8 - Scalping Strategy for Quick Profits: A Complete Guide

 Welcome everyone! In today's lesson, we will be discussing an effective scalping strategy. We previously covered the most common indicators used in the market in our last lesson. Today, I’ll walk you through a complete setup for scalping, including:

• When to enter and exit trades
• Which time frame to use for the strategy
• The maximum duration to hold a trade
• Risk-to-reward ratio
• Where to set your stop loss
• How to choose your strike price

Let’s dive into it!

What is Scalping?

Scalping involves making quick trades to secure small profits. The key characteristic of scalping is that trades are held for a very short time, and the profit from each trade is usually small.

Key points about scalping:

• Quick profits: Scalping is focused on making small, quick profits.
• Narrow holding period: The time frame for holding trades is very short.
• No big targets: Scalping isn’t about chasing huge targets—just smaller, consistent wins.

But here's the thing: scalping requires regular practice. You can’t just try it one day and move on to something else the next. To master scalping, you need to stay disciplined and follow this strategy consistently.

When Should You Use Scalping?

Scalping is most effective when you have limited time. It’s great for traders who can’t hold positions for long hours but still want to take advantage of small market movements. If you are someone who trades intraday and prefers short trades, this strategy is ideal.

However, if you prefer swing trading, then scalping might not be the best choice. Intraday trading and scalping require more focus and can create confusion if you try to mix them with swing trades. If you’re looking to manage both, I recommend trading one at a time—either intraday or scalping, but not both simultaneously.

Using RSI for Scalping

For this strategy, we’ll use the RSI (Relative Strength Index), which we’ve covered in detail in a previous lesson. To refresh, here are three common setups for RSI:

1. Traditional Setup:

   • Overbought (above 80) and Oversold (below 20) levels.
   • If the RSI is above 80, the market is overbought, and a dip should follow.
   • If the RSI is below 20, the market is oversold, and buying pressure may begin.

2. Momentum Setup:

   • RSI levels at 60 and 40.
   • Above 60 suggests a bullish market.
   • Below 40 indicates a bearish market.

3. My Personal Setup:

   • RSI at the 50 level.
   • Above 50 is bullish; below 50 is bearish.

For this scalping setup, we’ll use the 50-level RSI approach. Let’s move on to setting up the strategy.

Strategy Setup

1. Time Frame: Use a 1-minute time frame for scalping.
   • Larger time frames are not suitable for scalping because we need quick entry and exit.
2. RSI Marking:
   • Mark the 50 level in the RSI as the mid-point.
   • If the RSI crosses above 50, it indicates a bullish market.
   • If it crosses below 50, it’s a bearish market.

Entry Criteria

• Bullish Entry: When the RSI crosses above 50, you’ll enter a call (buy) position.
• Bearish Entry: When the RSI crosses below 50, you’ll enter a put (short) position.

But remember, you don’t enter immediately after the crossover. Confirmation candles are crucial:

• Wait for the next candle to confirm the direction.
• This confirmation ensures that the market is following the expected trend.

Timing of Entries

As I always advise in the hedging batch, avoid entering trades in the first 30 minutes of market hours. Why?

• The first 30 minutes are volatile, with big, sudden moves.
• After 9:50 AM, the market tends to settle, and trends begin to develop more clearly. Therefore, wait until after 9:50 AM to enter trades.

Example of Entry

Let’s look at an example:

• On January 13th, after 9:50 AM, the RSI was initially below 50.
• It then crossed above 50, indicating a bullish trend.
• Wait for the confirmation candle. If the next candle closes above the previous high, it’s confirmation to enter the market.

Once confirmation is received, you can enter a call option for a bullish move.

Exit Strategy

For exits, we use the following RSI levels:

• First target: When the RSI reaches 30 on the downside or 70 on the upside.
• Trailing stop: After hitting the first target, you can trail your stop for further profit.

In this example, the exit would occur once the RSI hits 30 (on the downside) or 70 (on the upside).

Stop Loss

For stop loss, it’s important to always define your risk upfront. Typically, the stop loss will be placed just below the previous candle’s low for bearish entries or above the previous candle’s high for bullish entries.

Example of a Quick Trade

• Entry: At RSI 50 crossing above (bullish confirmation), enter at 8240.
• Exit: When RSI hits 70 or price reaches your target (say 18208), exit with a 32-point profit in 7 minutes.

That’s how quick and effective scalping can be!

Conclusion

Scalping can be a great strategy for quick profits if you follow the rules and execute it with discipline. Always use the 1-minute time frame, wait for confirmation candles, and be aware of the 9:50 AM timing. Use RSI to identify entry points and set your targets with a 30-70 RSI range for exits.

Remember, consistency is key. Don’t jump in and out of strategies. Stick to the plan, and over time, you’ll master scalping!

In the strategy we're discussing, it's essential to understand that holding trades for too long can lead to missing out on the quick profits that come from small, but consistent movements. For example, if a Nifty trade moves by just 20 points in a short time, this is a good opportunity for a quick exit. While some traders might hold out for a larger move, our focus is on taking quick profits, even if they are small.

Example of a Nifty Trade

Let's say you entered a trade at 18,003, and the market moved to 17,980—this is a 20-point move. While this may seem small, in options trading, such a move can result in a substantial percentage gain, especially for strikes that are near the money. For example, if you are trading an option priced at ₹100, a 7-8 point move can result in a 7-8% return within just 15 minutes. This is the kind of quick profit that makes intraday trading attractive, especially when compared to the annual returns of fixed deposits.

The key takeaway here is that even small profits matter in this strategy, and they accumulate quickly with consistent application.

Nifty Setup Recap

To make the strategy work, your setup should involve:

• 5-minute time frame: You look for clear breakouts or breakdowns and set precise targets.
• RSI 50: The market must cross the 50 level for an entry to be valid.
• Max holding time of 15 minutes: Exit once the target is reached or 15 minutes have passed, whichever comes first.
• Target: For calls, target RSI 70; for puts, target RSI 30.

In the example above, we exited the trade when the price hit the target, achieving a decent profit in a short period.

Scalping Strategy with Bank Nifty

Using the same strategy, we also applied it to Bank Nifty. The setup and rules remain consistent, with the key difference being the market's movement. For example, after exiting a trade at 10:20 AM, we waited for another setup, and at 10:30 AM, a confirmation candle formed, signaling an entry. After entering, we saw the target hit around RSI 70, confirming the success of the trade.

Again, remember the maximum time frame for any trade is 15 minutes. Holding beyond this time frame can reduce the profitability of the trade.

Further Bank Nifty Example

We can also review a previous example from January 13th. If we look at the 09:50 AM candle, we can see that the market broke below the 50 line, signaling a potential move to the downside. After confirming the breakdown with a confirmation candle, we entered the trade and saw a decent down move. The RSI target for puts hit 30, giving us a solid exit point within 15 minutes.

The Importance of Rule Adherence

It's critical to adhere to the rules set out in this strategy. This means not holding trades for longer than the defined 15 minutes, not deviating from the stop-loss levels, and always confirming entries with the appropriate break or crossover. While market conditions may shift, sticking to the setup gives you the best chance for consistent returns. No emotional decisions, and always trust the process.

Key Points for Quick Reference

1. Time Frame: 5-minute charts for both Nifty and Bank Nifty.
2. Entry and Exit: Based on RSI 50 crossover (above for calls, below for puts) and RSI target of 70 for calls and 30 for puts.
3. Max Holding Time: 15 minutes (do not hold beyond this).
4. Trade Frequency: Only between 09:50 AM and 11:00 AM.
5. Risk-Reward: Target a ratio of 1:2 or 1:3. Always use stop-losses and exit as soon as the target is reached or the time limit is hit.
6. Strike Price Selection: Choose near-the-money options for quicker results.
7. Avoid Futures or Option Charts: Stick to spot charts for Nifty and Bank Nifty.

Conclusion

To summarize, the key to success in this strategy lies in discipline, timely entries, and exits, and the consistent application of well-defined rules. By focusing on smaller, quick profits, you can build your trading success gradually, without over-leveraging your capital. Keep your strategy simple, and let the market work for you within the defined time frames and conditions. Happy trading!