As Gary noted in his post, the price of commissions makes a big difference in this flavor of the game. With $55x700 = $38,500, doing what Gary does, but paying the costs I incurred would turn that $6,700 gain into an $10,800 loss!! ($27,700-$38,500) That tends to color ones thinking about the ratio of winners to losers one needs to achieve in order to turn a profit.
Dan,
Absolutely excellent analysis, thank you!
1. Commissions are, as you point out, the most important factor determinative of whether a scalper can make a profit. If Fidelity were to up their commissions just a little bit (above 15/trade), my scalping activities would grind to a halt.
2. Trade size is important as well. Before Fido eliminated aggregation, my commission was only $2.80 a trade. Still, I made the same as I am now. The reason: My trade size back then was only 200 shares (which, in retrospect, was a mistake; the lots should have been larger). I later accomodated the increased commission by increasing my lot size, from 200 shares to 500 shares.
3. There is, however, a limit to lot size. I've recently experimented with 1,000 share lots (same $15/trade commission). However, that lot size seems to exceed autoexecution limits all too often, and left me with unfilled orders, or orders that took substantially longer to fill than the standard 500 share order.
4. Low commissions and acceptable lot size won't work, however, if the execution systems are not acceptable. I had tried a move to DLJDirect when Fido took away my live broker access (i.e., on the line with a broker for 90 minutes at a time). While DLJ was actually less expensive due to its 5,000 share aggregation rule, the fills were unacceptably slow and losses resulted. Similarly, I've opened an account at ABWatley for trading. While the Watley data feed is exceptional (and is what I now use for data), the fills on the trades, and the partial fills, were not comparable to those at Fidelity (at least for my trading style), so I consistently lost money scalping there.
5. All in all, the razor thin profits that scalping generates (for me) clearly do depend upon a fortuitous combination of commissions, tradeable lot size and systems performance.
Now about the losers. I'm wondering about the exit decision process from the following viewpoint. if I trade a stock with a spread of 1/16, unless I manage to limit into the position across the spread (buy at the bid or sell at the ask), I am immediately down 1/16 (plus the ticket costs, of course) and in jepoardy of dropping another 1/16 on the next tick. So what is it that makes you decide to get out with your 1/16 loss, when that loss is staring you in the face from the outset? Do you get out everytime a trade moves one tick against you, or before when you see the bid/ask size ratio going the wrong way? Do you get out if it doesn't move your way within some predetermined time? Do you manage to get out flat, or with a small loss on a lot of trades where you could have taken a 1/16 or 1/8 profit but did not because you want to ride your winners and find the risk of slipping back acceptable?
1. The short answer to this question is as follows: I first enter a trade when Level 2 suggests a good list of buyers, few sellers, with trades going off at the ask. I therefore get out of the trade when that scenario evaporates. That may happen the second I get in, or it may happen minutes later. If a trade is successful, say up 1/2 point, I'll be more willing to give up 1/16th to see if things turn around. However, if things sour before any success accumulates, I get out, and I get out fast. That can often mean an instantaneous 1/16th loss, plus commission.
2. The short answer is fine tuned with experience. For example, I'm not terribly spooked when MASH (Schwab) shows up on the ask, even with size. I am spooked, however, when INCA appears with the same size.
Let me guess that his losers (including flats) outnumber his winners 2:1, and that on the average his loss is 1/16. Then the average winner must be about 5/16: (-2*1/16 + 5/16)/3 = 1/16
I think you are about right on the size of the average winner. Overall, as I said, an exceptional analysis. Bravo!
Best,
Gary Korn |
