We can take the two-tiered model and extend it to three or more tiers. In this way, the trader gets an understanding of the relative profitability of various scale-out strategies.
A two-tiered, scalp-then-swing strategy almost doubles expected trade value over the baseline scalp. For some, the two-tiered strategy has psychological benefits: The scalping portion gives an early successful trade then establishes a "no-lose" position for a possible winning runner.
Compression and price action
Some price action scenarios can suggest a move from a scalping to a swing-trading mentality. One of the best known is a breakout from a period of price compression. Some technicians draw a correlation between the duration and narrowness of a consolidation and the strength of a subsequent breakout. If the trader has entered the market in the direction of a breakout following a well-defined compression, then a swing trade becomes the goal.
Breakouts that occur off key price levels, for example the first-hour high or low or the previous day’s high or low, may help convince the trader that a sizable move is afoot and every attempt should be made to keep a position open.
Likewise, if a trade entry is believed to be near the day’s high or low, then consider leaving the trade on. Some traders practice intraday swing trades and scalps simultaneously, even on the same contract using multiple accounts. Generally, a swing position that uses perceived intraday highs or lows can be left open with a relatively small number of contracts, perhaps using wider trailing stops.
The trader who understands the pros, cons and relative profitability of scalping vs. swing trading is better equipped to sustain success in today’s markets. Ultimately, the active trader may need to employ both approaches to be successful, taking advantage of the risk controls and rewards that both strategies provide.
For 20 years Michael Gutmann was a software engineer and manager at Intel Corp. He trades his system daily and recently has published the second edition of a popular trading text: "The Very Latest E-Mini Trading: Using Market Anticipation to Trade Electronic Futures" (2nd Edition). He can be reached via www.anticipationtrading.com.