[0:00]If you want to increase your chances to succeed at scalping, you must find confluence. Confluence is when several trading tools give the same signal. You combine more than one technique to increase your odds of a winning trade. Today I'm sharing a scalping strategy, which I'm currently back testing on the 5-minute timeframe. The strategy relies on trend and momentum breakouts, confirmed by trading volume. So if you could, like, subscribe to the channel and stick around for the full video.
[0:36]The strategy requires to analyze the main trend, the prevailing momentum and the volume, to find low risk, high reward trade opportunities. As I said before, we look for confluence between these three forces: trend, momentum and volume. We'll use multiple trading tools that give the same reading, as a way to confirm the validity of a potential buy or sell signal. For determining the trend, we'll use Heikin Ashi candles. For analyzing the price momentum, we'll use the RSI bars indicator, and for confirming our entry, we'll use a volume spread analysis indicator.
[1:20]A Heikin Ashi chart offers a unique perspective on price action. Its essential contribution in our strategy is that it eliminates small price fluctuations to highlight price trends. A moving average smooths the price chart as well, so what is the difference between a moving average and a Heikin Ashi chart? While the smoothing effect of a moving average depends on its look-back period, the Heikin Ashi chart does not require a look-back period. And with such smooth and wavy price action, a part of market noise is eliminated. Now, despite being plotted as candlesticks, Heikin Ashi charts don't directly represent the real prices. They overlap with actual traded prices, but they are not the same! Just be aware of this when you back test Heikin Ashi. Make sure you have these tabs checked in TradingView. The last price line and the real prices on price scale. Heikin Ashi candles are a great tool to detect trends in an easier way. A very common Heikin Ashi behavior is for candles to stay green during uptrends, and for candles to stay red during downtrends. Green candlesticks without lower shadows are indicating a strongly bullish movement. Red candlesticks without upper shadows are strongly bearish. Also, the size of each candle tends to be associated with the strength of the movement, just like in regular candlesticks. A long green candle is an indicator of strong bullish forces. A long red candle is an indicator of strong bearish forces. Always remember, the best way to analyze a chart is by thinking and trying to make sense of the price action through logic. Candles are a visual representation of the actions of buyers and sellers, so what we really care about is how buyers and sellers are behaving.
[3:21]I found this indicator on TradingView: RSI Candles. This indicator changes the color of the price bars if the Relative Strength Index, the RSI, is above or below a certain value. We'll use the RSI as a momentum oscillator because it measures the velocity and magnitude of price momentum by comparing upward and downward movements. The indicator was originally designed to find overbought and oversold levels at the 30 and 70 level. While many traders use the RSI mostly to reveal overbought and oversold conditions, we'll use a different approach. Our target in this scalping strategy is to identify the energy behind the move. We'll change both inputs to 50 and we'll focus on the middle line of the indicator. We'll also change the length of the indicator to 50. Because this is a scalping strategy, I want to eliminate the noise as much as possible. So higher period on the RSI will help us in this way. The color of price bars change every time the RSI crosses above or below 50. When the RSI is above the 50 line, the price has upwards momentum and the Heikin Ashi candles are green. When the RSI is below the 50 line, the price has downwards momentum and the Heikin Ashi candles are red. When the RSI is crossing the center line, the momentum is switching from one direction to the other and the candles are changing color.
[5:00]For volume confirmation, I use this indicator, called Volume Spread for VSA. It shows you how the relative change in volume between bars is happening. It's very easy to read volume using this indicator. Red means ultra-high volume, yellow is high volume, green is average volume, and blue is low volume. This is probably the best VSA indicator on TradingView. If you want a separate video about this indicator, let me know in the comments. Now, volume is the ultimate leading indicator. When there is unusually high volume in any given time period, then the price tends to continue in the same direction in the future. In this scalping strategy, volume will confirm the strength of a move or will show its weakness. If the price is rising, for instance, and the volume is increasing, then this suggests that we have a strong price move supported by an increasing number of buyers.
[6:07]When you are scalping and day trading, the process is much harder, because numerous opportunities come up every day. It gets challenging if you don't know what to look for, meaning what is a good trade setup and when is a good time to enter a trade. Even though the trend is up, momentum is bullish and volume is increasing, because of the nature of scalping, you will still witness a lot of false signals. That's why when I'm scalping, I'm focusing on the short-term breakouts. This breakout filter aims to enter a trade as soon as the price manages to break out of a previous support or resistance level. We are looking for strong short-term momentum and the actual breakout is the signal to enter the position. Volume will help to validate the breakout. When the market is consolidating on low volume, a pick up in volume can signify that a breakout is due. A breakout occurring on rising volume is a valid breakout, while a breakout that attracted no interest from traders occurring on low volume, is likely to be false. For a long entry, trend is up, meaning Heikin Ashi candles are green. Momentum is up, RSI candles are green. Price is moving above a resistance level. Volume confirms the breakout, meaning we must have high or ultra-high volume. A confluence of factors, all indicating a continuation of the price move. For a short entry, trend is down, meaning Heikin Ashi candles are red. Momentum is down, RSI candles are red. Price is moving below a support level, and volume confirms the breakout. Meaning, we must have high or ultra-high volume. This is the 5-minute chart of Apple. After an uptrend, the price switches directions and starts moving sideways, creating a consolidation area. Meanwhile, there are a couple of swing lows created. Observe the area around the lower weeks of the candles, which creates our support area. When trading breakouts, it's best to wait for a candle close beyond the support area to confirm the breakout. With this break of structure, we have a potential down move in place. The trend condition is confirmed by the red Heikin Ashi candles. Momentum is also down, with the RSI candles being red. At the moment of the breakout, we see an obvious increase in volume, which is our third condition. So trend, momentum and volume are indicating the same thing. This is the power of confluence. You don't guess the market direction or randomly enter when you see some activity. You time the market when multiple energies are indicating strength or weakness in the market. This is how I personally place my stops. I look for the breakout candle, the one which really confirms the level is broken. If the volume is high or ultra-high, I set my stop loss above that particular candle, and I aim to win double the amount I've risked. I look for a positive reward to risk ratio, such as two to one, which would dictate that my potential profit is larger than any potential loss. This is the 5-minute chart of Tesla. Notice that we have an obvious uptrend with price making higher highs and higher lows. Momentum is clearly up with many consecutive green candles. Observe this price contraction after the up move. Like other contracting patterns, this will eventually lead to a breakout and create a new price movement. The direction of the breakout is typically unknown. This means that a breakout from the pattern could send the price in either direction. For this reason, even though you expect an upward, you will continue carefully to watch both the support and resistance levels for potential signs. This is the candle which moves above the upper level, the resistance. After the price breaks through the upper level, you have to confirm if the breakout is valid using the volume. You see increasing volume and more importantly, above average volume, which indeed confirms that there is strength in the market from the buyer's side. Again, trend, momentum and volume are in harmony. Long trade here, stop loss below the breakout, and we target double the amount we risked. Here is EURUSD on the 5-minute timeframe. After this period of consolidation, we have our breakout, followed by a big bold candle. The candle closes well below the support level. We have a little break of structure, which could prepare the market for a shift in the short-term trend. This is highlighted by the shift in the color of the Heikin Ashi bar. Momentum also shifted to the downside with the red candle appearing right at the moment of the breakout. The volume is increasing and is yellow, which means we have consecutive bars of high volume. Breakouts that occur on high volume show greater conviction, which means the price is more likely to trend in that direction. And this combination of multiple energies, trend, momentum and volume, all agreeing on the same basis, is very important to filter the market noise and bad signals. Short position after this candle, with a stop loss above it, and a two-to-one reward to risk ratio.
[12:57]Being a scalping and day trading strategy, you obviously want to catch minor trends or shifts in the market, which means you need to make quick decisions. Given the number of trades you will make in a single day, it's important to lower the amount of margin dedicated to any single trade and minimize risk. My advice is to never risk more than 1 or 2% of your initial deposit. This will allow you to have two or three positions at a time without having a big exposure. You can improve the strategy as you wish. If you don't like using Heikin Ashi candles, you can use regular candlestick charts and add a moving average or VWAP to determine the short-term trend. If you don't want to use the RSI bars, you can remove them, because Heikin Ashi candles can also show price momentum if you are analyzing the weeks.
[14:02]I like to add the RSI candles because it hides some unimportant red candles in an uptrend and some green candles in a downtrend. It's visually more appealing for me, but if you feel you can take signals without it, you can remove it. You can also remove the volume confirmation. Sometimes, you can scalp a few points even without having high or ultra-high volume. The point is, you can customize the strategy and add your own filters to improve it and make it even better. If you found value and learned something new, leave us a like. This way we'll know if you'd like to see more videos like this one. And check out our academy program if you want to further level up your trading. Until next time.
