Traderpedia

Scalping

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Definition:
The term used for a day trade method where trades are opened and close within a very short time scale, perhaps anything from a second or two to a few minutes.


One who employs this methodology is referred to as a scalper.

Contents

[edit] Trade Frequency

Scalpers tend to make several, perhaps hundreds of trades a day, accruing a number of small profits into a respectable daily total. Losses per trade tend to be minimal, from scratch to a few ticks at most. A scalp trade would certainly never be held overnight.

[edit] Requirements

  • Price spreads and commissions must be as low as possible in order to reduce the cost of doing business to a realistic proportion of turnover.
  • Data provision and execution must be fast
  • Adequate liquidity
  • A sufficiently large capital base in order to make the small targets and time spent monetarily worthwhile.

Scalping is sometimes referred to as 'the quick and the dead', as it takes a lot of mental discipline, intense focus and quick reactions to be able to scalp successfully and most people would agree that it is not for the novice trader.

[edit] Scalping Strategies

Some scalpers work around the bid/offer, buying on the bid and selling on the offer to pocket the spread, or perhaps a tick or two more. This is perhaps the "purest" form.

Slightly longer term scalp trades (there's an oxymoron!) are generally taken from three different trading patterns:

What sets a scalper apart from other traders is that the profit target is likely to be small. While a longer term breakout trader might wait for the breakout to turn into a trend, the scalper will generally be happy to pocket a few points during the frenetic trading activity as the breakout occurs. (S)he may well trade in large size with an eye on the order flow in order to spot the optimum time to enter and exit.

Some traders will scale out most of their position for a scalp but leave some on, in order to capitalise on further price movement, should it appear. Different market conditions often require different approaches so scalping can be a tool in the trader's box as opposed to the method always used.

In most cases, and certainly for the shortest term of scalps, traders will require some knowledge of the order book, coupled with time and sales and possibly also Level II. Some scalpers work principally off the order book, reading the tape rather than making purely chart-based entries and exits.

[edit] Advantages

  • Very effective use of capital with minimal risk per trade.
  • High percentage win rate.
  • Suitable for the impatient trader who is prepared to devote a lot of time and continuous focus to the market.
  • Event risk is small as the scalper will usually be almost certain of a fill at the chosen exit point even if conditions suddenly change.
  • Knowledge of fundamental analysis not required, although scalpers should be aware of news and/or earnings releases.

[edit] Disadvantages

  • Intense, draining and demands a lot of screen time. Accurate timing is vital.
  • Trading platform, data provision and connection the the exchange often expensive.
  • Danger of "death by a thousand cuts" to the inexperienced.
  • Higher cost per unit of profit than longer term strategies.
  • Requires complex knowledge of market structure and order flow.
  • Can be stressful
  • Not suitable for spread betting.

[edit] See also

[edit] T2W links

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