Scalping 102: Game Planning Your Scalp Trades

Scalping trades requires prudent decision-making and nimble reaction time. Both of these factors are enhanced through proper preparation ahead of the trade. The adage “Plan your trade and trade your plan.”, certainly rings true. We reviewed the tools and preparation routines in our Scalping 101 article exclusively on MarketBeat. For this Scalping 102 article, we will refine the process of preparing a trading game plan for any stock on your watch list ahead of time. Knowing ahead of time where prices could go enables you to be at-the-ready to react, as opposed to blindly chasing trades. Having a trading game plan dramatically improves agility and cuts down on impulse trading.

Gameplay Materializes

We don’t subscribe to the notion of static game planning but rather partake in a more fluid, adaptive and reactive approach that enables a trading game plan to materialize naturally. The best analogy is to visualize price action like a pinball machine. The metal pinball represents price as it reacts off bumpers, mechanical triggers and the control flippers. The gameplay for a pinball machine is virtually self-explanatory because all the bumpers, triggers and obstacles are laid out and displayed for the player ahead of time. Thinking along the same lines, a trading game plan becomes self-explanatory once the bumpers and triggers are identified and laid out in advance. As you become more familiar with the gameplay through repetition, reactions become more intuitive and fluid.

Constructing the Pinball Table 

The components of the pinball table including bumpers and triggers. We utilize the rifle charts as the pinball table for each stock. Bumpers are support/resistance price inflection points where the action will take place (deflection or penetration). There are two types of price bumpers, dynamic and static. Dynamic bumpers change in value throughout the day which are the simple moving averages (MAs) and Bollinger Bands (BBs). Static bumpers remain in place unchanged, which are sticky 2.50s and 5s zones and Fibonacci (fib) price levels.

Just as the pinball deflects when it comes in contact with a bumper, the same applies to bumpers on the rifle charts. For any stock you wish to trade, it’s important to track and plot these bumpers. With MAs and BBs, it’s important watch for any overlapping price levels between the wider time frames (monthly, weekly and daily) and the static bumpers within in the trading range. Multiple bumpers stacked around a certain price level raises the probability of a stronger reaction. These multiple bumper price levels are where we can find optimal triggers. This is how the game plan materializes as the bumpers are laid out, we know where powerful price inflection points are located. The next part is planning the triggers.

Price Action Pinball 

Triggers are formed by a combination of the stochastic momentum oscillator and price pattern set-ups at or near strong bumpers. We look for triggers near the bumpers. For example, a 1-minute stochastic 20-band crossover up combined with a 1-minute MSL trigger off a 0.618 fib price level stacked with a sticky 5s price zone is a compelling buy signal. The signal becomes more powerful if the 5-minute chart has a bullish mini pup pattern as well.

 

In the Papa John’s International (NASDAQ: PZZA)Trading Blueprint article, we plotted the bumpers, which enables the scalping game plan to materialize as we anticipate price reaction when bumpers are hit. The $60.55 price is a sticky 5s price zone ($60.40 to $60.60) and a powerful 1.618 fib. This is a solid area to anticipate a buy/long signal if triggered. The game plan creates itself this way.

As PZZA shares start to approach a key bumper area, it’s time to take notice and be ready to react. The three-candle MSL formation of a low, lower low and higher low candlestick forms around the $60.55 fib.  The buy signal triggers 1-tick above the high of the higher low candle, which is $60.83. The 1-minute stochastic crosses up through the 20-band oversold line indicating a nice cheap entry. The mini pup segment of the stochastic is subtle but powerful as it forms when price pulls back and coils back up off the 5-period MA. PZZA shares continued to spike up to the $61.60 peak before the first 1-minute red candlestick formed. This 1-minute MSL combined with a 1-minute stochastic mini pup 20-band cross up buy trigger off the $60.55 stacked support level resulted in a + $0.83 price move, of which 1/3^rd or more could be scalped quickly for profits. In future scalping articles, we’ll examine the weekly and monthly BBs magnet set-up, the art of scaling shares and exit management.