Scalping, a modern interpretation

Discussion in 'Strategy Development' started by algahelga, Oct 30, 2009.

  1. Scalping is a trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable.
    It requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains that the trader has worked to obtain.
    Having the right tools such as a live feed, a direct-access broker and the stamina to place many trades is required for this strategy to be successful.

    Scalping is based on an assumption that most futures contracts will complete the first stage of a movement
    (a contract will move in the desired direction for a brief time but where it goes from there is uncertain);
    some of the contracts will cease to advance and others will continue. A scalper intends to take as many small profits as possible,
    not allowing them to evaporate. Such an approach is the opposite of the "let your profits run" mindset,
    which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse.
    Scalping achieves results by increasing the number of winners and sacrificing the size of the wins.
    It's not uncommon for a trader of a longer time frame to achieve positive results by winning only half or even less of his or her trades -
    it's just that the wins are much bigger than the losses. A successful scalper, however,
    will have a much higher ratio of winning trades versus losing ones while keeping profits roughly equal or slightly bigger than losses.

    The main premises of scalping are:

    Lessened exposure limits risk - A brief exposure to the market diminishes the probability of running into an adverse event.
    Smaller moves are easier to obtain - A bigger imbalance of supply and demand is needed to warrant bigger price changes.
    It is easier for a contract to make a 5 tick move than it is to make a 50 tick move.
    Smaller moves are more frequent than larger ones - Even during relatively quiet markets there are many small movements that a scalper can exploit.
    Scalping can be adopted as a primary or supplementary style of trading.

    Primary Style:

    A pure scalper will make a number of trades a day, between five and 10 to hundreds.
    A scalper will mostly utilize one-minute charts since the time frame is small and he or she needs to see the setups
    as they shape up as close to real time as possible. Automatic instant execution of orders is crucial to a scalper,
    so a direct-access broker is the favored weapon of choice.

    scalping can be seen as a kind of method of risk management.
    Basically any trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio.
    This means that the size of profit taken equals the size of a stop dictated by the setup. If, for instance,
    a trader enters his position for a scalp trade at 800 with an initial stop at 795,
    then the risk is 5 ticks; this means a 1:1 risk/reward ratio will be reached at 805.

    Scalp trades can be executed on both long and short sides. They can be done on breakouts or in range-bound trading.
    Many traditional chart formations, such as M and W formations can be used for scalping.
    The same can be said about technical indicators if a trader bases decisions on them.

    A trader enters a position on any setup or signal from his system,
    and closes the position as soon as the first exit signal is generated near the 1:1 risk/reward ratio

    Conclusion:

    Scalping can be very profitable for traders who decide to use it as a primary strategy or even those who use it to supplement other types of trading.
    Adhering to the strict exit strategy is the key to making small profits compound into large gains.
    The brief amount of market exposure and the frequency of small moves are key attributes that are the reasons why this strategy is popular among many types of traders.
     
  2. Fractal

    Fractal

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