This is the lesson where we start to have some fun!  The last few lessons showed you how to eliminate the noise from charts by filtering price movements based on the current market volatility. These resulted in “zig-zag” lines.

As a result of this, you can now layer a dominant trend on top of any chart – this was the topic of the prior lesson.  Two traders looking at the same chart will arrive at the same conclusion for the dominant trend – there is no ambiguity.

How To Make A Short Scalp Trade

The chart above is in a very clear down-trend.  Price is currently in an upswing (“green”).  However at some point price is going to switch to a red swing. This will occur at point #1 (around 2080 or 2079.25).  When that occurs, a short trade can be entered with the protective stop above the most recent swing high that formed.

Now, point #1 is a moving target.  Until price closes below it and you see the red bar formed you cannot enter the trade.  It is a moving target because price can move higher on the green swing which will move point #1 higher.  Or price can go sideways which can also move point #1 a bit higher.  You can’t really tell when a red swing is going to form until price actually closes below the designated point, forming the red bar that we’re looking for.

Tip: Point #1 is defined as 2.5 ATRs below the highest high of the last 16 bars.  You might need to go back and look at prior lessons to refresh your memory – it’s been a while since we’ve covered this.

Once a trade has been entered, you should quickly set your exit target.  This is a 350 tick chart which is an ultra-small timeframe.  It means that you should probably set an exit for 1-2 ticks!  On the ES that is still a nice profit of 25 dollars on just a single contract.  Trading 10 contracts gives you a profit target of $250.00.

The only way you can get your orders in that rapidly is if you use your trading platform to create macros – a single keystroke to enter the market order and both the stop and target orders as OCO.  Now you can see why we had you do all those practice sessions early in the lesson series!

Now, the stop point will likely be 2+ points higher.  This means that you could be risking 100-150 dollars to make 25 dollars.  Ouch.  Actually, its not that bad – it just means that for scalps, you expect your win rate to be above 80% in order to be profitable.  For scalp trades, this is what you would expect.  The smaller the target, the higher the win-rate!

It is a much differnet probability profile than, say, breakout trades where your realistic win rate is aroudn 40% or even less.

Understanding the probilities behind different trading styles is the subject of a different lesson.  This is just a taste of one of the decisions you’ll have to make behind each trade.

How To Make A Long Scalp Trade

Homework

Your homework is simple – I am sure you can guess what it is.  Using your simulator, make 25 scalp trades. Please make sure you use your trading platforms macros to automatically enter your target and protective stop on each trade.

Terminology

There are no new definitions or terminology for this lesson.  You’ll have your hands full with the practical – making scalp trades.

How do you feel after you have completed this exercise? Let us know by using our contact form! We would love to hear from you!

Wrap Up

In principle, scalp trades are easy to understand.  You wait for a pullback in a trend and then you wait for the trend to reassert itself.  As soon as price moves far enough that the probabilty of the trend re-asserting itself is high, you enter a trade and try to take a small piece out of it.

Coming Up Later

• Selecting scalp trades
• Managing scalp trades
• Using multiple time-frames to fine-tune your trading entries
• Determining how to set your stop points and the trade-offs of each tactic
• Understanding trading as a numbers game