What is Emini Scalping?
Scalping is a specific tactic used by Emini traders for capturing small quick price moves. The goal is to accumulate point gains, little by little using rapid fire, in-out trades with quick targets throughout the day as opportunities present themselves, vs. taking positions in an attempt to hold for bigger targets (often called runners). Your typical scalp targets attempt to grab 1-2 points out of a sudden price move while utilizing tight stops of equal or lesser distance. Scalp trades can last only 30 seconds to a few minutes.
What is Scalping Good For?
Scalp Trades can be utilized in a variety of ways in your trading approach. Some traders exclusively employ scalp trades in their trading methodology while others may use scalping as a way to build a few points of risk capital and as a means of testing the waters early on in the trading session. Taking a few high probability scalp entries can help a trader make up a drawdown from a previous stop-out in a non-trending market. (How do you eat an elephant? One bite at a time.) Or maybe a trader has had a fantastic high-point scoring day, and going for a few well positioned, 1-2 point Scalp Trades can be a nice way to put a little icing on the cake. And don’t forget, that during sketchy price action in an erratic, non-trending market, Scalping may be the ONLY way to score any points during the day if you are going to participate in the game.
The Pros and Cons of Scalping
Like anything else, there are advantages and disadvantages to the scalping approach. One advantage to scalping is that it may be a superior way to pull profits out of a tough market. A dull market may provide little trending action, but instead lots of up and down wiggles and waves during the session that can be exploited utilizing quick in and out Scalp Trades. And some beginning traders might find it easier to master these quick trades with easier targets, helping them to build their confidence while getting the mechanics of order placement down.
The obvious negative to scalping is that if you are always taking your trades off the table at fixed targets of 1-2 points, you will never be able to participate in a massive trend move that could make you 20 points when holding a runner. If you are doing lots of in and out Scalp trades during the day you may end up paying a higher ratio of commissions per points gained, however this is not really the big concern some people immediately think it is, because if you can only make money scalping and can’t making any money attempting to hold runners in a non-trending market, then the debate about commissions is a moot point.
Scalping Could Be More Work
Finally, Scalping may take more work to win the same amount of points. For instance, a trader that goes for runners may be able to pull 6-8 points out of the market with 1-2 well placed runners while the scalper may need 10-15 trades to net the same number points – (the number of trades is totally dependent on how many stops get taken in the process). On the other hand, a skillful scalp trader may be able to pull a desired quota of points out of a non-trending market within the first 2 hours of the session, while a trend-trader might have to sit around all day long attempting to catch the trend runners, in the end not catching anything.
A Scalper Must Maintain A High Win Ratio
To be profitable over the long run with scalping, a trader must maintain a high win ratio and be vigilant about preventing catastrophic losses to their account, which means ALWAYS taking stop-outs quickly. Like a disciplined sniper, you as a scalp trader will be taking one-shot, one-kill entries, not trusting the market further than you can throw a grand piano. (One big accidental drawdown could take you 20-30 scalp trades just to get back to break-even). All scalp trades should have a predefined hard stop-loss, as you never want a trade to get away from you and wipe out a weeks worth of your winners. To see why a high win ratio is necessary to be profitable in scalp trading take this example. Trader A: trades for runners and does 10 trades per day. This Trader could stop out 9 times at -1.25 points and then catch only one runner that makes him/her 20 points. At the end of the day, with only a 10% win rate Trader A: finishes with a +6.5 point gain or $275. Trader B: the Scalper, doing 10 trades and using the same -1.25 stop (with a +1.25 target) would have to win at least 80% of the time to net the same 6.5 points and 55% of the time just to break-even.
3 Types of Scalp Trades
There are literally hundreds of different entry setups that traders could potentially use to Scalp the Emini Futures, however they all breakdown into one of 3 main groups. (1.) Breakouts, (2.) Pullbacks, (3.) Fades. So for instance, many scalpers play price breakouts from visible congestion zones for example. At times the market gets locked down tight in between a rock and a hard spot of support and resistance. Scalpers attempt to jump on board when they see the market setting itself for quick and forceful move out of that congestion zone. Some times scalpers employ scalp setups that occur on price pullbacks in a trending market. When the market is experiencing a strong intra-day trend, more often than not, after the first big momentum wave up or down, we see a short rest break occur in which price will pullback or retrace a certain distance. The savvy scalper knows just when to enter the market ahead of a trend-continuation pop, and grab a point or two as the trend wave attempts to resume. A final way to scalp the market is to fade strong price moves as they run out of steam and encounter resistance or support levels. These are counter-trend scalps and can be taken right at the point a trader thinks the market is ready to make a quick reversal of at least a few points.
Integrating Scalping Into Your Trading Arsenal
After experimenting with Scalping concepts on SIM mode for awhile, you as a trader may wish to incorporate Scalp Trading into your daily toolkit of Emini Trading Strategies. You should decide if you are going to dedicate all of your trading to scalp trades or include them in with other forms of Emini Trade Entries, from larger targets or holding runners during strong trends. You will also want to review for what purpose you wish to include scalp trades into your approach and in what manner you wish to use them. It might be to build a few points of risk capital in the morning while market direction is unsure, make up some drawdown on a full stop-out, or putting a little icing on the cake on a winning day.
The great thing about trading is that it can be whatever you want it to be – and you can decide on the right mix and types of trades you employ in your approach. Scalping is is great way to get started as it is the least risky way to play the market in the beginning.. and it also comes in useful when we go through dull or erratic patches in the market. Best to think of scalp trades as just one part of a balanced diet.. where the larger 4+ point moves are like the meat and potatoes and your scalp trades are like low hanging fruit. Easy to grab and sweet at the end of larger meal. As you get more experience in the market you will find that a healthy mix of these two approaches to day trade is really the way to go.
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Additional info on scalping at Investopedia:
Scalping: Small Quick Profits Can Add Up
Check out our Video Presentation on scalping the ES Futures: