Scalping options requires a disciplined approach with a strategic focus on rapid trades. Your goal is to make small, frequent profits, while minimizing potential losses. To do this, you’ll need to manage various factors like your broker selection, delta of options, and dynamic support and resistance. You’ll also need to keep a tab on commonly used indicators, maintain a mechanical approach to exits, and avoid being swayed by profit and loss fluctuations.
SELECTING YOUR BROKER
When it comes to options scalping, the choice of broker can significantly impact your profitability. The broker you choose should have a reliable and quick execution system and should offer low commission rates as frequent trading can add up in fees. Further, your broker should provide an easy-to-navigate trading platform, with quick access to real-time data and an intuitive interface for trade execution.
The delta of an option is a measure of how much the price of the option is expected to change for a one-dollar change in the underlying stock. The closer the delta is to 1.0, the more the option price will move in sync with the underlying stock’s price change. For scalping, you may want to choose options with a higher delta, as they can provide more profits for smaller moves in the underlying stock.
DYNAMIC SUPPORT AND RESISTANCE
Understanding the concept of support and resistance is crucial for successful options scalping. These are price levels at which the stock has had a hard time moving beyond in the past. Dynamic support and resistance are levels that change over time as the stock moves. Being able to accurately identify these levels can be beneficial in predicting short-term price movements, thus helping to increase your scalping profits.
COMMONLY USED INDICATORS
There are several indicators that traders use to aid their decision-making process. Some of the most commonly used indicators in scalping include:
- Moving averages: These are used to identify the direction of the trend and can help with trade entries and exits.
- MACD (Moving Average Convergence Divergence): This is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.
- RSI (Relative Strength Index): This measures the speed and change of price movements and is used to identify overbought or oversold conditions.
KEEPING P&L OUT OF IT
In the heat of the moment, it can be tempting to watch your profit and loss (P&L) fluctuations. However, focusing on your P&L can lead to emotional trading decisions. Instead, stick to your trade plan, focusing on the technical aspects of your trades. Make decisions based on your pre-set entry and exit points, not on whether you’re currently in profit or loss.
KEEPING EXITS MECHANICAL
In options scalping, one of the most critical parts of your trade plan is the exit strategy. It’s crucial to determine when you will exit the trade before entering. This helps to manage your risk and prevent significant losses. Keep your exit strategy mechanical by strictly following your predetermined exit points, whether it’s a stop-loss or a take-profit point.
Options scalping can be a profitable trading strategy, but it requires discipline, skill, and experience. It’s crucial to have a solid trade plan, good charting skills, and an understanding of options’ characteristics. Remember, success in options scalping isn’t about making huge profits on each trade; it’s about consistently making small profits that can accumulate over time. The next installment will delve deeper into the world of options scalping, covering more advanced topics and strategies.