Under this heading we’ll actually look at twelve different setups that all operate in a similar way. Scalper trades are high probability strategies that use tight stops and target small profits, and typically last only a few minutes. As well as suiting those who prefer a more active, intense style of trading, scalping futures has a number of other pros.
Because you’ll be in and out of the markets in minutes, your exposure to the risk of new pricing information entering the marketplace will be limited.
There are many more small moves in the markets that a scalper can exploit than there are longer term trends. Even in a relatively quiet market, the tooled-up scalper who executes a sound strategy can turn a decent profit.
Because you’ll take a greater number of (small) trades, you’ll get accustomed to the sensation of taking losses, and this will help to build healthy attitudes and trading discipline.
Like the daily pivots, scalping systems have their origins in the strategies of the floor traders of the exchanges, who would take simple cues from short term price movements throughout the day. Often the scalper’s objective is to profit from nothing more than the difference between the bid and ask, pretty much as a ticket scalper at a concert would aim to buy tickets cheap and then sell them on at a higher price. In the high liquidity of the pits, positions can be entered and exited within minutes, and this process can be repeated dozens of times throughout the cash session. To the outside observer these actions would probably look like impulse trades but the market makers follow simple yet precise sets of rules in order to remain profitable.
Tick fades are also a form of scalper trade, but they’re covered separately and in greater detail.
Hedging the Opening Range
The concept here is very simple: you’re looking to box in the price action of the first fifteen minutes of trading, buying or selling any breakouts from this range.
You’ll also need to do all this pretty quickly, especially if price is trading near one of these extremes, so jump the gun and get the order at the farthest point from current price action in about thirty seconds before the close of the bar, and the order that is closer to the market bang on the close.
If you want to greatly improve the win rate here (although you’ll reduce the number of opportunities to trade this setup by more than half), place an order at one end of the range only – if the first fifteen minute bar has an up close, then you’re looking to sell a breakdown from the low, and if it has a down close a breakout from the high. In other words, you’re looking to catch a reversal of the opening price frenzy as the markets become more focussed and directional. This does not need to be immediate – you can leave your order in place with a high probability outcome until about midday.
This setup tends to work especially well in the FTSE and DAX futures since there is little else going on in other markets to influence price at that time.
The 10 o’clock Turnaround
Thirty minutes into the cash session the panic buying and selling of the open has subsided, and the S&Ps are preparing to settle into their mode for the day.
3/10 Oscillator Trades
This setup calls for fading price action when markets have made a strong trending move. An overbought or oversold state is identified by a +30 or -30 reading from the 3/10 Oscillator, and on fifteen minute bars of the Dow you can look to take 20 points profit with a 20 point stop loss. The frequency of wins here isn’t spectacular, but the 1:1 risk/reward ratio helps to maintain a workable edge. Cash sessions with more than two signals are very rare, and you can often expect to wait several days at a time for a signal, so don’t rely on this as your sole trade!
The Bond Market Dropout
At 20:00 (GMT) the US bond market closes, and when this key pricing reference drops out of the equation, the indices are prone to reversals.
Key Fibbonacci Reversals
Only use this setup following a day where the 24 hour highs and lows were made during the cash session. Once you have identified these highs and lows, you need to calculate the two key levels this setup uses. Most charting packages provide a tool that allows you to draw the Fibonacci levels directly onto your chart with the drag and drop of a mouse – you’ll just need to remember to ignore the additional levels (23% and 50%) that this will include. To calculate by hand, use the following formulas and the prior day’s price extremes:
((HIGH-LOW) x 0.62) + LOW
((HIGH-LOW) x 0.38) + LOW
More often than not you will see some kind of retracement at these levels. If the markets want to go somewhere then sooner or later they will, but it’s fairly unusual for a move just to cut straight through these levels on the first strike.
The Grail Trade
This is another strategy for re-entering the market on pullbacks in trends, developed in the 80’s by Linda Bradford Rasche. It will often setup immediately after a Momentum Pinball trade.
The original version of this trade looks for a retesting of the prior highs or lows to take profits, but using a fixed profit target appropriate to the market removes much of the stress.
Note that this setup has plenty in common with the ‘propulsion plays’ strategy in the swing trading section.
End of Session Engulfing Patterns
Look for this trade to set up only in the first and last hours of the YM or ES cash session.
Don’t sit around twiddling your thumbs waiting for this trade each day – it doesn’t set up cleanly all that often. However, don’t be afraid to get aggressive and ‘chase the market’ with this one: if you get stopped out and then a new engulfing pattern forms immediately on the next bar, take the trade.
Ten Minute Pregnancies
This setup also uses a candlestick pattern on a ten minute chart. When a candle forms with its entire range inside the prior candle it is what the Japanese call a Harami. This means ‘pregnancy’. On a daily chart this often signals that the market has become unsure of itself and a reversal may be due. On a ten minute chart, in the context of a strong trend, it usually just means that the move is catching its breath, and we will place our order in the assumption that it will resume.
If a series of Harami form successively (each candle having a range within the last) your order will not be executed, but don’t be tempted to keep moving your order in closer to the market action, as you’ll end up dragged unwittingly into a meaningless trade. Stick with the order placed when the setup first presents itself.
Scalping Latecomers into the Close
The key reversal time employed in the Bond Market Dropout setup is widely known among market participants. Because you stuck to a strict game-plan you were in and out of the market for a quick, small profit along with the pros, but what about those who came onboard later into the move once they’d got ‘extra confirmation’, or those who got greedy and hung on to their positions for a larger profit? By 20:50 the move will often be losing strength (remember, it was a move counter to the principle direction in which bonds had traded), and the market makers will be looking to shake these traders out for one last profit before the close. Another scalping opportunity presents itself, this time courtesy of trader-educator John F Carter:
Play It Again, Sam! – Reasons Not to Get Trigger-Happy
I’ll end this post by sounding a note of caution. When you’re three feet from the middle of a pit at the very epicentre of where price is created, in the midst of the bubbling cauldron of sweat and emotion that makes markets, literally watching the flow of paper orders coming into the pit from the world outside, then it’s pretty reasonable to expect that you might have a keen sense of where price is headed, at least in the short term. When you’re sitting at the end of a computer feed on the other side of the globe, you’re not going to benefit from this intimacy. The setups presented above take something of the spirit and structure of scalping, but don’t let that fool you into thinking that you can second guess price movement from your home computer. Stick to the setups!
And if it proves any consolation for the unfair disadvantage that the floor traders evidently enjoy (they pay zero commission on their trades as well, by the way), when the LIFFE floor in London closed in 2000, the number of ‘locals’ who successfully made the transition to screen trading on the Euronext could be counted on one hand. . .
Because you’ll be in and out of the markets in minutes, your exposure to the risk of new pricing information entering the marketplace will be limited.
There are many more small moves in the markets that a scalper can exploit than there are longer term trends. Even in a relatively quiet market, the tooled-up scalper who executes a sound strategy can turn a decent profit.
Because you’ll take a greater number of (small) trades, you’ll get accustomed to the sensation of taking losses, and this will help to build healthy attitudes and trading discipline.
Like the daily pivots, scalping systems have their origins in the strategies of the floor traders of the exchanges, who would take simple cues from short term price movements throughout the day. Often the scalper’s objective is to profit from nothing more than the difference between the bid and ask, pretty much as a ticket scalper at a concert would aim to buy tickets cheap and then sell them on at a higher price. In the high liquidity of the pits, positions can be entered and exited within minutes, and this process can be repeated dozens of times throughout the cash session. To the outside observer these actions would probably look like impulse trades but the market makers follow simple yet precise sets of rules in order to remain profitable.
Tick fades are also a form of scalper trade, but they’re covered separately and in greater detail.
Hedging the Opening Range
The concept here is very simple: you’re looking to box in the price action of the first fifteen minutes of trading, buying or selling any breakouts from this range.
- As soon as the first fifteen minutes draw to a close, place a sell stop order at the lows and a buy stop order at the highs.
- Your target is 10 points, and you’ll need a 15 point stop loss.
You’ll also need to do all this pretty quickly, especially if price is trading near one of these extremes, so jump the gun and get the order at the farthest point from current price action in about thirty seconds before the close of the bar, and the order that is closer to the market bang on the close.
If you want to greatly improve the win rate here (although you’ll reduce the number of opportunities to trade this setup by more than half), place an order at one end of the range only – if the first fifteen minute bar has an up close, then you’re looking to sell a breakdown from the low, and if it has a down close a breakout from the high. In other words, you’re looking to catch a reversal of the opening price frenzy as the markets become more focussed and directional. This does not need to be immediate – you can leave your order in place with a high probability outcome until about midday.
This setup tends to work especially well in the FTSE and DAX futures since there is little else going on in other markets to influence price at that time.
The 10 o’clock Turnaround
Thirty minutes into the cash session the panic buying and selling of the open has subsided, and the S&Ps are preparing to settle into their mode for the day.
- Open a 15 minute chart of the S&P500 index.
- If the market has trended down during the two bars prior to 15:00 (GMT) then place a buy stop order at the high of the second bar, if it has trended upwards, place a sell order at the lows.
- Your target is 1.5 points and you should exit for no more than a 1 point loss.
- If the order has not been executed by 15:30 then it should be cancelled.
3/10 Oscillator Trades
This setup calls for fading price action when markets have made a strong trending move. An overbought or oversold state is identified by a +30 or -30 reading from the 3/10 Oscillator, and on fifteen minute bars of the Dow you can look to take 20 points profit with a 20 point stop loss. The frequency of wins here isn’t spectacular, but the 1:1 risk/reward ratio helps to maintain a workable edge. Cash sessions with more than two signals are very rare, and you can often expect to wait several days at a time for a signal, so don’t rely on this as your sole trade!
The Bond Market Dropout
At 20:00 (GMT) the US bond market closes, and when this key pricing reference drops out of the equation, the indices are prone to reversals.
- Open a chart of the YM with 15 minute bars.
- If the market has trended down during the two bars prior to 20:00 then place a buy stop order at the high of the second bar, if it has trended upwards, place a sell order at the lows.
- Your target is 15 points and you should exit for no more than a 10 point loss.
- If the order has not been executed by 20:30 then it should be cancelled. Be aware that scalps on this same reversal may also set up as End of Session Engulfment Patterns.
Key Fibbonacci Reversals
Only use this setup following a day where the 24 hour highs and lows were made during the cash session. Once you have identified these highs and lows, you need to calculate the two key levels this setup uses. Most charting packages provide a tool that allows you to draw the Fibonacci levels directly onto your chart with the drag and drop of a mouse – you’ll just need to remember to ignore the additional levels (23% and 50%) that this will include. To calculate by hand, use the following formulas and the prior day’s price extremes:
((HIGH-LOW) x 0.62) + LOW
((HIGH-LOW) x 0.38) + LOW
More often than not you will see some kind of retracement at these levels. If the markets want to go somewhere then sooner or later they will, but it’s fairly unusual for a move just to cut straight through these levels on the first strike.
- Look at where the market is trading at fifteen minutes into the cash session.
- For any level above, place a Sell Limit Order at that level, and for any level below, a Buy Limit Order.
- Use a 10 point stop and a 10 point target
- If price has already traded at one of these levels then ignore that level for that trading day.
The Grail Trade
This is another strategy for re-entering the market on pullbacks in trends, developed in the 80’s by Linda Bradford Rasche. It will often setup immediately after a Momentum Pinball trade.
- Set up a 21 period exponential moving average on a five minute chart.
- As a trend (which should have been strong enough to generate a +30 reading on a 14 period ADX ) enters a consolidation, aim to go long or short back in the direction of the trend when price retraces to the moving average.
The original version of this trade looks for a retesting of the prior highs or lows to take profits, but using a fixed profit target appropriate to the market removes much of the stress.
Note that this setup has plenty in common with the ‘propulsion plays’ strategy in the swing trading section.
End of Session Engulfing Patterns
Look for this trade to set up only in the first and last hours of the YM or ES cash session.
- On a ten minute candlestick chart you’re looking for an engulfing pattern (see the diagram below) following a gentle trend.
- Once the engulfing candle has formed (you’ll need to wait until the close of the ten minute period for this), go long or short at the market according to the pattern.
- Use a ten point target and a ten point stop loss.
Don’t sit around twiddling your thumbs waiting for this trade each day – it doesn’t set up cleanly all that often. However, don’t be afraid to get aggressive and ‘chase the market’ with this one: if you get stopped out and then a new engulfing pattern forms immediately on the next bar, take the trade.
Ten Minute Pregnancies
This setup also uses a candlestick pattern on a ten minute chart. When a candle forms with its entire range inside the prior candle it is what the Japanese call a Harami. This means ‘pregnancy’. On a daily chart this often signals that the market has become unsure of itself and a reversal may be due. On a ten minute chart, in the context of a strong trend, it usually just means that the move is catching its breath, and we will place our order in the assumption that it will resume.
- Open a ten minute candle chart and wait for a harami candle to form during regular cash session hours, when the market is trending upwards. Ideally it should occur during a substantial move consisting of three candles with higher highs and higher lows.
- As soon as the harami has formed placed a buy stop order at the high of the candle that preceded it.
- In the DOW your target is fifteen points and your stop-loss is 10 points from your entry – adjust these accordingly for other indices.
- If your target is not hit and the market moves away in the other direction, cancel your order.
- For sells the rules are reversed.
If a series of Harami form successively (each candle having a range within the last) your order will not be executed, but don’t be tempted to keep moving your order in closer to the market action, as you’ll end up dragged unwittingly into a meaningless trade. Stick with the order placed when the setup first presents itself.
Scalping Latecomers into the Close
The key reversal time employed in the Bond Market Dropout setup is widely known among market participants. Because you stuck to a strict game-plan you were in and out of the market for a quick, small profit along with the pros, but what about those who came onboard later into the move once they’d got ‘extra confirmation’, or those who got greedy and hung on to their positions for a larger profit? By 20:50 the move will often be losing strength (remember, it was a move counter to the principle direction in which bonds had traded), and the market makers will be looking to shake these traders out for one last profit before the close. Another scalping opportunity presents itself, this time courtesy of trader-educator John F Carter:
- Set up a one minute bar chart of the YM (e-Mini Dow Futures) index.
- Only take this setup when there has been a clear reversal of trend between 20:00 and 20:30 (GMT). This trend should have been sufficient to have moved the YM by at least ten points at the time you enter the trade.
- At 20:52 precisely, enter long or short in the opposite direction to the trend.
- Use a 20 point stop loss.
- Exit the trade at the market at 21:13 for either a profit or a loss.
Play It Again, Sam! – Reasons Not to Get Trigger-Happy
I’ll end this post by sounding a note of caution. When you’re three feet from the middle of a pit at the very epicentre of where price is created, in the midst of the bubbling cauldron of sweat and emotion that makes markets, literally watching the flow of paper orders coming into the pit from the world outside, then it’s pretty reasonable to expect that you might have a keen sense of where price is headed, at least in the short term. When you’re sitting at the end of a computer feed on the other side of the globe, you’re not going to benefit from this intimacy. The setups presented above take something of the spirit and structure of scalping, but don’t let that fool you into thinking that you can second guess price movement from your home computer. Stick to the setups!
And if it proves any consolation for the unfair disadvantage that the floor traders evidently enjoy (they pay zero commission on their trades as well, by the way), when the LIFFE floor in London closed in 2000, the number of ‘locals’ who successfully made the transition to screen trading on the Euronext could be counted on one hand. . .