Using the Scalping Strategy to Get Alpha

Using the Scalping Strategy to Get Alpha

As a trader, you are exposed to hundreds of strategies. Certainly, you cannot use all these strategies. If you attempt doing this, chances are that you will lose your entire investment within a very short duration. The secret is to have one or two strategies and then mastering them. The best thing about this is that many people have made it and using whatever strategy available. Warren Buffet has become extremely successful by doing value investing. George Soros has become a billionaire as a trader. Bill Ackman has become successful as an activist investor. Thousands of people have also become super successful as swing traders. In this article, I will focus on a strategy that many traders use: scalping. Scalping is a simple strategy where a trader opens a trade and then watches it. He will then close the trade once it goes positive. This can be seconds after opening the trade.

Why scalp?

There are many reasons why one can decide to scalp. One, it is a very simple strategy that anyone with limited experience as a trader can undertake. Second, a scalper one can trade for a very short period of time on a daily basis. In fact, many scalpers trade for less than 30 minutes per day. Third, as a scalper one does not need to understand a lot about the macro environment. Remember that one can make money in whatever way a trade goes. Last but not least, it is possible to foresee the market short term than it is on a long-term basis. For instance, one can tell how the dollar is going to trade on a daily basis. No one can accurately predict how the dollar will behave in a longer duration.

Finding the asset

The first thing you need to do as a scalper is to identify an asset. This asset could either be: currencies, equities, commodities, or indexes. You should avoid identifying very many assets. You should avoid being a jack of all trades but a master of none. As a scalper, the more you try very many things, the harder it will be for you to make a good return on investment. For instance, you can decide to focus on Brent oil. In this, you will only trade Brent oil while ignoring other asset classes. If your area is equities, you can select one or two companies and specialize on them.

Mode of analysis

As a scalper, you will definitely need a mode of analysis to define your entry and exit positions. The best strategy to follow here is to identify the trend (upwards or downwards) and then move with it. For instance, if Brent oil is moving upwards, you could either buy the trend or wait for the reversal. To do this, there are a number of strategies you can use. For instance, you can use technical indicators such as moving averages, Stochastics, and the Relative Strength Index (RSI). You can use each indicator separately or combine two or three.

Ideally, you need to have a technical analysis method that you have back-tested for a long time. If you have this, your process of making money will be a walk in the park.

In addition, you need to define the timing when you will be trade. Based on your risk appetite, you can trade on any market time. For instance, you can trade effectively during the Asian markets, the European markets or the American market. This will be based on the asset class you are trading. Finally, you should be cognizant of periods when there is economic data. The economic calendar is therefore a very valuable tool to use. Remember that there are traders who have achieved a lot of success in trading news. Just assess and test yourself to find out what works for you.

Once you create and test your strategy, you will be good to go. To succeed, you will need to be a very disciplined person by following the rules you set. For instance, if you purpose to make 200 pips a week, you should learn to stay away from the market once you hit your target. If you break the rules you set yourself, you will have a very difficult end.