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Anchor Points: Scalping Options

Anchor points refer to levels of significance that traders may use as a reference for making decisions about when to enter or exit trades. They are often used as a simple way to confirm or negate a trade. Additionally, this concept of anchor points is often applied as a proactive risk measure across various strategies and time horizons. Let's explore how to effectively use anchor points for trade entry and how they dictate the confirmation or negation of a trade.


In trading, Gamma levels often take precedence as our preferred anchor points for making decisions. However, in a scalping approach that aims to profit from quick momentum moves, Gamma levels may not always be nearby. In such instances, other levels can be used, including market structure/trendlines, VWAP, recent highs or lows, psychological round numbers, etc.


Example

Trade Thesis: Let's consider entering a long trade off an upsloping trendline, assuming the price will hold this significant level and rise in the short term. This trendline becomes our anchor, the decisive factor for confirmation or negation.



Confirmation occurs as long as the price holds above the trendline, validating the viability of the long trade.


Negation occurs if the price breaks below the trendline, rendering the initial trade setup and thesis invalid.


Stop Loss

Having an exit strategy in place in case the price breaches the anchor point helps limit potential losses. Since the negation signal is very close to the entry point, losses are minimal when proven wrong.


Of course, levels can experience false breaks. To safeguard against this, one could set a stop slightly beyond the anchor point to prevent such occurrences or wait for a candle to close above/below the anchor point. Alternatively, one could always re-enter if a false break occurs.


When scalping single options, I personally don't use a hard stop; instead, a more flexible, soft stop. This approach allows for flexibility while ensuring the trade doesn't move too far against the position. Every situation is different.


Additional Indicators & Confluence

Using additional indicators alongside anchor points can make trade decisions stronger. This might involve integrating momentum cycles, market internals, or other preferred indicators.


When your anchor intersects with more than one level of significance, this is referred to as ‘Confluence” and increases the likelihood of seeing a favorable reaction.


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