Keep Your Scalping Off the Rocks with Channels

October 4th, 1980. A fire broke out on the Dutch cruise ship Prinsendam and the captain gave the dreaded order — abandon ship. As 520 passengers were loaded onto lifeboats, the emergency channel was engaged.

A full 130 miles from the nearest airstrip, with the icy waters ready to claim everyone, a full rescue seemed an unlikely outcome.

If you’re a scalper, one bad trade can wipe out a full day’s worth of trading and profits. A few bad trades can send your account headed for the rocks — or worse yet, capsize it. Sticking to a plan that’s focused on trading with a channel can help you chart a course to consistent profits — with high probability location spotting and entry execution.

Use this mayday call when your scalping strategy is in distress

500 kHZ has been the primary international distress frequency for most of the 20th century. If you’re a captain of any seafaring ship, you know that this has been phased out in favor of the Global Maritime Distress Safety System.

If you’re in distress, ‘mayday’ still stands as the primary signal of choice followed by a red flare. If you’re a scalp trader and believe your account is about to capsize, you can turn to a channel of a different kind for help — the price consolidation channel.

Channels form during periods of high volume when price starts to consolidate within a value zone. They can take place over the course of a trend or simply appear horizontally as the market simply grinds sideways.

When they form, the edges of the channel can be monitored for favorable entry conditions, as the market (primarily the institutions) drives value and price.

However they appear, channels can be a beacon guiding you to focus on value and basic price fluctuation. The result that follows: high probability scalp opportunities.

Spotting safe harbours that lead to profits

Price channels for scalpers can be found in just about every instrument, usually during the cash session, or during primary trading hours for the major markets. Your primary ingredient is volume, since you’ll need that to drive the consolidation and the fluctuation you’re looking for.

They’re easy to spot as long as you know what you’re looking for. Here are two common intra-day formations:

• Grinding/Sideways: Price basically stays within a range over a particular period of time — never really moving in one direction or the other.

• Trending:

The market pushes price to a new level over a period of time. As price advances, support and resistance levels will be tested and retraced along the way.

With both of these formations, the market is determining the value zone with which the most volume will likely take place. When price tests these zones or ranges — you have your opportunity to enter.

Generating consistent profits while reducing risk

Scalping within a channel isn’t too different from traditional value-based trading. When conditions reach overbought or oversold conditions — or extremes at the top or bottom of the channel — you have your opportunity to enter.

The difference is the time zone and the profit expectations. In this instance you’re looking for between 5-7 ticks and won’t necessarily be waiting for price to travel to the other end of the channel or range.

The strategy is simple — trade at the edges, or the extremes. Stay away from entries in the middle of the channel. Instead, target exits towards the center where you’ll see the most volume. Even if price runs to the edges — stay focused on your profit target of 3-5 ticks.

Steering clear of rocks that can wipe you out

Emergency frequency channels come with ironclad, black-and-white rules for usage. Abuse the channels, cry wolf and you’ll find yourself sitting in jail with an average sentence of 18 months.

To avoid wipeout disasters that can undo a full day’s worth of great scalping profits, the same black-and-white, ironclad rules need to be followed.

Stick with your profit target, no matter how enticing it may be to let them ‘run’. Letting profits ‘run’ without a plan is the same mentality that will send your account directly for the rocks.

Your target will usually be the mid-point of the range which should develop between 5-7 minutes, usually less and no longer than 10 minutes. At the mid-point, you’ll usually find the most volume, or fair price — which is the price level the institutions are usually looking to protect/maintain.

Likewise, take your lumps and get out early with the same stops. Usually a five-tick stop is used for most scalpers — and it’s followed religiously. Understanding that absorbing a 10-tick loss will require three to five straight winners just to break even will keep you from trying to ride out a loser (the absolute worst move you can make).

Scalp profitably while saving your account

Everyone, including the entire crew, was rescued the day of the Prinsendam disaster. It was a combination of the Coast Guard, Canadian helicopters, three cutters and every vessel in the area participating in the rescue effort. Imagine the number of radio channels used to coordinate such a massive effort.

To save your account and keep your scalping strategy safe from danger, you only need one channel. Spot areas of price consolidation and high volume with clear boundaries — and market them as your channel.

They can appear as price grinds along in a zone — or as it plots its way with a trend and marks the defined edges on your chart to form the channel. As price tests these boundaries take your entries at the edges. Short on top, long at the bottom — nothing in between.

Keep an eye on volume and barreling candles as signs that price may be headed for a new channel, and that you may need to ride out the storm.

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