Over the past three weeks, we have looked in-depth at the trading method of scalping. From the basics to the psychology of losing properly, the Scalping 101 series has attempted to shed some light on a strategy implemented by many market professionals.

It is now time to take a look at a real, live scalping setup for the upcoming Monday trading session.

The Target

To recap, when selecting an ideal product to scalp several factors come into play. A market must be volatile, liquid, and provide the order flow necessary to drive price directionally in a rapid fashion. There is one such product that fits the bill for the Monday, May 20/21 electronic session: June gold futures (GC).

If you have followed FX Leaders for any period of time, then you will know that we cover the bullion markets in depth. Gold CFDs (XAU/USD) and the full-sized gold futures contract offered by the Chicago Mercantile Exchange (CME) are among those frequently discussed.

The Plan

Keeping things simple is an important part of executing any trading plan. The plan for the Monday, May 20/21 session in June gold futures is straightforward — buy-in above Friday’s high and grab 10 ticks before anyone is the wiser.

Here is the trading plan, valid as of the Sunday, May 20 CME Globex electronic open (6:00 PM EST):

Product: June Gold Futures

Symbol: GC

Market: CME Globex

Leverage: 1 lot

Buy/Sell Price: Buy, 1293.8

Profit Target: 10 ticks, 1294.8

Stop Loss: 9 ticks, 1292.9

Entry Order Type: Stop Limit, 2 tick variance

Stop Order Type: Stop Market

Risk/Reward: 9/10 or US$90/US$100 (GC trades at US$10 per tick)

Duration: Less than one minute, but may vary depending upon market conditions.

The stop limit order for entry should be put in the queue immediately after the Sunday electronic open. Using a 2 tick variance, we will accept a fill for our buy entry order as high as 1294.0. Bracket orders are recommended to automatically place stop and profit locations upon entry.

If manually executing, a limit order at the profit target (1294.8) is placed at the same time as the entry order. The stop-loss (1292.9) will be a stop market order placed after the trade goes live. I recommend the use of a bracket order to save time and promote precision.

A quick word about fills. Scalping is a game of inches — the difference between winning and losing often comes down to who gets in and out of the market first. How accurately your orders are filled at market is a product of your broker’s performance. If your orders are being routinely filled poorly, then it is time to explore other brokerage alternatives.

Breaking Down The Trade — What To Expect

The goal of this trade is to capitalize upon a bulk of short position stop-loss orders being located in the vicinity of $1293.8. Upon a test of the $1293.8 level, two things are likely to occur creating a bullish bump in pricing:

• A high volume of resting buy orders triggered.
• Momentum and black-box traders joining the bullish price action.

Let’s take a look at a few scenarios that may play out after the trade goes live:

• Price runs to the bull with vigor: This is exactly what we are looking for. Quick, positive price action to our profit target.
• Price grinds higher slowly: Not as desirable, but certainly no reason to panic. As long as the smaller time frame charts (in this case the 1-minute chart) hold symmetry, then all is well.
• Price rejects $1293.8: The worst case scenario comes to be if the market reverses upon entry being hit. In the event that this occurs, a bulk sell order is the likely culprit. Of course, we are only on the hook for 9 ticks — the tight stop-loss makes this scenario a bit easier to handle.
• Price sits at entry: By far, price doing nothing upon entry poses the most challenges. If the market remains slow immediately after hitting $1293.8, then the trade is a “dud.” Taking any available profits or letting the 9/10 risk vs reward play out is acceptable.

Parting Thoughts

It is possible that June gold “gaps up” before the market opens to the public. If the market opens for trade above $1293.8, then all bets are off. We simply missed out on the move, with no opportunity to get in on the action. Due to the fact that this trade goes on the weekly open, a “gap up” is a possibility.

In addition, June gold may sell-off on the open and move heavily to the bear. Should this occur, no harm, no foul. Our orders are simply pulled from the queue at session end. While they can be frustrating, unelected trades do not cost us money!

Scalping is a great way of trading high leverage instruments while limiting capital exposure. Taking small profits can be lucrative — picking up pennies adds up quicker than one thinks.

Be sure to check out the Comments section that is located below this article. Opinions, questions, or thoughts on the trading plan are welcomed. Also, occasional updates and ongoing market analysis are available via the Comments.

The weekly open is rapidly approaching and with it comes opportunity. With any luck at all, our entry in June gold will be hit and the game will be afoot!