trigger price. The MSL is a three-candlestick pattern composed of a low, lower low and higher low with the buy trigger above the high of the higher low candle (3rd candle) and stop-loss under the low of the lower low candle (2nd candle). Using the rifle charts further improves the probability of the set-up by adding the stochastic timing mechanism and the five-period SMA as price support.
There are two key conditions/filters for the set-up:
- MSL composed of at least four consecutive lower low candles preceding the MSL trigger
- Stochastic falls under the 20-band
Once qualified by the two filters, the buy signal triggers when:
- The stochastic oscillator crosses up through the 20-band
- Price rises above the MSL trigger
- Five-period SMA rises or slopes up
Managing the Trade
Once a position is entered, the trade is scalped out at various price levels (of your choosing) or when stochastic nears the 80-band. Stop-losses trigger if the stochastic crosses back down and/or MSL price breaks (the low of the 2ndcandle). The five-period SMA can also be an early stop tool (for profits or losses) if the candle closes under it combined with a stochastic cross down. The key is taking profits sooner rather than later by scaling down the position to minimize exposure to zero.
Risk and Probability
Instead of focusing on the conventional risk versus reward approach, scalping relies on balancing risk and probability. Risk is comprised of two types of exposure, size of the position and (holding) time. Narrowing either minimizes risk. Probability is determined by two factors, the strength of the set-up/pattern and profit target. Smaller profit targets naturally have higher probabilities.
Perpetual Strategy Enhancement
This basic strategy can further be enhanced with additional price indicators in addition to specific stochastic-based patterns that efficiently utilize the five-period SMA. Confluence is the key with indicators. Even more, refinement is possible by adding additional time frames to generate a Doppler effect that foreshadows, not predicts, impending price moves. These refinements and nuances will be covered in upcoming articles.