Scalping is basically a technique which involves the opening and closing of trades in a very short period of time, in order to obtain quick profits. This trading method is based on opening trades and closing them with small profits, on lower timeframes. My scalping setup is based on finding confluence. A confluence is an area with multiple support or resistance levels, both static and dynamic. A confluence of support or resistance is more relevant to traders as it includes 2 or more important focus points on the chart.
Although it might seem complicated, finding confluence on the chart is not so difficult. You just have to train your eye to spot chart areas where multiple levels meet. Finding confluence on your charts is very important for scalping because these areas offer high probability trading opportunities. Before we continue with the scalping setup, let me tell you something important: finding confluence is quite subjective and it’s dependent on the trader’s skill, experience and tools used on the chart.
My personal rule is to find areas with at least 2 support and resistance levels, one of them must be a static level, and the other one a dynamic level. So, we need 3 confluence conditions to be met for our scalping strategy: First, we need an obvious area of support or resistance. Support and resistance is practically the foundation of technical analysis and these levels serve as a starting point for developing an idea of what may happen next in what concerns the price movement. So, we first look at recent market swings and try to spot areas of static support or resistance.
As a rule of thumb, if the line includes 3 or more swing points, it means that the support/resistance level is more relevant. But drawing horizontal lines around recent market swings can be very subjective and in most cases, we can usually only approximate those areas. That’s why we need to add something else for our scalping confluence setup. The second confluence condition involves the 200 EMA, as a dynamic area of support and resistance. I prefer to add the 200 EMA because, as a dynamic area of support and resistance level, is constantly changing depending on recent price action. In the case of static support and resistance, you already know at the beginning of the trading day where those levels are.
You know in advance where the possible areas of interest are located on the chart. With dynamic support and resistance, you don’t know an exact number, as these levels are changing depending on market fluctuation. This is a good thing for our scalping setup because we can use both static and dynamic levels in our advantage. So, we add the 200 EMA, and start searching for areas of confluence between the dynamic support and resistance and static support and resistance. Our 3rd component in our scalping setup is the Stochastic, used to pinpoint market entries.
The Stochastic oscillator will help us to spot divergences on the chart. If you are not familiar with divergences, a div a divergence occurs when prices form a lower low while the Stochastic forms a higher low (indicating a possible buy), or when prices form a higher high while the oscillator forms a lower high (indicating a possible sell).a divergence occurs when price action is different from the action of the Stochastic oscillator. When a divergence occurs, a potential change in price direction could be on the cards. So, now we have the full setup: we are looking for confluence of dynamic and static support and resistance levels (respectively recent market swings and 200 EMA), and we pull the trigger if we spot a divergence on the Stochastic oscillator.
Let’s see this scalping strategy in action. In this chart we see this level of static support and resistance and here is the confluence area with the 200 EMA (the dynamic support and resistance indicator). So, we have this potential area, but we cannot enter the market blindly. We need to confirm it with the Stochastic. We have a regular divergence. And we also have a hidden divergence, a more powerful setup.
All our conditions were met, so after the crossover of the Stochastic lines we can enter long on the market. Because we trade based on confluence, the stop loss order would be placed below the confluence area. The profit target depends on your trading style and risk aversion. You could aim for a 2:1 ratio, or put your stop to breakeven once in profit and ride a risk free trade. Here is the same setup.
We have a confluence area between the recent market swings and the 200 EMA. And a divergence on the Stochastic oscillator. If you incorporate also some price action techniques, the scalping setup will become even more powerful. Look at the flag pattern developed, which is another confirmation that the long position was the only alternative and short positions were out of the question. Here we have a short scalping trade. We have a clear resistance area right around here.
The 200 EMA serves as a dynamic area of support and resistance. Right around here, we have our confluence area. We see a hidden divergence on the Stochastic and once the Stochastic lines crossed we had the confirmation we needed and the high probability trade was on the short side. I know that there are some of you that are also trading the crypto markets. I personally don’t trade cryptocurrencies because I prefer to understand the fundamentals behind a market before i decide to put my money on it.
So, I’ve not tested this scalping setup on crypto markets, but you can back test it on a demo account, to see if has potential. On this Bitcoin chart, i found the confluence pattern, and the Stochastic entry here, but I’m not familiar with the spreads on crypto markets so I cannot tell for sure if you can profit from it in the long run. Why I’m talking about the spreads? Because of the nature of scalping you need to trade only the instruments with the lowest spreads. As a scalper, by default you’ll use tighter stop-losses, aiming for small profits.