Best Futures Scalping Strategy

Futures are leveraged derivative exchange-traded financial instruments that traders can use to take advantage of movements in the underlying market. Scalping futures can be an exciting (and potentially risky) trading method that provides almost instant feedback on your trading abilities. That's why it's important to know your futures scalping strategy options as an investor.

The Best Futures Scalping Strategies:

• The Breakout Trade
• Trading with Indicators
• Trading Ranges
• Automated Strategies

The Breakout Trade

A breakout occurs when an asset’s price moves outside of a predefined area of resistance or support. The scalper hopes enough momentum gathers behind the push to “tick” (in the futures market, movement is measured in ticks) the price up or down long enough to both enter the market and then make a profitable exit.

Good breakout trades usually, but not always, demonstrate the following characteristics:

• Multiple touches on a support or resistance price
• Contracting volatility followed by a substantial volatility increase on the breakout
• Increased trading volume on the breakout

Bollinger Bands are envelopes placed two standard deviations above and below a simple moving average of the price. Together with a graph of the moving average they are based on, they create a “roadmap” that traders can use to implement a simple scalping strategy.

The set of blue lines surrounding the price action are Bollinger bands.

Bollinger bands move in real-time with the price of an asset, providing what some traders consider “guidance” as to what price range that asset should be in based on past data. One of the simplest applications of Bollinger bands involves scalping when the price hits either band. If it hits the top band, go short. If it hits the bottom band, go long. The trader should ideally hold the trade until the price hits the opposite band, at which point the market should be ready to reverse itself. 

Bollinger bands are not prison walls, however. They are instead standard deviations that expand and contract around the chosen moving average as the asset price moves and its volatility shifts. Since the bands follow the price’s moving average, the asset’s price is not in any way obligated to respect the bands as its upper and lower limits. They are simply a guideline scalpers can use. 

Trading Ranges

Traders who focus on index futures like the popular S&P 500 E-mini and Micro E-mini are likely looking for medium volatility assets to trade. Moderate volatility levels help scalpers avoid unexpected and large moves up or down. Also, if you scalp in the middle of a trend you think you can count on, you can more easily predict the market’s direction.

When you trade a range, you first identify a set of support and resistance levels. Support levels are lows that seem to form a price floor. Resistance levels are prices that an asset can’t seem to break above without some real effort.

As you can see, support and resistance levels do not last forever. They can, however, provide guidance for a scalper to trade in the very short term.

Once you have identified support and resistance levels that form a trading range, you simply buy near support and sell near resistance. You can do this until a breakout occurs, at which point you should wait until new support and resistance levels develop to form a fresh trading range.

Sophisticated high-frequency traders often use automated trading robots or “bots” to trade for them. This has many advantages: Computers trade with no input error, they have higher trading velocities, and they don’t get emotional or switch strategies after a few losses. You may not be able to program your own trading bot just yet, but you can take advantage of some automation to help in your trading.

Setting an automatic stop-loss for each trade is the law for some traders. Your stop-loss is the price point at which you instruct your futures broker to take you out of the trade at the next available price when it trades. Using stop-loss orders helps you limit losses if a trade jerks against you suddenly.

Defining your risk in this way also allows you to determine a rough risk/reward ratio for trade in advance. You might decide to take trades only when the risk/reward ratio is acceptable to you. For instance, if you set an automatic stop loss of 2 ticks of risk per trade, and you only take trades with a 3:1 risk/reward ratio, then you would require a trade to have an upside potential of at least 6 ticks.

What is Scalping?

Scalping involves exiting a trade very quickly after entry. In some cases, a trade may last only a few seconds or even shorter. The shorter the trade, the less exposure to market movements — this is one of the major ways that scalpers reduce their risk. Scalpers aim for a small profit on each trade and often trade with a high frequency, hoping to reach larger profits by adding up small wins over the day. Commissions on these trades can add up quickly, so scalpers must take this into account as well.

Because scalping is all about speed, you will need an extremely fast internet connection with no lag because your input speed and accuracy will make a difference on your bottom line. You should also trade through a reputable and well-regulated futures broker you are comfortable with because you want your margin deposit to be in good hands. 

Scalpers also typically make up for the short duration of their trades by increasing the size of their positions taken. Futures are also leveraged instruments, meaning that you can control a position in the underlying asset with less money than its notional amount. Traders with small accounts or who simply want more exposure when scalping can trade futures on margin.

You can scalp all types of futures, although the commissions and dealing spreads you pay can determine whether scalping makes sense for you. Futures contracts listed on a particular exchange typically trade with the same rules, regardless of the underlying asset. Many futures market scalpers prefer to trade only contracts on the underlying assets that they are familiar with, although some technical traders might scan the futures markets for advantageous setups rather than sticking to futures on a particular set of underlying assets. 

Let’s describe some of the most common futures scalping strategies. From there, you may be able to determine the best futures scalping strategy for yourself based on your personality and risk tolerance.

Exponential Moving Average vs. Simple Moving Average

Scalpers can use one or more Exponential Moving Averages (EMAs) or Simple Moving Averages (SMAs) as lagging indicators of market trends. Let’s discuss what they are and the differences between them.

Exponential Moving Average

An EMA is the exponentially weighted average of an asset’s price over a predefined time period. You will set this time period when you turn on the indicator on your user interface. In general, shorter time periods create more actionable information for scalpers. Unlike an SMA, an EMA gives more weight to recent prices when calculating the average. As a result, an EMA reacts more quickly to market moves than an SMA of the same period. Because it responds faster to price changes, an EMA can be more useful to identify short term trend changes than an SMA. 

Simple Moving Average

An SMA is an average of an asset’s price action over a period of time that you set. Because it gives equal weighting to all prices within your period, it does not respond as quickly as an  EMA to new price data. Long-term traders tend to prefer SMAs because they even out price spikes over time and highlight the primary trend.

Best Brokers for Futures

Choose a futures broker that gives you access to your preferred financial vehicles and that supports trading software that makes your trades easy to execute. Check your broker’s terms for margin rates, trading commissions and other fees. Your margin rate determines how much leverage you can use, while trading fees must be factored in to assess your net profits or losses.

Choose the Best Futures Scalping Strategy 

Approach scalping futures with caution. They can be useful for traders without large amounts of risk capital, leveraged instruments like futures provide greater exposure to the market that can magnify losses as well as gains. 

Scalping is also a labor-intensive exercise. You need a singular focus on the market, especially when you just start out. Don’t scalp unless you can put your full attention on the market. If you want to learn more about sophisticated high-frequency trading techniques, check out Benzinga’s options trading newsletter and bookmark this site for constantly updated suggestions and information.

Frequently Asked Questions