In this comprehensive guide, we are going to cover the best technical indicators that are popular among scalpers. We will explore how these indicators help them stay attuned to favorable conditions in the market, allowing them to identify clear entry and exit points while avoiding probable pitfalls. We will also discuss how it is quite simple to understand and master these indicators, along with their positive aspects, the conditions under which these indicators may fail, and how to identify and act in those market situations. Let's illuminate each aspect of these indicators to master them one by one.
Table of content
Table of content
1. What is Scalping?
There are many traders who use different kinds of trading styles, ranging from executing trades within a span of a few seconds to minutes, to holding positions for several days or months. One such popular trading style known as 'scalping' is used by traders to make profits from short-term and small fluctuations in the market. Traders who adopt this kind of trading style are known as 'scalpers.' The primary aim of a scalper is to make rapid profits by exploiting minor price movements in stocks, currencies, or other financial instruments, with a special focus on accumulating incremental gains by executing dozens to hundreds of trades in a single day. Scalpers often hold their positions for just a few seconds to a few minutes. Scalping, being a good trading strategy, requires precision, quick decision-making ability according to the current market situation, and a keen understanding of market dynamics in order to master it.2. Why the Scalping is most popular among active traders?
This is the most popular style of trading among active traders because there are certain reasons behind the popularity of this trading style. It allows traders to benefit from having big profits in a short period of time, minimized exposure to market risks since they operate on shorter time frames, comparatively lower losses, and a high frequency of opportunities, allowing scalpers to execute high-frequency trades while involving low capitalization per trade.3. Best Platform for Scalping
There are multiple trading platforms that allow for scalping, but 'Dhan' is well known for features like lightning-fast order execution, which is the primary need of scalpers in trading, advanced charting and analytical tools, low brokerage costs, and a mobile-friendly interface, making it increasingly popular for scalping. There are a few features specifically designed for scalpers on Dhan. Ultimately, it is the best trading software that most scalpers use. To use 'Dhan' for scalping, you need to have a demat account first, which you can open through the official website (dhan.co) of 'Dhan' or by downloading the 'Dhan' app (Dhan) from the Play Store or App Store.4. Why indicators are important in scalping?
Scalping is a trading style in which the scalper executes high-frequency trades within a very short span of time; that is why time and precision are everything here. Unlike long-term trading, which can accommodate minor fluctuations, scalping relies on quick decision-making and errorless timing. There are multiple kinds of applications for indicators in scalping; in fact, it would not be an exaggeration to say that 70-80% of the analytical work utilized in scalping is indicator-based. Technical indicators help traders identify the right moment to enter and exit trades, predict market movements, filter noise, improve timing precision, and aid in efficient decision-making.5. Best indicators for scalping
1. Moving Averages
Moving Averages (MA) are one of the most popular and widely used technical indicators in trading. They are well known for their ability to smooth out price data by creating a constantly updated average price over a specific time period. This helps traders identify short-term trend directions by filtering out short-term price fluctuations. Additionally, traders or scalpers also use this indicator to identify entry signals based on the crossover between short-term and long-term moving averages, as well as to determine support and resistance levels.
There are two types of moving averages: Simple Moving Average (SMA) and Exponential Moving Average (EMA). The simple moving average is calculated by taking the average of a set number of closing prices over a specific period (e.g., 9-day SMA or 20-day SMA). As the SMA gives equal weight to all prices in the period, it becomes slower; that is why it is often used for identifying broader trends. On the other hand, unlike the SMA, the EMA focuses greater weight on recent price data, making it more sensitive to recent price movements. Because it is more responsive to recent price fluctuations, it is preferred by scalpers for identifying short-term price action and trends.
How Moving Average works in Scalping?
For scalpers, the identification of trends is crucial before entering a trade. Moving Averages, as short-term trend indicators, guide traders on whether the trend is bullish or bearish by smoothing out minor fluctuations. Scalpers opt for this method to ride potential short-term trends to gain quick profits and avoid trading against the trend, which helps minimize their losses. As scalping relies on fast-moving signals, there are shorter-period moving averages, like the 9-period and 20-period EMA or SMA, which are employed to signal different kinds of indications. The 9-period EMA is quick to respond to even very small price fluctuations; that is why it is used for identifying short-term trends, while the 20-period EMA can act as a smoother guide for the overall trend while still being responsive to short-term price movements in the market. Scalpers use these short-term MAs to identify potential entry and exit points for their trades. For instance, when the 9-period EMA crosses above the 20-period EMA, it might signal that the trend is about to be bullish, while crossing below the 20-period EMA signals that the trend is going bearish.
How to use Moving Average effectively?
The moving average, being a short-term trend detector, can be used in many ways to identify trends, potential support and resistance levels, as well as entry and exit points for trades. Since scalping is performed on ultra-short time frames, it's advisable to use a 1-minute chart to get accurate signals based on these MAs. To identify an entry based on moving averages, traders must wait for the crossing of the shorter moving average (e.g., 9-period) above the longer one (e.g., 20-period); this process is also known as a bullish crossover and is used to enter the trade. Conversely, there is another crossover called a bearish crossover, which occurs whenever the shorter-period moving average crosses below the longer-period moving average. This signals an exit for traders holding a buying position and entry for sellers.
The moving average performs best when there is strength in the market trend, where the price is continuously reaching new highs and lows, forming clear uptrends and downtrends. On the other hand, whenever the price is in a sideways trend, it might fail or mislead by generating false signals. In such situations, scalpers must use moving averages in combination with other technical indicators.
2. Supertrend
The Supertrend is one of the most popular and easy-to-use indicators, well known for its simplicity in providing signals. Unlike other indicators, it solely provides buy and sell signals. Its simplicity and visual clarity make it useful, especially for intraday and scalping strategies, making it easy for scalpers to spot potential trade opportunities. The indicator is plotted on the price chart and changes color based on the trend: green during an uptrend and red during a bearish trend.
Supertrend comprises the Average True Range (ATR) and a multiplier as its components. The ATR, being the core component of Supertrend, measures the volatility of the market, while the multiplier is a factor used to adjust the sensitivity of the Supertrend line. The key function of the ATR is to determine the distance at which the Supertrend line is plotted concerning the price. A higher ATR value indicates higher market volatility compared to a lower value, suggesting calmer market conditions. Regarding the multiplier, the larger the multiplier, the further the line is formed with respect to the price; in such cases, it becomes more sensitive but also more prone to false signals during sideways trends in the market.
How Supertrend Works in Scalping?
Supertrend performs best in volatile markets, where price movements are significant enough to sustain a trend. The ATR component adjusts the Supertrend line according to market volatility, making it a dynamic tool. The Supertrend line adjusts itself based on the volatility of the market; as volatility increases, it warns traders to avoid premature entries or exits in their trades. The buying signal generated by Supertrend occurs when the price crosses above the Supertrend line, turning the line green and indicating a potential uptrend. Conversely, the selling signal suggested by this indicator arises when the price crosses below the Supertrend line, causing the line to turn red and indicating a downtrend. Traders can assess these signals to identify clear entry and exit points.
How to use Supertrend for Scalping effectively?
There are certain conditions that scalpers need to consider to utilize this indicator effectively. The default setting of Supertrend is an ATR value of 10 and a factor of 3 when applied to the chart. This combination offers a good balance between sensitivity and reliability. Whenever the default ATR setting is set to 10, it calculates the average true range over the last 10 periods. This value provides a reasonably fast reflection of recent volatility without being too reactive to small fluctuations. In the case of the factor or multiplier, it is 3 by default, which provides enough buffer to avoid false signals while still being reactive for early trend identification. A lower multiplier, like 1.5 or 2, can be used for quicker signals but also increases the risk of false entries.
Traders or scalpers can customize these settings for ATR and the multiplier to suit their trading style. This can be determined by backtesting different ATR and multiplier values in various market conditions. For instance, in a highly volatile market, the default settings of Supertrend may provide false signals multiple times, but customizing the ATR period to 14 and the multiplier to 4 might reduce the rate of false signals. Conversely, if a trader frequently executes multiple trades, reducing the ATR period to 7 and using a multiplier of 2 can provide faster but potentially riskier signals.
Best and worst market conditions for supertrend
If there is a unidirectional trend in the market, then this is the best condition for Supertrend to perform effectively. In these environments, the indicator's reliability in signaling the initiation of a new trend increases, helping scalpers ride the momentum. Conversely, in a ranging or sideways market, the indications generated by this indicator could mislead due to constant price reversals within a narrow range. During these periods, the Supertrend line frequently flips between red and green, leading to false entry and exit points. Scalpers should either avoid using this indicator in such conditions or use it in combination with other indicators like RSI, MACD, or ADX to confirm the signals.
3. Relative Strength Index
The Relative Strength Index (RSI), being a momentum oscillator, measures the speed and change of price movements. It is plotted on a range between 0 and 100 and is primarily used to identify overbought and oversold conditions in the market. As this indicator pinpoints the conditions of overbought and oversold in the market, it helps scalpers identify healthy entry and exit points. RSI provides insights into the market's momentum to assist traders in making informed trading decisions during rapid trading sessions.
The RSI indicates the overbought and oversold nature of the market. According to this indicator, when it signals a range above 70, it means that the market is in the overbought zone and a reversal is likely. Conversely, whenever it indicates that the range is below 30, the market is in oversold conditions, and a bullish reversal is underway. While the ideal ratio is 70-30, traders also use 60-40 and 80-20 ratios to assess the market in different situations.
How Relative Strength Index works in Scalping?
The Relative Strength Index (RSI) is used to detect rapid price reversals in the market, assisting scalpers in identifying entry and exit points based on indications of overbought and oversold conditions. When the reading of this indicator reaches above 70 or below 30, it indicates that the price has been moving in one direction for an extended period, increasing the possibility of a reversal in the market. A reading above 70 may suggest that a scalper should look for selling opportunities rather than buying, especially when this indication is backed by a bearish candlestick pattern. Conversely, whenever there is a reading below 30, the indicator signals oversold conditions, leading scalpers to focus on buying and avoid selling, particularly if the indication is supported by bullish price action.
In addition to identifying reversals, the RSI helps confirm momentum shifts in the short term. For instance, whenever the RSI reading signals above 50, it suggests that bullish momentum is strengthening, while a reading below 50 indicates that the market is shifting toward bearish momentum. Scalpers can use this information to plan their trades accordingly.
How to use Relative Strength Index for scalping effectively?
For scalping, adjusting the RSI settings to a shorter time period (such as 7 or 9) can increase its responsiveness to market fluctuations, allowing the indicator to react quickly to price movements and providing scalpers with timely entry and exit signals. However, the default setting of the RSI is at 14 periods; reducing it to 7 or 9 can help capture shorter trends and rapid reversals in the market, making it more favorable for high-frequency trading strategies.
Whenever there is a divergence between the RSI and price action, such situations can significantly benefit scalpers. When the price makes lower lows and the RSI forms higher lows, it is known as bullish divergence, which signals that bullish momentum is underway and that it is a good time to take buying positions in the market. Conversely, when the price makes higher highs and the RSI forms lower highs, it is called bearish divergence, indicating that bearish momentum is about to emerge and that it is a favorable time to enter the market with short positions.
Best and worst market conditions for RSI
Conditions such as a volatile market favor the functioning of the RSI, where sharp price movements create opportunities for quick reversals. High volatility in the market increases the likelihood of extreme RSI readings (above 70 or below 30), indicating to scalpers when to enter and exit trades at the right moments. In a highly volatile market, this indicator can highlight profitable trading opportunities as prices oscillate rapidly. Whenever the reading of the RSI is above 50, it signals that there is strength in the bullish trend, while a reading below 30 indicates a bearish trend. Using the RSI in combination with other technical momentum indicators increases its effectiveness in the market.
Along with the positive aspects of this indicator, there are a few drawbacks. One significant drawback associated with the RSI is that it can mislead during strong unidirectional trends. For instance, when the market is in a strong downtrend, the RSI may frequently range above 70, indicating overbought conditions; similarly, in a strong downtrend, it may signal below 30, suggesting buying positions in oversold conditions. In such situations, traders must seek additional confirmation, as this indicator could mislead.
4. Moving Average Convergence Divergence
The Moving Average Convergence Divergence (MACD) is a versatile and popular momentum indicator used by scalpers in various ways, such as identifying the strength, direction, momentum, and duration of a trend. The MACD consists of the MACD line, which is calculated by taking the difference between the 12-period and 26-period exponential moving averages, the signal line (typically a 9-period EMA), and a histogram that visually represents the difference between the MACD line and the signal line, with red and green bars placed over the zero line. This helps illustrate the momentum in the market.
The MACD line, as a core component of this indicator, indicates the convergence and divergence of two EMAs, assisting traders in identifying momentum shifts in the market. There are a few indications associated with the MACD line. For instance, whenever the MACD line crosses above the signal line, it signals bullish momentum, while a crossover below it indicates bearish momentum. The height of the histogram bars visually indicates the strength of momentum. Larger histogram bars signify stronger momentum, while smaller bars highlight weaker momentum in the market.
How Moving Average Convergence Divergence works in scalping?
The MACD indicator is expert at identifying momentum shifts, which are crucial for scalping strategies. With the crossovers and the relationship of the MACD line with respect to the signal line, scalpers can detect when there is strength or weakness in the trend. For instance, the rising of the MACD line above the signal line indicates that bullish momentum is about to emerge, signaling a suitable environment for entering a buying position in the market. On the other hand, a crossover of the MACD line below the signal line represents an upcoming bearish momentum, suggesting entering the market with selling positions.
How to use MACD indicator for scalping effectively?
The default settings of the MACD are a fast length of 12, a slow length of 26, and a signal line of 9, which are still effective. However, as scalping is a fast trend detection process, it can be customized to a shorter time frame with a fast length (short period) of 6, a slow length (long period) of 13, and a signal line of 5. These settings allow traders to capture quick price movements, making them suitable for high-frequency trading strategies. However, there are also some risks associated with using these customized settings, such as limited trend confirmation and the risk of receiving false signals multiple times. Assessment of the MACD histogram provides valuable insights for momentum identification. An expanding histogram indicates increasing momentum, signaling traders to hold their positions. Conversely, a contracting histogram indicates diminishing momentum, suggesting that traders should exit the trade or plan for a reversal.
Best and worst conditions for MACD
The trending market enables the MACD indicator to perform well, as momentum is strong and consistent. In such environments, the reliability of the indicator in identifying trends and providing clear entry and exit points increases. Scalpers, with additional confirmation, can capitalize on the MACD indicator to ride profitable trades. Additionally, during high-volume trading periods, such as market openings or major news releases, increased volume often indicates significant price movements, making MACD signals more reliable. Based on MACD crossovers, scalpers can exploit these conditions to execute quick trades and seize potential profits.
Despite its advantages, the MACD indicator faces several challenges. One significant challenge is its lagging nature, which means it may provide entry and exit signals after a significant price movement. In fast-moving markets or during rapid reversals, this delay can result in missed opportunities. Similar to other technical indicators, the MACD works best in trending markets; if the market becomes range-bound or starts to follow a sideways trend, it can produce false signals as prices oscillate within a narrow range. In such conditions, frequent crossovers can lead to false signals and trades that quickly hit stop-losses. Scalpers should exercise caution when using the MACD in these environments and, importantly, combine this indicator with other technical indicators and solid price action for enhanced reliability.
5. Average Directional Index
The Average Directional Index (ADX) is a technical analysis indicator that quantifies the strength of a trend. While it does not indicate the direction of the trend—whether it is an uptrend or downtrend—it provides valuable insight into the strength of the ongoing trend. The ADX is calculated from the moving average of price range expansion over a specific period and is plotted on a scale from 0 to 100, with higher values indicating a stronger trend.
Typically, an ADX value below 20 indicates a weak trend, while a value above 40 signifies a strong trend. The Directional Indicator (DI) lines measure the strength of upward and downward movements. Although the ADX does not provide directional information, traders can assess its readings to determine the strength of the trend, decide how long to hold their positions, identify and protect against false breakouts, and confirm trade entries when used in conjunction with other directional indicators. This allows for timely exits and more informed trading decisions.
How Average Directional Index works in scalping?
The key aspect of scalping is to determine the strength of a trend, and the Average Directional Index (ADX) is a helpful tool in assessing the strength of the current trend in fast-moving markets. An indication from this indicator above 25 suggests that there is enough strength to sustain a strong trend, signaling an opportunity to enter the market with a buying position in the direction of that trend. This is advantageous for traders, as trading in alignment with the current trend increases the probability of successful trades, allowing them to capitalize on market movements effectively. Conversely, a reading of the ADX below 20 signals that the ongoing trend is weak or that the market is about to consolidate, warning scalpers to exercise caution. During such situations, market movements become erratic and less predictable, resulting in higher risk and lower win rates if trades are executed without proper assessment.
How to use Average Directional Index effectively for scalping?
Scalping is a trading process where timing is everything, and the standard ADX setting typically uses a 14-period average to measure trend strength, which is not as suitable for scalping. However, customizing it to an ADX smoothing of 7 and a DI length of 10 increases its sensitivity to quick price movements in the market, making it easier for traders to receive quicker signals about changes in trend strength. By using the ADX with shorter customized settings, scalpers can take advantage of trading opportunities in volatile markets without the risk of lagging signals that often accompany longer periods. For instance, a faster rising ADX indicates a strengthening trend, signaling traders to participate in positions that align with the momentum. On the other hand, a declining ADX value indicates that the strength of the ongoing trend is weakening, thereby warning traders to exercise caution. When the ADX is used with other indicators, such as moving averages or momentum oscillators, it provides solid confirmation that maximizes profits and minimizes risk.
Best and worst conditions for Average Directional Index
The trending market favors the performance of the Average Directional Index (ADX), which works best in trending markets where price movements are predictable and consistent. The sustained momentum in trending markets provides scalpers with better opportunities to capture profits, as prices tend to move in a clear direction. However, the ADX has some limitations, such as its inability to identify the direction of the trend; it only signals the strength of the ongoing trend, not its direction. Additionally, it fails to perform as expected in sideways or range-bound markets, which lack a clear trend. In such market situations, scalpers should either avoid relying on the signals provided by this indicator or use it in combination with other technical indicators and wait for solid price action.
6. Bollinger Bands
Bollinger Bands are a widely used volatility indicator that helps in identifying probable market movements. They consist of three main components: the first is the middle band, which is typically a 20-period Simple Moving Average (SMA) that acts as a baseline for the bands and provides insights into the general price trend. If the price regularly moves above the middle band, it indicates an uptrend, while movement below it indicates a downtrend. The second component is the upper band, calculated by adding a set number of standard deviations (usually 2) to the middle band, signaling potential overbought conditions in the market. Conversely, when the price reaches the lower band, it signals oversold conditions, as this band is formed by subtracting the same number of standard deviations from the middle band. One of the key strengths of Bollinger Bands is their ability to dynamically adjust to current market conditions. The bands expand when volatility in the market increases and contract in size when there is stability. Traders can assess the interaction between the bands of this indicator and price movements to identify potential entry and exit points.
How Bollinger Bands works in Scalping?
Bollinger Bands are a highly effective trading tool that helps in scalping based on volatility expansions and contractions in the market, assisting scalpers in quickly identifying the best trading opportunities. The expansion and contraction of Bollinger Bands depend on market volatility; more volatility leads to an expansion of the bands, while a stable market creates a narrow or contracted funnel. This indicator is a valuable tool that also signals market volatility, helping scalpers to enter volatile markets as they can provide better trading opportunities compared to stable markets. The interaction between price and the bands of this indicator signals different indications. Whenever the price comes closer to the lower band, it signals potential buying opportunities, while when the price approaches the upper band, it suggests that the market is favorable for selling trades. Additionally, when the price slightly crosses above the upper band, it presents a strong buying opportunity, and similarly, when it crosses below the lower band, it signals a good selling opportunity.
How to use Bollinger Bands effectively in scalping?
The default setting of Bollinger Bands has a length of 20 and a standard deviation of 2, which is effective in capturing 70-75% of accurate trades. However, customizing it to a length of 10 and a standard deviation of 1.5 increases its responsiveness to shorter or rapid trends in the market, which proves beneficial for scalpers. Customized Bollinger Bands work efficiently on shorter time frames, but as they operate in these shorter time frames, the risk of exposure to false signals is generally higher when using this indicator.
Best and worst conditions for Bollinge Bands
Bollinger Bands are an effective tool for scalping in conditions of high volatility and mean-reverting scenarios, but they also come with certain drawbacks that traders should analyze carefully. In a highly volatile market, the efficiency of Bollinger Bands is at its peak, providing traders with clear entry and exit points based on breakouts. Conversely, the widening of the bands signals increased volatility, suggesting that traders can benefit from a rally in the market. Additionally, this indicator is effective in identifying conditions like oversold and overbought market situations. However, along with the benefits associated with this indicator, there are drawbacks, including false signals resulting from false breakouts. Not all breakouts in the market are true or provide genuine signals; there are multiple false breakouts that could potentially harm traders who entered the market prematurely based on the indications of this indicator. In such situations, traders must seek additional confirmation to protect their positions against false signals in the market.
Need to Know
Scalping is a fast-paced trading process that requires quick decision-making abilities, instant action according to varying market conditions, and a solid understanding of indicators and price action to excel in this trading style. There are multiple effective indicators that assist traders in understanding the market and provide detailed insights on entry and exit points. However, despite the effective performance of these indicators in the market, there are certain conditions under which they may not perform as expected. Traders need to navigate these situations before capitalizing on the signals provided by these indicators. Combining more than one indicator with a solid knowledge of price action can significantly help traders achieve profits.Frequntly Asked Questions
1. How profitable is the scalping trading?- Scalping can be highly profitable trading strategy, but the success of this trading method relies on multiple factors encluding the skill level of trader, descipline, market conditions, and the tool being used be trader.
2. What is the success rate of an expert scalpers?
- The average success rate of an expert scalper with solide base of market understanding, effective use of indicators and deep knowledge of price action, is approximately around 70-80%.
3. Is scalping can help in big wealth creation?
- Yes, trading could be highly rewarding profession, helping in big wealth creation, if follwed by descipline, risk management and continuos learning.
4. What are the qualities required to master scalping?
-Scalping is the fast trading style requires the qualities like quick responsive to the varying market conditions, the qulity of continuos learning and emotional resilience.
