I’ve been getting quite a few questions recently about scalping in 2020 and as to whether it still works like it used to?
My response is that not only does scalping in these type of conditions work – it’s better than ever.
There are a few reasons for this, but for the most part, it’s because volatility is a friend of the scalper.
Let’s take a look at a good measure of volatility – the VIX.
As a general rule, when the VIX is over 20 and certainly over 25, it suggests there is good volatility in the markets. The VIX is really a measure of volatility in the SPX (S&P 500), but when there’s movement in stocks, that usually translates to moves in other commodities and products as well.
Using Volatility
What volatility means for a scalper is that we will generally get more value from our winning trades.
So for example, if a DOM setup would generally average a 5-6 tick winner, that same trade might now be generating 10+ ticks.
From that perspective, we can get a fair bit more value from the winning positions.
At the same time, there is also a higher probability of being right during these times as well. That’s because larger traders are quite often a lot more urgent in trying to place trades.
Our edge as a scalper comes from the fact that these big traders and institutions are unable to hide their activity. We are effectively frontrunning their positions as they try to put them on or take them off.
When there’s fear in the air, there is more urgency than ever and these types of large traders are attempting to trade with other considerations, not just the short-term impact of their buying and selling.
However, these conditions are also not without their risk factors.
One of the biggest risk for a scalper at the moment is on the back of reduced liquidity. This was probably a lot more relevant a month or two ago when markets were falling and we could see the DOM was certainly thin at times.
When liquidity dries up, scalpers are at risk of getting trapped in positions. If there’s not much protection on the ladder behind you, that’s when a 2-3 tick loss can quickly blow out and destroy your entire session. We see that with bid/ask spread also getting a bit wide. This happens a lot around an inflection point, which is something I speak about in the Advanced Course.
A wide spread might be OK if you’re entering positions via a limit order, but the protection to get out (which is basically the ability to hit out at market) can really hurt you. Especially as a scalper. That’s really the main consideration for me when markets are really moving around and they’re a bit thinner than normal.
For the most part, this is something we can control as we can choose when to enter a trade and if the DOM isn’t showing us any protection behind, we should consider whether or not the risk/reward is good enough.
We also have the option of reducing our trade size. If you’re normally trading 10 lots, trading 5 might be a smarter thing to do if liquidity is a little light on.
Trade size is something that you should also base not just on conditions, but also on the type of setup. For example, a breaking news trade might be fine to take as the downside is limited. You can also look to add to winners and build up to our normal position if we see that our bias is being backed up by the price action in the early stages of a trade.
Scalping, for the most part, is actually an incredibly low-risk style of trading. When you look at the wild swings, buy and hold inventors have been through in the last few months, it’s not something we as scapers generally need to deal with.
