Are Short Timeframes Just Noise? (And Other Scalping Feedback)
Thanks to everyone who provided feedback on the Scalping article last week – http://yourtradingcoach.com/trading-process-and-strategy/scalping/
It appears this is a market approach that interests quite a few people. Expect to hear more in future. For those of you not interested though, do not despair. There will be lots of other content. And the concepts will often apply to larger timeframes as well.
Today though, let’s address a couple of the key points discussed via email feedback during the last week.
(1) Ensure Liquidity
These strategies absolutely must be executed only in liquid markets. You need to have the confidence that you’ll get into or out of the market at, or close to, the planned price. Essentially, you’re looking to ensure that the market still provides smooth price action. If the chart is filled with stop-and-go price action, or gaps all over the place, avoid it or stick to higher timeframe trading. If the market results in too much adverse slippage, find another market.
I’ll be sticking to the emini indices and the fx futures, during their peak volume periods only.
(2) Minimize Costs
Costs MUST be minimized or you’ll bleed your account to death. As I said above, I’ll be sticking to the emini futures and the fx futures. I don’t plan to attempt this on spot forex at all. That being said, ForexBird seems to scalp the spot forex EUR/USD and EUR/JPY contracts quite successfully.
If you want to try it on spot forex, test on a demo platform first. But I’d be limiting scalping to pairs with 2 pips or less spread, possibly 3 as an absolute maximum for some of the larger range pairs such as GBP/USD.
(Actually, that’s good advice regardless of the chosen market – practice and prove success on a demo first.)
(3) Bias is dangerous
Great comment from a reader. I absolutely agree – but only when the trader is unwilling to change their bias.
While I believe you need to have some view of future market direction, you must be absolutely ready and willing to dump that bias as soon as new information comes to light that opposes your view.
Success on these timeframes is about reacting to what the market is showing you. Be prepared. Be focused. And be flexible. If you’re not willing to be proven wrong, you don’t belong in this timeframe (actually, you don’t yet belong in the markets, full stop!)
(4) Are Short Timeframes Just Noise?
Thanks to those who tried to tell me that short timeframes are just random noise, so scalping just won’t work. Love it! I appreciate your concern. 🙂
Seriously, this is a common view that I read all over the internet – "short term price action is just all random noise".
Traders who operate on daily charts believe that hourly charts are just noise and contain no edge. Hourly chart traders believe that the 5 minute chart is noise. 5 minute chart traders believe that the 1 minute chart is noise. And on and on.
The reality is that they just can’t read it.
There is no noise – it’s all information.
Once again this will be best demonstrated by showing charts. Let’s look at a couple of trade opportunities from the last week, using standard price action based setups. All charts are 10 second charts. As you’ll see, THE SAME SUPPLY AND DEMAND PRINCIPLES WORK.
Price action prior to A is pre-session. Point A is the open, which drove down price down to touch a pre-market support level at 9800. Strong demand entered the market at the support level, driving price back to the area of the stall midway between A and B. A second push by the bears drove price back to the support area, although this time on reduced volume. Price at C broke the support level, but there was no further evidence of supply below the 9800 level, with each breach of the level being rejected. A second attempt which fails is often a great entry (I’ll have to cover this concept in more detail in coming weeks). Entry was at 9807 on the break of the congestion at C, targeting initially the A-B midway price action, and then the area of the open around A. I mismanaged this one and ended up flat at 9815 for only 8 points, instead of the 25 or so on offer – it happens!!
The point is though, supply and demand principles work on all timeframes.
This second example shows another common swing trading setup – prior support becoming resistance.
Point A involves a strong break of the 10100 (round number) support level. Point B is a return to that level to test the previous support, now resistance. Note the upper tail forming a shooting star at resistance. No entry on this candle; however it occurs just 3 candles later at point C on the close of the red candle (for the candlestick fans, note the shooting star at B followed by the evening star reversal pattern on the three candles up to and including C). Target is the previous swing lows.
Support and resistance concepts work on all timeframes.
Now, having said that, let’s look at a loser which I think demonstrates what the "it’s all just random noise" people are really referring to – the increased likelihood of an unexpected shakeout.
The market here was in an uptrend, which led to 3-swing retrace to point A. Entry was at 10300 on close of the green candle at A, anticipating a continuation of the trend. Unfortunately in this case, while the bias was proven to be correct, I was stopped out at 10021 on the spike down at B. Yes, my stop was moved up too quickly (saying that with the benefit of hindsight), but this is I believe what the ‘random noise’ people are referring to. Simply put, price movement is a result of orderflow, and at these smaller timeframes it’ll take less effort to create a short surge of opposite direction orderflow. A number of large orders short can more easily move price down by this 10 or so points. So, at these timeframes you’ll get more of these little surges against your position upsetting your plans. But it’s still not random noise – it’s information. There are traders who have an opposing bias. And in this case we see that their orderflow could not carry through to further downside action. The failure of their surge once again creates opportunity long if we’re quick enough (I wasn’t, by the way).
The key thing to remember is, as I said last week, expect a lot of small winners, small losers and breakeven trades. But if you control your losses to ensure they’re within your 1R limits, you’ll profit greatly on the few trades that do run to larger (>1R) profits.