I’ve listened to several of my local banker buddies talk about trading in general, and scalping in particular. These bankers explain to me that «there is no way to make money day trading» because of excessive risk involved in the enterprise. Not being the most genial fellow on planet earth, I explain to them that scalping, done properly, is one of the most profitable trading strategies available to retail-class traders, given a certain level of experience and knowledge. Of course therein lies the rub.
Since I am a dyed in the wool scalper and teach individuals how to scalp effectively, I run into a plethora of different strategies taught to new traders by well-meaning trading rooms and educators. Of course, I want to emphasize that trading in the shortest time frame is an acquired skill and inexperienced traders will struggle mightily without the proper tools and mindset. Consistency in scalping is the name of the game and scalping consistently takes a good deal of discipline and self-control. You don’t need to take every mildly attractive set-up, and should focus on the high-probability set-ups that pop-up throughout the course of the day.
What is the secret to consistently profitable scalping?
Real time indicators are the most realistic path to becoming successful in trading. Yet, the general trading public (especially e-mini traders) have been slow (which is a huge understatement) to accept what institutional traders have known all along; the market is dynamic in movement and reaction to that movement has to be interpreted quickly and trade set-ups recognized as they transpire.
Given that the general trading population is still mired in J. Wells Wilder’s groundbreaking market analysis published in his 1978 book, «New Strategies in Technical Trading Systems,» trader after trader that enters my small trading room insists on perpetuating and arguing the merit of attacking the market with these lagging indicators, which are far better suited to swing trading than scalping. I am not debating the genius of Wilder and his contemporaries; I am simply stating that recent improvements in technology and data feeds provide new traders with the type of information to scalp that has, until recently, been unavailable to traders at the retail level.
What are these tools that I am touting so highly?
Quite simply, modern day order flow programs that allow you to analyze volume and direction in real time put lagging indicators to shame. I also happen to utilize some older analysis methods too, especially Market Profile. Using these tools with a specific trading methodology and a written trading plan can genuinely improve your scalping results dramatically. I have converted many lagging indicator traders to this system of trading thinking. Of course, many traders at the onset are skeptical of new and different takes on day trading, but most have generally come around and learn to trade consistently and profitably.
One quick note on Market Profile; I am not of the opinion that this system is particularly effective in indicating specific trades. However, by understanding general areas in the daily range that are most conducive to high-probability set-ups, then using order flow analysis to identify specific levels for those trades’ results in some astounding results. Further, I do use one «old school» indicator (the Commodity Channel Index) as a confirming indicator in my trade set-up analysis.
In short, if you are trying to scalp out 20 ticks per trade and using lagging indicators to this end, you will find yourself several bars behind the order flow guys. In other words, you will be consistently late to the party; and in the scalping world being late to the party cuts deep into your profits. Of course, programs similar to the current order flow programs have been available at the institutional level for years, but now retail traders can enjoy trading on a more level playing field with the big boys. Still, I haven’t seen a high level of acceptance among retail day traders of these newer technological developments. It’s a conundrum I don’t fully understand; perhaps the charts look a bit complicated, but with some time spent studying the order flow tools they can be understood and interpreted with relative ease.
In summary, I have continued to urge traders to move away from traditional scalping methodology and embrace the more sophisticated and effective order flow/tape reading programs available. I am convinced that they are a significant upgrade over the lagging indicators of time past. Technology has changed, and its high time traders adapted their trading style to these new developments.