Scalping Presentation
Scalping Presentation
I have put a few videos on how I scalp out on YouTube as well. You can find them by
searching for “Tom Hougaard scalping” in YouTube.
I run a live trading channel, where I post my trades in real-time. I have over the last 3
days produced close to 3,000 points for my followers – which I admit is easy - if you
were short! This is written in March 2020 and anyone who was short stock indices
would have made money.
If you want to be part of the Telegram channel (where I don’t scalp!! Because you
can’t post your entries fast enough), then please visit my home page where you can
read more about it. The Telegram channel is free.
https://tradertom.com/trading-signals/
Or send me email on
[email protected]
Definition of scalping
Scalping doesn’t have a widely accepted definition. Therefore, for the sake of having definition, I define
scalping as
“the act of trading on a very short-term time frame, in an instrument with sufficient volatility to warrant
short-term trading, using NO specialised equipment”
What I am teaching here is something you can do on any charting package. I am not using specialised
indicators, nor am I using specialised timings like “tick charts”.
Good instruments to scalp is the Dow Jones index, DAX index and to a lesser extent the FTSE 100 index.
The Origin of Scalping
Scalping Birthplace
1. The broker gives up edge to get business done. He pays the bid-ask. Broker/client is now long.
2. The “local” sells to the broker. The local is now short. However, he has an edge.
3. The broker is immediately out of pocket by the size of the bid-ask spread.
4. The local is at breakeven. The local has a very small amount of transaction cost.
1. The local takes on the risk in return for a neutral position. The locals role is to facilitate liquidity.
4. From a status quo perspective, he should be able to get out at breakeven – minus t-cost.
5. If a local could do this many times a day, he or she should theoretically over time – statistically
speaking – make a near risk free living. However, when you factor in the cost of
owning/renting/leasing a “seat” on the exchange, and include transaction costs, however small, the
prospect for the “local” scalper was perhaps not as rosy as you imagined. It was noisy, dirty, smelly,
even dangerous, but some made it big: Tom Baldwin, Charlie D.
6. How is that different to what we do today as “off floor – screen based” traders.
While I am certain you think you are immune to statistics, you should be
mindful of the numbers below.
• Assume you trade with a 1-point spread (for ease of calculation) in Dow or DAX etc.
• Let’s assume you execute 10 trades a day – probably not too unrealistic giving the nature of scalping.
• Assume you trade £10 a point – you will give away some £25,000 in “silent commission”.
• To do “scalping” properly, you have to exercise an extreme degree of emotional discipline, otherwise your
active trading activity will undermine your effort, considering the statistics.
• The risk to a CFD scalper is that, once he is filled, the market goes against his position to such an extent that
he is obliged to trigger his stop loss.
• If he sets his stop loss too tight, he may be forced to exit positions that are initially unprofitable, but which
would have recovered and shown a profit, had he not exited the position.
• Conversely, if he sets the stop loss too far away from his entry, the risk reward ratio might be good, but a
single loss-making trade could wipe out the profit from a large number of smaller, profitable trades.
“One inch is too soon – one inch is too late” . . Al Pacino in Any Given Sunday
• If you are too ambitious in your profit target, you may never get to realize the gains the position is showing.
The market could reverse, leaving you with a loss on a position that was, initially, profitable.
• The flip side is you set too tight a target, you may give up too much potential in a winning trade to
overcome the effects of the occasional, large loss.
• The obstacles that are facing a scalper are compounded by the fact that time is rarely on their side. There is
not the luxury of waiting.
• It stands to reason that the exit is just as important as the entry, if not more so.
Hit rate is a dangerous concept to focus on. A high hit-rate does not equate to a profitable strategy.
Examples
P = profit
R = risk
P is our profit target and R is the risk we undertake. How do we optimise our P and our R? Does it matter? What
market factors if any do we have to factor into our decision process?
After all, there is a big difference between scalping in the following 4 scenarios:
1. YELLOW is for the “Daily High Low” between 300 and 500 Dow points.
3. When the Dow is trading in a “very low volatility” environment, I do well by using a larger stop loss
than my profit target. I will have an exceptionally high hit rate, but I will have the occasional larger
loss. The hit rate is around 90%, and the purpose is to make a large number of small gains.
1. As volatility grows, my approach to scalping has to change too. This is a dynamic approach rather
than a static approach. I can’t simply declare “I use a 25 point stop loss”.
2. As volatility grows to between 300 and 500 Dow points using True Range as measure, it becomes
evident that making 20 points is akin to being given a basket full of apples, and then you only take
one. The stop loss approach can now take one of two paths:
3. The win rate naturally decline, depending on selected option, and it is far from 90%. As volatility
grows, I am aiming to make occasional larger gains, but I am willing to pay the price of sustaining
repeated small losses.
1. If the markets are very volatile, when Dow readings on True Range exceeds 500 points, the whole
dynamics of scalping changes dramatically. I am essentially doing a 180 degree U-turn from how I
scalp in a low volatility environment.
2. If you trade with large stops in a raging volatile market, you are likely going to suffer an increase in
larger losses. Therefor I have gone in the opposite direction, and I have opted to trade with very
small stop losses, but I am targeting occasional large gains.
4. I have deliberately been overtly negative on the win-rate to portray a bleak scenario. I think perhaps
having stated that I am right 3 times out of 10 in volatile situations was more realistic.
www.tradertom.com © Material is copyrighted by Tom Hougaard. – All rights reserved Page 38
What is Intra-Day Volatility?
What is the volatility on the 10-min chart
over various time segments during the
trading day?
• Scalping – manually as opposed to via an algorithm – is a serious endeavour which requires an immense
amount of concentration and focus.
• The setting of the optimal profit targets and the stop loss limit is a dynamic process and is dependent on
the current levels
• At low levels of volatility I use large stops, and small profit targets. The chance of being stopped out is
small, and the profit target usually gets hit. The win rate is 90%, which will compensate for the occasional
larger loss.
• At the opposite end of the volatility scale, it seems more prudent to reverse the strategy, by using large
targets but small stops. This is irrespective of whether being LONG or SHORT.
• Before I engage in the “main course” of the lecture, I would like to make an opinion known.
• Whether the volatility is high or low, we still have to figure out whether to buy or whether to sell short.
• The problem with “trend” within a highly volatile environment is that trend tends to get washed out or
drowned out on short time frames like a 1min chart.
• If I gave this talk in the US, I would have to consider topics such as slippage and fill rates.
• Outside of the US, we have CFDs at our disposal, which means that when we trade stock indices, we rarely
if ever pay commissions, and we certainly don’t pay stamp duty or exchange fees.
• We also have the advantage of being able to trade odd lot size as opposed to exchange set contract sizes.
• Finally because we trade through a financial middle man (the broker) we tend to always get the price that
we have requested.
• Buy On Close is an entry technique in its own right – scalp or position trading.
• I will show the chart and then break down the individual trades.
• It is very important for the success of the scalper to quickly ascertain if the asset is trending or if it is range
bound.
• If the 4th bar is shorted, it is risky because the market is still “young” from the open and
neither trend nor trading range has been established.
• The 5th bar is a breakout bar, and while it doesn’t close exactly at its highs, the odds are good
that the next bar or the following bar will see the market push higher.
• Stop loss will be where you consider the setup to be invalid. For conservative reasons we can
say stop is below the actual 5th bar itself.
• The following 5-min candle was bearish, but it held above the low of prior bar, and although
it didn’t push above the high of prior bar, it is still making higher lows
• The last bar you see is a full blown bull bar. There is ZERO tail at the top, suggesting that bulls
are firmly in control. If I was not already long, then a bar of this magnitude, in an uptrend,
should at least see another higher bar.
• Usually you don’t get much more than 5-8 bullish bars in a row. What complicates this
picture you are seeing so far is that you also have a red bar mixed into the trend.
• If I “bought on close”, my stop loss – as a scalper – would be below the low of the current
bar.
• Although you are a scalper, you also need to be aware of the support and resistance from
previous trading days.
• The problem I am faced with now is several fold:
• There may have been a prior top we can’t see on the current chart, so we will discount that
possibility that there was a warning.
• Every bull bar has had a one bar pause, but the difference between the current red bar and
the prior red bars, made during the up-trend, is that this bar actually closes its low.
• That is significant, because you will likely see bear scalpers sell short below the low of the big
red counter bar.
• If I short the close of the last bar, then my stop loss is above the high of the last bar.
• The current chart needs careful explaining. I will have to magnify it – next slide
• Point 1: Bears sell below low. Bulls buy below 1.
• The concept of BUY ON CLOSE or SELL ON CLOSE is still a scalping technique, but it requires a
very good grasp of several aspects.
• If I see a strong bull bar – but still in context of a trading range, I will actually sell
short.
• If I see a strong bear bar – but still in the context of a trading range – I will actually
sell.
• Now, identifying a trading range early is not easy. You are making an assumption,
but then again, all we do as traders is make assumptions. We assume the trend will
continue or reverse etc.
• As an educator I will run the risk of being “smug” because I obviously know
what will happen next on the charts that I select. That is something I am not
entirely comfortable with.
• I don’t want to oversell the idea that scalping is easy. It isn’t. Scalping is no
easier or more difficult than say mean reversion trading or trend following,
but as with any discipline of trading, be it one or the other, it requires a
specific mindset. You can’t have a trend followers mind set and scalp well in
a trading range, because you will invariably thing that every test of top or
bottom of range will lead to a break and a trend.
• As I look at this chart, I see several profitable trades and several
losses.
• The latest loss would have been me shorting the 4th last candle on
close. The index pushes above and closes above. That is not a good
sign for some who is short.
• As I look at this chart, I see several profitable trades and several
losses.
• The latest loss would have been me shorting the 4th last candle on
close. The index pushes above and closes above. That is not a good
sign for some who is short.
Buy On Close
• The vital criteria for Buy On Close is a strong close.
• The 3rd bar is the bar in focus. It is a bullish bar, longer in length than
previous 2-3 bars, and a decisive bullish close with nearly no “tail” at
all.
• This makes it a good candidate for a “Buy on Close” scalp. The stop
loss is a function of volatility, but here are three suggestions:
2/ Halfway down bar (less risk – but high chance of stop triggered)
3/ Below day low (more risk – but less chance of stop trigger)
Buy On Close
• Strong Momentum bar with the ultimate bullish close – zero tail.
• Reminder: low vol – small target and large stop – high odds of success.
Buy On Close
• The bar itself – the third one in – is fine. It has the qualities I need.
• My stop is either below the low of last swing, or volatility based or simply below
the low of the signal bar.
• Circle 1: happier to buy it – cleared sideways
congestion resistance. The bar itself is perfect.
Stop loss is very manageable.
• The 2nd circle has a near identical setup to the first circled
bar.
Sell On Close
Sell On Close
• Sell On Close is an entry technique in its own right – scalp or position trading.
• Like the Buy On Close, the close is important. Is there a tail or no tail?
• I will show the chart and then break down the individual trades.
This is in the context of very short-term trading. If we work under the assumption that more than 60% of all
trading executed in America is the result of algorithmic trading, and on very volatile days, they can account for
as much as 90% of trading, then it becomes a question of figuring out what THEY are doing.
Again, I stress this is not for position trading. This is for ultra-short term trading. The average holding time for a
stock in America is now 22 seconds. It is unfortunately not within the remit of a human mind to Observe,
Evaluate, Execute, Evaluate, Close - all within 22 seconds, all day long.
However, an active scalper can look to execute some 40 trades a day, or one about every 10 minutes. There are
78 5-min bars in the active Dow Jones session.
You always hear me talking about: “Are stop entry bears making money, are limit entry bears making money?
Are stop order bulls, are limit order bulls making money?” In a situation like this, where the only way to make
money is buying the market – right? – that to me is a market that is going to go higher. Probably some kind of a
measured move up.
“Who is making money?” is a question geared towards understanding what is going on in an index on a very
short-term basis, in this case using a 5-min chart.
The points below are used to describe the price action of the third bar,
which is the last bar you see.
1. Limit Order buyers BOUGHT at, or below, the price of the 2nd bar low.
They are now making money.
2. Stop Order sellers SHORTED at, or below, the price of the 2nd bar low.
They are now losing money.
3. Limit Order sellers SHORTED the top of the 2nd bar or higher. They are
now losing money.
4. Stop Order buyers BOUGHT the top of the 2nd bar or higher. They are
now making money.
The Fluid Balance of Buyer and Sellers
“It's not that I'm so smart, it's just that I stay with problems longer” Albert Einstein
Entry Where Support or Resistance is Made
I will call the extreme left green bar Bar 1, and then the following bars Bar 2,
Bar 3 and Bar 4.
➢ Bar 2 is negative. It pushes below the low of bar 1. It also closes below
the low of bar 1. It is not a full blown negative bar. Limit buyers are
losing, and stop sellers are winning.
➢ Bar 4 pushes above the high of bar 3, but it loses momentum as “limit
sellers” overcome buyer strength.
➢ Bar 4 is the signal bar for my scalping approach using this method.
There is an “aggressive” approach and a “Closed Bar” approach. I am
showing you the Closed Bar approach.
Explaining the Shift in Forces
➢ Sellers pushed the buyers back. There must have been more Limit
Sellers above the high of Bar 3 than there was Stop Order buyers.
➢ Bar 4 closes well into the range of Bar 3. This and the above trigger a
“sell short” alarm and a stop above the high of the bar.
➢ Establishing volatility during the day – from the early start, through the day, to the end of day.
➢ [email protected]
Scalping: The Human Side
➢ I have to accept that at times my victory will be snatched away from me.
Scalping: The Technical Side
➢ The rewards? Well, in time and with a stomach for higher stake sizes, you can quickly make a decent
amount of points.
Example
One More Example
And when you get it wrong?
Scalping: The Technical Side
Correlations
➢ When I scalp, I keep a sharp eye on the Dax index and the Dow index.
➢ Today (the 23rd April 2020) I pushed the FTSE hard to the downside (£1200 a point), trusting that the DAX
would eventually persuade the FTSE to give up. It did – but not before going 14 points against me and
forcing me to close out some positions to mitigate my loss. I had actually already decided to take my loss
when the FTSE began to fall back again, and I started adding the positions once more. Expensive? Yes, very.
The right thing to do? Well you never know, but in this case it paid off.
➢ If you see Dow and DAX break higher, and you are contemplating scalp short in FTSE, hold off for a while.
To join my Trader Tom live trading room
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For notes and questions
Tom Hougaard
www.tradertom.com