Increased news flows have impacted equity traders in the short term apart from higher margins on contracts reducing capital available. Some of these traders have, in recent times, turned their sights towards trading USD INR as not only are margins extremely low but the very low volatility also means certain strategies like scalping can ensure very good profits!
What is Scalping?
Forex scalping is one of the main trading styles in the Forex market internationally and one suspects it is a much larger business than day trading, swing trading and position trading for individual traders across the world.
Scalping is a quick-trading strategy – often executed in a 5 to 15 minute time-frame (we are excluding HFT based scalping strategies from this write-up as those are micro-second based) designed to profit from small price changes, with profits on these trades taken quickly and , at times, reversing the trades at equal speed.
Scalping is a trading strategy that targets the capturing of profits from small price movements–as small as one to a few ticks. In order to make a profit, one often has to execute a substantial amount of trades a day. It isn’t uncommon for scalpers to make anywhere from ten to a hundred trades a day as each individual scalp trade typically generates a minuscule profit.
Scalping relies on the idea of lower market exposure risk, since the actual time in the market on each trade is quite small, lessening the risk of an adverse event causing a big move. In addition, it works on the presumption that smaller moves are more frequent than larger ones.
The Perfect Candidate : USD INR
With just a 2% margin (As of Dec 12, 2019) , the USD INR contract offers one of the most leveraged asset classes in the country. Also given that this 2% margin is about Rs 1400/- per lot, it has become a popular asset for traders and analysts alike.
Apart from affordability, one more reason why this asset is preferred is due to its low inherent volatility – as the table below shows, more than 60% of the time, the day to day move of the asset is not even 0.2% – of course, with leverage this can multiply or decimate capital but then , it also means a disciplined trading regime can help eke out a lot of profit!
Since the volatility is limited on most days- so the number of trades can be large, the leverage kept high and the small gains from each individual trade can add up to a smart ROI per day if executed well.
Using Indicators for Scalping
In order to find the opportunities for scalping, you will need to begin by selecting a few key technical indicators. Ideally, you should only incorporate leading indicators that focus on only two things: 1) direction of the market and 2) how much volatility you should expect in the next few time periods that you are trading.
The blogger’s potential favorites are the ones below :
Scalp trading using the Stochastic Oscillator
Scalping can be relatively easily accomplished using a stochastic oscillator as it is best suited to a mean reverting kind of asset pattern. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points. Read more about this oscillator here https://www.plindia.com/blog/stochastic-oscillators-defined/
Scalp trading using the moving average
Another method is to use moving averages, usually with two relatively short-term ones and a much longer one to indicate the trend.
In the example below, on a 15 minute USD INR chart, we are using two, four, eight and 34-period exponential moving averages. To signal a potential move, we have used a proprietary sum of smaller averages which when it crosses the longer term, a buy signal is generated. And the opposite for a sell signal. One may choose any combination that works best depending on the underlying regime of movements. The backtesting has yielded fairly good results.
Bollinger Bands and Keltner Channels: These handy volatility bands contain the vast majority of price movements (about 95 percent). Some traders use these bands to help determine when breakouts and trend reversals are most likely to occur.
Our Preference: A combination of EMA, Volatility and Oscillator
To improve your scalp trading strategy’s win rate, we feel it is best to combine both oscillators and volatility-based indicators. In the below trade example, you can see how effective it is when you combine these two completely different types of technical indicators where we used EMAs as well as Keltner Channels .
Scalp trading using the RSI
Traders can also use the RSI to find entry points that go with the prevailing trend. Dips in the trend are to be bought, so when the RSI drops to 30 and then moves above this line, a possible entry point is created.
By contrast, when the RSI moves to 70 and then begins to decline within a downtrend, a chance to ‘sell the rally’ is created.
Some scalpers use volume indicators for multiple reasons. Volume and price have a very strong, short-term relationship, but changes in trading volume usually happen before sustained price movements. Paying attention to volume indicators makes it possible to take advantage of these movements before they actually occur.
Using candlestick charts can also help scalpers get a quick view of the market. Candlestick charts contain more information than simple price charts (such as daily price ranges), allowing traders to understand current price trends.
What you need to know before scalping
Scalping requires a trader to have iron discipline, but it is also very demanding in terms of time when done manually. Possible entry points can appear and disappear very quickly, and thus, a trader must remain tied to his platform. For individuals with day jobs and other activities, scalping is not necessarily an ideal strategy. Instead, longer-term trades with bigger profit targets are more suited.
Scalping requires quick responses to market movements and an ability to forgo a trade if the exact moment is missed. ‘Chasing’ trades, along with a lack of stop loss discipline, are the key reasons that scalpers are often unsuccessful.
Prabhudas Lilladher offers clients a terminal in association with Symphony called “Blitz Trader” which is well suited to capture such opportunities if one wishes to use an algorithmic solution to scalping. Do mail us at email@example.com for more information on this.
While scalping sounds good in theory, it comes with some caveats:
- Since you must carry out a large number of trades, the transaction costs from fees and commissions can eat up a lot of your gains.
- Considering that trading volume and liquidity may differ from minute to minute, you can never predict when price slippage will shave a tick or two from your entry points, reducing your profits or adding to your losses.
- In fast-moving markets, you have to execute trades at lightning speed–an exceedingly stressful task if you don’t have the luxury to take regular breaks.
- Last but not least, when you make a series of decisions in a context wherein real money is at stake, you may be prone to making more errors in thinking and execution. That’s why we prefer this to be ideally an algo based strategy rather than human.
Talk to us at firstname.lastname@example.org to help us help you with Blitz Trader, Organising a training session on currencies or helping you optimise any analysis you may want help on!
Read more about the USD INR contracts: