Scalping as a futures trading technique

 In the financial markets, trading has to do with negotiating and / or speculating in order to obtain profits over time. You can trade on stocks, forex markets, futures, commodities, and a variety of other financial markets. But whatever market you trade in, the goal is generally to make money in the short term, even in minutes.

Within trading strategies, there is a type of trading designed to obtain quick profits by taking advantage of the volatility and liquidity of a market. It is called scalping and it is a strategy that has become very popular among beginner traders who want to amass risk capital in a short time. However, scalping is not for every trader. It requires time, technical training, nerves of steel, information and knowledge of the market in which you are going to operate, so it is convenient to find a reliable broker.

In almost all markets the scalping strategy can be used, but investors will look for the most liquid and volatile ones that are ideal. Many operations can be done with indices, commodities, forex, futures and derivatives.

Futures trading using the scalping strategy is reserved for the most experienced traders. The so-called futures are derivative financial contracts, whose value depends on an underlying asset. These contracts oblige the parties to negotiate a quantity of a given asset, at a pre-established future date and at a previously agreed price.

What is futures trading?

Futures are derivative financial contracts (based on an underlying asset), in which one party is obliged to buy a quantity of an asset, which could be for example a raw material (commodity) and the other is obliged to sell it, on a certain date future preset and at a price that has been previously agreed. These futures contracts are standardized agreements that specify the amount of the underlying asset and that can be bought or sold on a futures exchange. They are widely used as a hedge but even more as a financial instrument for speculation.

The objective of futures contracts is to secure a price of a good or a commodity and thus protect against the possibility of the price changing sharply (up or down). There are companies that actually require the merchandise for their daily operation, but there are also other negotiators in these markets, who are financial agents and investors, both wholesalers and retail investors, interested in making a profit but who do not require the merchandise.

Example of futures trading

A very illustrative example of futures trading is that of a company in the aeronautical sector that is interested in setting the price of jet fuel that it will require in the coming months. For this, it buys a futures contract in which it is obliged to buy a quantity of a certain fuel at a certain price and on a certain date. In this way, you ensure the price of this raw material for your business.

In the same way, the fuel distributor that sells the futures contract to the airline can obtain the benefit of setting the price since it ensures stability in its income and covers the risk of the price falling in the markets.

Minority investors operate in this market by buying and selling futures contracts with the sole objective of obtaining benefits over time in the face of price variations of these financial instruments.

Futures are derivative contracts, that is, their price depends on or is derived from an underlying asset or group of assets. That is, if the price of the underlying asset increases or decreases in the markets, it will affect the price of the futures contract.

In our example, the underlying asset is jet fuel. If the price of fuel increases in the markets, the price of the futures contract will also increase and the positions can be sold at a profit or profit in the futures markets. These types of operations are those that investors who only buy the asset to sell it will make a profit.

Types of existing futures markets

Our example focused on a commodity because futures contracts often have this asset as an underlying. But are not the only ones. You can trade in futures contracts for bonds, stocks and even cryptocurrencies (bitcoins).

The types of existing futures markets are:

• Futures of raw materials such as crude oil, natural gas, wheat, etc.
• Index futures such as the S&P 500 index.
• Currency futures (forex).
• Futures of precious metals such as gold and silver.
• Bond futures such as US Treasury bonds.

How do the futures markets operate?

In the futures markets, trading volumes have increased to the extent that the technological advance of the last two decades has allowed access via the internet to a large number of broker platforms that act as intermediaries and operate on the main stock exchanges. world values.

Futures markets work with leverage, that is, with a small deposit you can start trading without spending everything required in the operation. This leverage or loan can be obtained from the broker through which you are carrying out your trading operations.

You must establish stops and limits (stop loss order), an order that will be executed only if the asset reaches a certain price. It is a highly recommended tool for managing risk while trading futures markets. A stop loss order will close your positions if the asset price moves to a less favorable level while a limit order will close your positions if it moves to a more favorable order.

What is scalping?

Every operator has wondered what is Scalping? As described in the trading dictionary, Scalping is a trading strategy, framed in day trading, through which it is expected to obtain quick benefits from small price changes of an asset. It is a high-risk style of trading that consists of carrying out short-term entry and exit operations, throughout the day with the aim of ensuring a small profit with each operation, so that the sum of the benefits generate a significant profit.

High-risk traders who use any of the scalping strategies are known as scalpers and must have an iron discipline regarding their trading system, because for this strategy to be profitable they will carry out a large number of operations. on the day, targeting small profits, rather than few big profit trades.

What is the scalping strategy based on?

The scalpers strategy is based on the following principles:

1. A short or brief exposure to financial markets reduces operational risks. It is more difficult for an adverse event that occurs related to the market in which it operates to have an impact in such a short time.

2. It is easier for many small movements to occur throughout the day that can be used to obtain small gains, than larger ones that would require a greater imbalance in the market.

3. In almost all markets there are small movements, even in markets with little volatility, which can be used for scalping.

How is scalping done?

Scalping requires not only discipline, but a high-risk profile level, a highly measured system, and nerves of steel to act fast and open and close a successful trade in just a few minutes or even seconds.

A quick exit is key in scalping trading and the exit strategy must be strong and strict because a large loss can cancel out many small profits that you have previously made in a short space of time. To scalp you will need tools such as high-speed internet access, a trading platform or website, live broadcasts, as well as the stamina to perform hundreds of trades a day.

The scalping strategy is based on the idea of ​​obtaining more exposure in the market but in a very short time, which reduces risk. In addition, it is based on the idea that it is easier for small movements in prices to be registered and take advantage of them to generate small profits, than for large movements to occur.

What variables must be taken into account for the scalping strategy?

When it comes to operating with the scalping strategy, knowing in depth the market in which you are going to trade is decisive for success. The following variables must be taken into account for this strategy to work.

• Volatility: To optimize short-term trading, volatility is required, that is, the price changes many times a day, such as forex trading.
• Liquidity: Scalping requires that the asset being traded be sufficiently liquid to allow you to enter and exit quickly and without additional costs.
• Commissions: It is important to consider the commissions when choosing a broker, since many operations will have to be done during the day.
• Stop Loss: It is important that the scalper uses a strategy that limits losses.
• Know the market: Have access to reliable information and study the main variables that affect the market in which you are going to operate. For this you can use both technical analysis and fundamental analysis.
• Leverage: In scalping it is vitally important to avoid excess leverage and calculate the greatest loss that can be assumed based on the volatility of the asset.

In almost all markets the scalping strategy can be used and the instruments that you can use are stock indices, futures, forex, commodities, bonds and CFDs.

To operate in the futures markets using scalping, priority must be given to choosing the most liquid instruments and the lowest commissions. Each trader will choose the asset with which they feel most comfortable and in most cases will aim to obtain between 5 to 10 ticks.

The following instruments are widely used in the futures market: S & P500, Nasdaq, oil, EUR / USD pair, gold, silver.

Scalping is obviously a strategy based on technical (chart) analysis and fundamental analysis is marginally used when trading derivatives.

A scalper will mainly use tick charts as the time interval is small. It will also use support and resistance lines.

What are the best indicators for scalping?

There are many indicators that can be used when trading using the scalping strategy, but for many traders the main ones are the following:

1. The SMA indicator: It refers to the simple moving average indicator and is a basic form that a trader uses to design a trading strategy. This technique helps to identify trends, that is, if the price of the asset with which they are going to trade moves up or down.

2. The EMA indicator: This is also a moving average indicator, only in this case it is a weighted average that gives more value to recent prices, while the SMA assigns the same weight to all values. It is probably the most widely used indicator and like the SMA it is used to identify trends, but it responds more to the most recent price changes than to those farther back in time. The trader makes use of this indicator to obtain buy and sell signals when the historical moving averages cross.

3. Parabolic SAR indicator: The SAR (Stop and Reverse) indicator, or stop and change direction. It is another indicator that shows traders the trend of the price. Faced with a trend change in the market, this indicator will stop and change direction. That is, this indicator informs the trader or broker not only that there has been a change in trend but also when the price stops and changes its direction. Buy signals will be identified if the price crosses above the SAR and sell if it crosses below the SAR. It is also a method of knowing where to place a stop-loss order.

There are many and varied strategies used for scalping trading, but each scalper will choose the one that best suits their style, personality and risk profile to obtain the expected results, this can also be useful for retail investors.