Scalping is a trading strategy that assumes a profit from small price movements, from one tick to several ticks. You have to make a significant number of trades every day to make a profit. It’s common for a scalper to make 10 to 100 trades per day, as each scalping trade the trader makes only returns a very minute amount of profit.
If you want to take advantage of the futures scalping trading strategy, which requires trying to capture profits from minimal price movements, you need to know when the product is moving quickly so that you can get in and out quickly and exit out of the trade before the market closes for the day. This is not as easy as it seems. Some days can be great for scalping with lots of hits on the market. Other days can be quieter with less price action. You can limit your scalped trades to liquidity instruments like crude oil (/CL), S&P futures (/ES), euros (/6E), bonds (/ZB), and exchanges (/ZN). However, even with these products, you can find varying levels of liquidity over time.
To help you navigate the futures market successfully as a scalper, follow the checklist below:
1. Trade only markets with a two-way action
In the peculiar world of futures trading, everything depends on the price range. Obviously, it’s best not to follow the market that clearly moves up and down. It will be difficult to scalp such price action. It’s best to go with a two-way price movement and by implication a market that moves within your trading range.
In some ways, it’s not difficult. Products with a wider daily price range will be better for scalping. Doing your trades at this price range will help you improve your risk management. This means that if the price is outside the daily average range, you may want to avoid trading it as it might not be worthwhile. Rather, look for better options. Knowing the price range means getting rid of speculation as you scalp your trades and get into mechanical aspects of trades. However, it may require complex math to calculate the price range. This can be a lot more difficult than simply looking at previous data to determine the average range of the day.
2. Take time to calculate your probability
Let’s say you want to trade/ES and that there is a 50% probability that they can rise or fall. Your intuition is telling you they are falling, so you want to sell them to close the deal. However, they can equally bounce back (upwards). Are you making your trades based on what your gut tells you, or do you calculate your probability of /ES downsides before making a decision?
Probability can be estimated with the use of variables like volatility (vol), underlying asset price, expiration time, redemption price, etc. As a scalper, your best bet is to determine an expected price range based on your current trading volume and use it to set your profit or loss targets. Consider placing your trades in the futures market based on your anticipations about volatility and probability. This can seem intimidating and out of reach. However, if you don’t want to spend time calculating probabilities and determining possible price ranges, an alternative method is to use a probability analysis tool.
3. Understand the difference between futures and equity options
Firstly, the buyer of the futures contract promises to buy the underlying asset, while the option owner has the right to buy but he or she is not obliged to buy (call option) or sell (put option) the underlying asset. However, if you put them together, that is, if you own the options on the futures contract, you have the right to buy or sell futures contracts but you are not obliged.
Secondly, unlike stock options, futures options are only available on stock exchanges that own certain instruments. This can affect the volume and bid-ask spread of the options.
Thirdly, the price of futures options can be more complex than the valuation of stock options. This is because the price is based on the spot price or the cash price based on the cost of keeping the spot price until it expires. Futures options are priced at the future of the option that corresponds to the expiration and is calculated based on the futures offering that specific futures contract. Futures prices are non-standard and have a high nominal value. The multiplier also varies from contract to contract and is not always multiplied by 100. This is a stock option.
For instance, the S&P 500 E-mini Index futures contract (/ES) is $50 per pipe and trades in ticks of ($12.50) quarterly, while the light oil (/CL) futures contract is 1000 barrels. . That is, $0.01 equals $10 price movement. For Euro FX futures contracts, it is $125,000 per contract in increments of $0.00005 ($6.25 per contract). Undoubtedly these are amazing things but don’t let it scare you. Trading options for these large contracts can reduce cash disbursements.
Knowing the probabilities of particular price ranges offers a scalper other analysis perspectives. As a trader, you can become more organized and strategic and often trade with more control. Price range helps you to bid farewell to random entry and exit points. With this, you now know a much clever way to approach trades.
4. Understand the importance of win rate and reward to risk in futures scalping strategies
The worth of each E-Mini futures is worth $50, each point is composed of 4 ticks and each tick is worth a quarter of the point or $12.50. When buying the future of E-Mini, the goal is to buy at a lower price and sell at a higher price (or sell at a higher price and buy at a lower price if you want to short the market).
One amazing success key for scalping is to understand the relationship between the empirical win rate ratio and the average reward to risk ratio of your intended futures scalping strategy.
Once you’ve found your futures scaling strategy, you’ll need to carefully back-test it across hundreds of trades to better understand your average win-rate and your average reward-to-risk ratio it produced across multiple historical periods.
Only then can you develop a suitable money management strategy for your technical trading strategy based on your risk tolerance and trading goals. Just because a strategy has a certain rate of return does not guarantee that you will not lose 5 to 10 trades concurrently.
It’s not easy to predict losing streaks and it could extend much longer than expected. So, having the emotional discipline and financial resources necessary to implement your futures trading scalping strategy can determine your long-term resilience and success as a scalper.
5. Stick to the recommended risk ratio
When evaluating your E-mini futures for a scalping strategy, the general rule is to not risk more than 1-2% of your investment capital per transaction.
6. Remember that past performance is not indicative of future results
Past results do not represent future results. Some professional scalping trader’s trade up to 10-20 trades per day during the most volatile hours on the market to reach their daily targets. Before you dive into the market with a scalping strategy, always remember that each trade is unique.
In theory, scalping sounds good but there are some precautions. Since scalping involves a lot of transactions, the fees and transaction costs associated with the fee can use most of the revenue. Since volume and liquidity can vary from minute to minute, it is unpredictable when price deviations will break one or two entry points and reduce profits or increase losses.
In a fast-changing market, you have to trade at lightning speed. It’s an extremely stressful task if you lack the luxury to take regular breaks. On a positive note, using this scalping futures trading checklist for futures trading scalping strategy can help you potentially mitigate many of these risks. Hopefully, with these strategies, you now understand how scalping in the futures market works and you can become a successful scalper.