It's no secret that scalping in the options market can be extremely profitable. But what exactly is scalping? And what are the best options scalping strategies?
In this article, we'll take a look at what scalping is, how to scalp the options market effectively, and some tips and strategies for success.
What is The Meaning of Scalping?
The term "scalping" refers to a trading style where traders take advantage of small price movements in the market. Usually, scalpers will hold their positions for a very short period - anywhere from a few seconds to a few minutes. They will then quickly exit their position as soon as they've made a small profit.
While the profits from scalping might be small, they can add up over time if done consistently. And because scalpers only look for small price movements, they can trade much more frequently than other types of traders. This means that they have the potential to make a lot of trades - and a lot of profits - in a relatively short period of time.
Of course, there are also risks associated with scalping. Because scalpers are trying to take advantage of very small price movements, they're often stopped out of their positions if the market doesn't move in their favor. This can lead to losses, which can offset any profits.
Additionally, because scalpers hold their positions for such a short time, they must be very quick and agile in their execution. This can be difficult, especially for new traders who are still learning.
So, what is the best scalping strategy? Let's look at a few of the most popular scalping strategies that many traders use.
Which is The Best Indicator for Scalping?
When it comes to scalping, there is no one-size-fits-all answer when it comes to indicator choice. However, some indicators are more commonly used by scalpers than others. These include indicators such as the moving average (MA), relative strength index (RSI), and VWAP.
The MA is a trend-following indicator that can be used to identify potential entry and exit points in the market. The RSI is a momentum oscillator that can be used to identify overbought and oversold conditions in the market. VWAP is a value of a security (stock or index) traded with the total volume. It acts as solid support and resistance in trending and sideways days.
When choosing indicators for scalping, it is essential to select those that generate signals that align with your trading strategy. It is also vital to backtest your indicator setup on historical data to ensure that it is effective in the time frame you plan to trade.
The Best Scalping Strategies
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For example, this is a small scalping trade (only 9 minutes of holding period) on Diwali Mahurat Trading Day.
There are dozens of different scalping strategies out there. But not all of them are created equal. Some are more effective than others, and some are better suited for certain types of markets.
Here are a few of the best scalping strategies that you might want to consider using:
1. The 1-Minute Scalping Strategy
This scalping strategy is very simple and easy to follow. As the name suggests, you're only looking for small price movements in the 1-minute timeframe.
To do this, you'll need to use a very short-term moving average, such as a 5 EMA and 50 EMA.
Besides, you need an RSI indicator as well.
Long Trade: (1 min Timeframe)
Entry - When 5 EMA crosses 50 EMA from the downside and RSI > 50
Exit - When 5 EMA closes below 50 EMA from the upside
Short Trade: (1 min Timeframe)
Entry - When 5 EMA crosses 50 EMA from the upside and RSI < 50
Exit - When 5 EMA closes above 50 EMA from the downside
The above image shows the example of a long trade under a 1-min scalping strategy.
Here RSI indicator avoids many false trades. Safe traders can use the 'RSI > 60 condition' to take more safe trades. Also, avoid taking trades immediately after the market opens and towards the end (30-min cushion is a good idea).
2. The 5-Minute Scalping Strategy
This scalping strategy is similar to the 1-minute scalping strategy, but it's a bit more relaxed and aims to take more points in profits.
Instead of using a 1-minute timeframe, you're using a 5-minute timeframe. This means that you're looking for slightly bigger price movements than you would if you were using a 1-minute timeframe.
Long Trade: (5 min Timeframe)
Entry - When 5 EMA crosses 50 EMA from the downside and RSI > 60
Exit - When 5 EMA closes below 50 EMA from the upside
Short Trade: (5 min Timeframe)
Entry - When 5 EMA crosses 50 EMA from the upside and RSI < 40
Exit - When 5 EMA closes above 50 EMA from the downside
The above image shows the example of a short trade under a 5-min scalping strategy.
3. Super Trend Scalping Strategy
Traders can use this scalping strategy either on a 3-min or 5-min timeframe.
This strategy requires a supertrend indicator, VWAP indicator, and a basic understanding of candlestick patterns.
Long Trade: (3 min or 5 min Timeframe)
Entry - When the supertrend indicator is bullish and gives a pullback near the VWAP line along with a bullish candlestick confirmation
Exit - When the supertrend turns bearish
Short Trade: (3 min or 5 min Timeframe)
Entry - When the supertrend indicator is bearish and gives a bounce near the VWAP line along with a bearish candlestick confirmation
Exit - When the supertrend turns bullish
The above image shows the example of a short trade using supertrend + VWAP in a 3-min timeframe.
4. Two Candle Options Scalping Strategy
This strategy was developed by Sivakumar Jayachandran a few years ago.
This strategy is only applicable to Nifty Futures and Banknifty Futures.
Required Indicators - VWAP, Supertrend (10,2), RSI, and Volume
Add a horizontal line at 50K for Banknifty futures and at 125K for Nifty futures.
Long Trade: (3 min or 5 min Timeframe)
Entry - When 2 consecutive green candles (volume should be above 50K in both the candles for Banknifty and 125K in Nifty) + RSI between 50 - 75 range + Price should be above VWAP + Supertrend must be in buying condition
Exit - stop loss should be below the low of the first candle and TSL when the price moves upside or the supertrend turns red.
Short Trade: (3 min or 5 min Timeframe)
Entry - When 2 consecutive red candles (volume should be above 50K in both the candles for Banknifty and 125K in Nifty) + RSI between 25-50 range + Price should be below VWAP + Supertrend must be in selling condition
Exit - stop loss should be above the high of the first candle and TSL when the price moves downside or the supertrend turns green.
The above image shows an example of a long trade using the 2 candle theory strategy in Banknifty.
You can watch the below video to know more about the 2-Candle Theory Strategy.
Which Scalping Strategy Should You Use?
There's no right or wrong answer when it comes to choosing a scalping strategy. It all depends on your individual preferences and trading style.
If you're new to trading, then you might want to start with a simpler strategy, such as the 5-minute scalping strategy. As you become more comfortable with scalping, you can slowly start to experiment with different strategies and timeframes.
Regardless of your chosen strategy, make sure you backtest it before using it in live trading. This will help you to see how the strategy performs under different market conditions.
Conclusion
When scalping, it is important to take a few key precautions to succeed.
First and foremost, always use a stop-loss. A stop-loss will help you limit your losses if the market moves against you.
Secondly, don't over-leverage your account. Leverage can be helpful in scalping, but too much leverage can lead to big losses if the market moves against you.
Finally, make sure you select a broker that offers a fixed brokerage plan per month. When you have a fixed brokerage plan, your brokerage amount is fixed every month, irrespective of the total number of trades. Because scalpers take more trades, they end up paying high brokerage.
If you follow these simple precautions, you should be well on your way to success in the world of scalping!
Options Trading Course
Options are a complex financial instrument and require careful consideration before entering into any options trade.
Before making any decisions, it is vital to clearly understand the risks and rewards associated with each type of option.
To learn more, you can register for this online options trading course
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