Scalping is a trading strategy that is designed to capitalize on small moves in asset pricing. To scalp effectively, scalpers conduct business on ultra-short time frames and trade frequently.
When compared to traditional day or swing trading strategies, successful scalping relies on consistent market volatility and liquidity. Given the impetus placed on these attributes, West Texas Intermediate crude oil futures (WTI) are an ideal product for the pursuit of short-term market share. One of the three global oil benchmarks, it is the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract. WTI is also commonly referred to as “Texas light sweet”—one of the world's highest-quality oils.1
Below we’ll discuss the basics of scalping and take a look at some of the most reliable scalping strategies when trading WTI crude oil futures.
Technical analysis trading is the favorite methodology for the vast majority of scalpers. Accordingly, momentum oscillators, support and resistance levels, and chart patterns are important tools for spotting and managing profitable trade setups. However, no matter the iteration, scalping strategies fall into four primary categories:
For one, trading crude oil futures can be done 24 hours a day, seven days a week. There are several other benefits of trading crude oil futures that make this type of investment popular, such as:
Crude oil’s distinct status within the world’s economic and political systems gives trading this commodity a high potential to profit in nearly all market conditions.2
The primary advantages of scalping are limited systemic risk exposure and vastly reduced capital drawdowns. Conversely, the chances of achieving extraordinary returns in the short run are unlikely. Also, trade-related efficiency is critical to success. When taking into account these pros and cons, many traders look to WTI crude oil scalping strategies as a way of generating consistent returns.
Successful scalping takes advantage of small price movements—these strategies involve searching for opportunities when the asset's price might fluctuate within a very brief time frame, which means close monitoring of market prices is essential.
Traders are using literally thousands of WTI crude oil scalping strategies at any given time. If you’ve found one that works, then stick with it! However, if you’re looking for something new, consider one of the following WTI game plans:
As the old saying goes: “The trend is your friend.” Although this is gospel for long-term investors, it’s also relevant in scalping. The ultimate driver of any trend is this: buyers outnumber sellers or vice-versa. By entering a prevailing trend from a Fibonacci retracement level, scalpers are able to join the majority and secure a moderate profit.
In the case of WTI crude oil, assume that prices have rallied from $41.00 to $42.50 in the U.S. overnight. At the traditional pit open at 9 a.m. EST, sellers drive prices off session highs. A scalper could place buy orders one tick above the 38 percent ($41.93) and 62 percent ($41.57) Fibonacci retracement levels to get in on the action.
Given that the intrasession trend is up, bidders are likely to be present at these levels; if so, a profit may be realized from a short-term bullish bump in WTI pricing.
Among the most common WTI crude oil scalping strategies are those that surround psychological barriers. WTI is priced in terms of dollars and cents, meaning that big round numbers such as $40.00 or $40.50 typically draw added participation. These areas are often viewed as being ripe for breakout scalping.
For example, suppose that WTI has put in an intraday top at $40.00. During the two hours ahead of the daily pit close (10:30 a.m. EST to 12:30 p.m. EST), prices have consolidated within the $40.00 to $39.50 range. Also, the big round number of $40.00 has been tested on multiple occasions.
Given this scenario, a breakout scalp could be executed by placing a stop-market buy order at $40.01. Should a rush of bids hit the market due to intraday stop losses being run and fresh buyers piling on, a “washout” above $40.01 will very likely generate a positive move.
Although most traders favor strategies that aim to capitalize on directional moves in pricing, reversion-to-the-mean or range trades are another way of approaching the market. For scalpers, these types of strategies are affordable and can be an essential part of a comprehensive trading plan.
Executing a range trade is relatively straightforward—all a trader has to do is buy or sell a non-trending market from an oversold or overbought technical area. This may be accomplished by implementing oscillators, such as the MACD, or simply identifying a periodic high or low extreme.
To illustrate, assume that WTI crude oil is in an intraday consolidation pattern between $41.00 and $42.00. In order to execute a range scalp, all a trader has to do is sell just below $41.00 or buy slightly above $42.00.
For instance, a range scalp to the short could be taken by selling at $41.94. By placing a stop loss at $42.01 and locating a profit target at $41.87, a crisp 1:1 risk versus reward ratio is secured. Given these parameters, WTI crude oil scalping strategies of this ilk do not need a robust winning percentage to be profitable in the long run.
Note: Any trade examples given are for educational purposes only. They do not include commissions and fees.
Perhaps the most critical characteristic of a successful scalping strategy is proper timing. With scalping, participants open and close positions within minutes or even mere seconds, necessitating precise entry and exit points. The most reliable scalping strategy is one rooted in quick reaction times and an in-depth understanding of the market.
Thus, effective scalping in any market requires the right tools, including:3
As in all things trading, there’s more than one way to profit as a scalper. Traders implement countless scalping strategies on a daily basis―as long as an approach makes money, it’s working.
If you’re looking to further expand your portfolio, our free guide offers ten strategies for learning how to think like a technical trader.