As a trader who has found his "pond" in scalping, I will try and give my take on what scalping is, how it's done, what pro and contra of this trading style are.
Please keep in mind that it's my personal take, other scalpers might have (and I am sure do have) different point of view.
Definition
Scalping is often defined as trading for fairly small gains, like 1/8 or 1/4. For me scalp is defined as trade where I do not allow stock to go against me, no matter at what point of trade stock weakens. If I bought stock at 20 1/8 and it went to 21 with no downtick, paused at 21, ask got stronger, bid has weakened and sellers started to nail the bid - I am out and this is scalp. If the same has happened at 20 1/2 or 20 1/4 - I am out and this is scalp, no matter what profit I took: 3/4 in first case, 3/8 in second, 1/8 in third. If I bought at 20 1/8, stock never went higher and bid 20 got hit - I am out with -1/8. In order to get out not allowing stock to downtick on me I often have to sell into strength (selling when you can, not when you have to).
What are scalp setups?
For me, it's any of pivotal points: intraday low on stock that dumps on bad news and pauses, intraday high on uptrending stock that shows signs of breakout, bottom of pullback on uptrending stock (for shorters it all could be applied in reverse of course). To initiate long scalp trade I also want to see signs of momentum: strong bid, thinning ask, prints at and above the ask.
Tools and method of reading
Level 2 is must. So is Times & Sales. I do not use charts although many do. Tape reading is what I prefer (again, it's just personal preference - there are traders that use stochastic or other indicators when looking for reversal). When I say tape reading I mean classical principles of it: accumulation, distribution, capitulation, euphoria stages of stock movement. Do they always work? Of course not, as no indicators work all the time.
Some psychological implications
In trading reasons for movement are usually irrelevant ("chart knows better"). In scalping reasons are as irrelevant as it gets. News, hype, short covering, bottom hunting, value buying, TA setup - any of these reasons could be valid to initiate scalp trade. Extreme example: several months ago I bought the stock on very good news (that was some cheapie, I think OSFT, not sure). The catch was: while headline sounded really great, if you read further you would notice that it was news for company with the same name but not publickly traded. I considered traders were likely to identify symbol by name but not read the whole thing right away. Stock went up about 1/2 and I hit sell button as soon as someone said in free chatroom 'It's not right company!" Not justifying anything I just use it as example of reason irrelevance. Scalping is a game of blinking numbers, scalper knows pattern of their blinking and goes with this pattern, ignoring such things as company reputation, value etc. People's behavior at pivotal points is all that matters. Scalper should be extremely cold-blooded, pretty fast on trigger, has to have lightening reaction and good execution technique. Stock either does what you bought it for or you are out with no second guessing, reasoning for staying in it, plan changing as situation changes. Each trade is "self-contained" - it doesn't matter where the price of new entry is comparing to previous one. You buy where setup has occurred. Scalper has to be prepared to see stock going way higher from his sell point not giving him setup for new entry - that's one of the biggest downside points of this style.
How risky this style is?
Answer is tricky... It's one of the toughest styles to learn and risk is pretty big if you try to start with it. At the same time if you mastered it, scalping is one of the safest ways to trade since your control over the trade is as close to absolute as it's possible.
Some miscellaneous points
Scalper usually buys with buyers and sells with buyers. If you buy with sellers, your timing has be impeccable. if you have to sell with sellers, your timing on sell side is most likely off.
You need to be more precise in your trades picking and entry timing. Your average win/loss ratio mostly is not as favorable as it is for good trader operating in longer timeframe, so your percentage of winning trades should be higher. It's one more downside to scalping.
It's very important for scalper to recognize familiar situation in a blink of eye. Intuition plays big role in successful scalping.
By no means beginner should try to learn this style from the start of his trading career. Scalping is something you should come to only if your personal temperament leads you there.
To make scalping worthy one has to play usually 1000 shares. So, make sure liquidity is there. Thin issues could be scalped successfully on as small lots as 200 shares tho.
Be aware of your execution capabilities. Even stock with thick levels could be pretty dangerous if trades with very fast pace and huge volume (CTXS today is example).
Scalper usually generates more in commissions comparing to other style traders. If this is of concern for you, do not scalp. If you do, forget commissions. 1/8 on 1000 shares is $85 for you right from the start, do not think of it as of $125 profit and $40 cost of the trade.
Scalping is about consistent gains, not about big gains. Scalper has no chance to get rich overnight.
Equipment should be right. I wouldn't attempt to scalp with online broker, or with 33,6K modem.
Reasonable question: with all downsides listed above, why to scalp?
Well, there are upsides as well. Good scalper is very consistent and his exposure to market (and it means risk) is very small. He/she is in control all the time.
One more important thing: no matter what market does (unless it's plain dead), scalps are almost always there. It's more universal style of trading market conditions wise.
Consistent gains are great for confidence support and for constant good feeling about oneself.
Probably, there is more to say but this ballad is already fairly long... If I missed something important I'll get back to it in a course of discussion.
Vadym |
