Great post, Vadym. I'd emphasize a point you made in passing: technical conditions. When you scalp, you are particularly vulnerable to problems such as slightly slower quote feeds, software problems and other purely technical issues.
Another point - I have found that when I do scalp, I tend to amend my style ever so slightly on stocks I really know well. F.ex. the point that you made "every trade is a separtate event" is very true - in principle. Yet, I find this: for a small number of stocks, that I follow extremely closely, on a daily basis, I change my style to accomodate what I "know" about the stock, and it includes information which I otherwise cannot use on a stock I don't follow. For such stocks, I see patterns that I recognize - I have a better feel for which MM is dominant, how the MMs in this stock tend to behave, how ECNs are used in this stock, what the institutional activity tends to be like, who the retail traders are and how they tend to behave, how the stock reacts to news, average volatility and size of reaction etc. This allows me f.ex. to stay in a trade even if it *appears* to be going against me, because I know that f.ex. the a given MM has very temporarily dropped a bid to take out some stops, and it would make no sense for me to get spooked out of a trade as I would be unable to get in at the "lower" price that lasts 2 seconds and was a "head-fake" (no execution). Also, to *some* degree, the principle "every trade is a separtate event" becomes modified for me in such stocks - I do find it important to follow the trading action tick by tick all day, and at that point, I feel as if I am "in synch", like a shadow, with the stock, and what happened half an hour ago, can give me information and insight on how to behave in a much later trade. Thus, if I trade such stocks, I can find a lot more trades than in stocks I don't know as well. Of course, the downside is that you have to devote yourself to that stock (or stocks), and give it a huge amount of energy - for months if not years (f.ex. I have been trading NITE for 18 months). If I am scalping a stock I don't know as intimately, I would tend to follow a more "general" rules - I don't know the particular characteristics of the stock, and I tend to trade much more sparsely, pretty much following the rules you outlined.
Another issue, is that while trading psychology is the same (inflection points, panic, enthusiasm etc.), if you scalp for a living, you cannot take a "vacation". You must pretty much scalp every day, because the trading environment changes constantly. F.ex. the way ECNs are used changes every 3 months on average (and f.ex. ISLD has changed very radically, with the greater participation of MMs on ISLD). If you don't keep up with these developments as a scalper, you can take a nasty spill. If I don't scalp for a while, I usually take it slow to get to know what happens before I scalp again, even if I've been position trading intraday all along. If you are going for bigger point trades, and not scalping, these smaller issues of how ECNs are used, how MMs are behaving now, are less important, though still a factor in entry/exit points.
Morgan |
