Late day scalping is a technical trading strategy that focuses on the exploitation of very small movements in a quiet and stable market environment. Typically, the timeframe in consideration is between 4 pm and 6 pm NY time, when trading desks in the U.S. gradually thin down, and trading is handed over to droning automated systems. The scalper seeks to execute numerous short term, low risk, low profit trades and to accumulate his gains over weeks and months, while cutting losses short. Our purpose is to exploit our small size, and turn it into an advantage: although the big players are able to cause storms, the small movements towards the end of the day are not very interesting for them, creating a field of relative freedom for retail traders with limited risk appetite and capital.
This strategy requires very low leverage, small trades executed throughout the closing hours of the market. Trend following strategies, especially oscillators that help traders maintain their hourly positions are useful, and there are countless possible variations. Moreover, since the size of each trade is small, it is critical to find a broker that keeps spreads tight. Otherwise the broker will be benefiting more from our trades than ourselves, even in the best case scenario where trading is profitable. If possible, using automated trading systems is advisable, since they manage the tedious and mechanical trading decisions far more effectively than human beings.
Ordinary crossover strategies based on 10-30 minute moving averages, or on MACD and/or RSI , are useful for establishing benchmarks and action points for this strategy. A typical oversold/bought signal at 20-80 on the RSI, or an MACD extreme at 10 or 90 are to be sought for actionable signals, as doing so reduces the number of trades and allows us to focus on the most profitable opportunities. Positions may be closed when indicators return to average values, rather than to extreme readings on the opposite side, because by its nature the market is calmer and less prone to extremes during our chosen timeframe.
Reversal patterns like head-and shoulders, candlestick engulf, hammer, morning star formations are not very useful for the late day scalper, since such formations are likely to occur for no reason, and without any meaningful backing in the price data. They can be employed to confirm signals obtained from oscillators, and may be utilized to filter actionable scenarios to an even smaller subset, but they are not, on themselves adequate to activate any strategy. Furthermore, credible reversal patterns may lead to breakouts, signalling the necessity of a pause to trading activity.
Breakout patterns are not expected to materialize very often under the circumstances most conducive to late day scalping, and if they do, it is a strong signal to sit back and wait until the market situation clarifies itself. Since this particular style of scalping is a low-intensity, low- frequency trading strategy that is designed to exploit the calm and quiet conditions and small disturbances of the later hours, big moves are capable of greatly upsetting our plans, leading to confusion, and sometimes even paralysis.
Breakouts that coincide with sudden events of fundamental significance, or with news releases, are the most dangerous, as we discuss further in the next section. It is advisable to avoid significant trading activity on days when important releases are expected, or major international meetings are planned, since sometimes unanticipated, unscheduled statements can lead to market shocks in the middle of quiet and nervous trading atmosphere.
Conclusions and Risks
Late day trading is particularly suited to traders with limited time, yet sufficient ability to focus and adhere to a predetermined strategy. Although, as we mentioned earlier, automated trading systems are definitely more suitable to executing trades under this overall strategy, late night scalping can be an effective way to learn how to trade and may even supply steady income for the occasional trader.
Finally, it must be mentioned that late day scalping is not free of its risks. Sudden volatility brought on by news releases and occasional fundamental changes can lead to an evaporation of liquidity, widening of spreads, an inability to fulfill stop-loss orders, and can, especially with highly leveraged positions, wipe out the gains of days if not weeks. To avoid this, traders should always keep stop-loss orders in place, and make sure that each trade is of small size so that however big the infrequent yet inevitable shocks are, their impact is manageable in a longer term context.
Sara Mackey works for Currency Publications, a content creation service for Forex brokers specializing on the topic of forex fraud.