Scalping Example

[Leth]

Scalp Trade Example
by Brett Steenbarger

A market drops on high volume at 11:00 ET, with the NYSE Composite TICK hitting –750. Despite this drop, the market makes only a marginal new low for the day before rebounding smartly as the TICK moves to zero. As the market pulls back lazily on only modestly negative TICK, I might enter that trade on the long side to take advantage of the failed downside breakout. The recent low—and the –750 TICK level—serve as logical stops. On the first surge in upside volume and NYSE TICK, suggesting that the shorts are panicking to cover their positions, I might exit the position and take a few quick points of profit—particularly if it appears the larger time frame trend is down.

Note that a key to this trading is the horizontal analysis of the market. I know that the volume is high on the downside breakout attempt, because I know the exact distribution of volume for the 11:00 hour. I also know that the TICK reading is extreme for that hour based on an analysis of distribution. The horizontal analyses allow me to objectively define a buying or selling panic. I am buying a panic where the market shows underlying strength; selling a panic where there is weakness. Because the trade takes place within a half hour period, I need not be overly concerned about shifting distributions of price changes. I can use standard one-minute charts and indicators without the need for equivalence adjustment.