The Art of Scalping

Discussion in 'Strategy Development' started by schizo, Apr 2, 2010.

  1. schizo


    I wish there was a crash course for scalping when I started out. How ironic that there ain't any even to this day. Interestingly, most of the day traders that I meet are better labeled as scalpers than otherwise. So I would like to start a brainstorm session in the hopes of catering to this ever burgeoning crowd.

    This thread is devoted to all things scalping. Non-scalpers need not participate.

    Let me kick it off by throwing out a couple basic questions for you to chew on:

    1) Just what exactly is scalping for you? 1-tick, 2-ticks, or 10-ticks...or perhaps more?

    2) Do you have a specific system you religiously follow, even if it were just 1-tick, or do you more or less trade by the seat of your pants?

    3) What is considered as the optimal risk:reward ratio? If your goal is to capture, say, 5-ticks, should the stop be smaller than 5-ticks?
  2. 1) Just what exactly is scalping for you? 1-tick, 2-ticks, or 10-ticks...or perhaps more?

    As you probably know, the true definition of futures scalping is 1 to 5 ticks (usually regardless of the instrument), multiplied by 10's or 100's of contracts resulting in 100's or 1000's of contracts traded per day, . Knowing that, from a profitability standpoint it is near impossible for a retail trader to be a "real" scalper for any extended period of time. Commissions, taxes, and a real-life non-100% profitable trade statistic ensure.

    Myself, a chartist/technician scalper/trader, my exits are based on technical analysis of the time frame being used. Sometimes that's 2 or 3 ticks, sometimes it's many multiples of that. A single entry and exit are based on a single time frame. Changing time frame after a trade is on is a no-no. Put on another trade.

    2) Do you have a specific system you religiously follow, even if it were just 1-tick, or do you more or less trade by the seat of your pants?

    Your question applies to all types of trading! Scalping is not an exception. Seat of your pants?? WTF is that?! Even if it were just 1 tick?? WTF is that?! Who the fuck cares how many ticks? You play not to lose. You play so you can play again. If you do not have a well defined set of rules for entry, maintenance, and exit of a trade, AND the discipline to honor those rules you are merely playing a video game, and you will lose. Period.

    3) What is considered as the optimal risk:reward ratio? If your goal is to capture, say, 5-ticks, should the stop be smaller than 5-ticks?

    There is no such thing as optimal risk/reward for scalping. You are just accumulating ticks. End of day result is all that matters. If you want to capture 100 ticks today, you must be prepared and willing to lose at least 100 ticks today. Stops are the things that allow you to go pee without fear of blowing up. Who the fuck cares how many ticks that is? If you are honoring your trade entry, maintenance, and exit rules this question answers itself.

    Good trading to you
  3. Cheese


    Since being a member of ET I usually write on the same theme. Use the intraday gyrations of price. Buy the upmoves and sell the downmoves. You have to translate that into a reliable methodology.

    However, scalping would appear to have attractions for the amateur or new amateur. Instead of the word scalping, I use the phrase, short-term target trading. The optimum play is a target at or in the upper levels of your range, assuming a liquid and volatile futures market (eg CL) is going to be used. The difference is that the player is micro-trading with a fast chart and that while he is still buying the upmoves and selling the downmoves he is exiting on a specific target.

    A stoploss is not necessary if the player is using a designed methodology. The player exits at target or earlier. If for example the player buys and it does not run to his target, his system provides the trigger to close. That close will also be the same trigger to sell subject to any conditions the player's system includes.

    Without going into detail, there are a few on-the-chart indicators which can be adapted to set up and run your short-term target trading system.
  4. I find "scalping" with a specific (fixed tick amount) target is a losing game. A scalper should
    not limit himself but take whatever the market is willing to give in a specific situation. If you learn to read the tape or the charts, you will find situations where the price will probably move 10, 20, 30 or more ticks within 5 minutes.

    These are the situations a scalper should look for, patiently waiting instead of chasing the market and running for 1-2 ticks hundreds of times a day.

    A good scalper can live with 2-3 trades a day.

    A Stoploss is essential because of the high leverage a scalper uses. There should always be a disaster Stoploss for the case of disconnects. People with difficulties with discipline and trading psychology also should have a fix SL to protect themselves.

    The size of the SL depends on the waves one wants to capture. If for example one wants to capture 5minute waves, the disaster SL should be at the long term (like 500 period) ATR of the 5Min. chart.
    The maximum lot size should be one that gives you max. 2% loss hitting your disaster stop.

    5Min waves one has to capture from a lower Timeframe (1Min or less, tick charts or range charts or the tape.)

    The target is open. Just get out when you see the wave is stopping, weakening or reversing.

    Always get out as soon as you detect the PA is not doing what you expected. Do not wait for the price to hit your disaster Stop.
  5. achilles28


  6. 1. Scalping, I think, is not defined by the number of ticks, but we refer to the fact that one fixes, for each trade, a minimum given amount and, when price moves more than that, you promptly grab the profit.

    Clearly, smaller is the amount, more frequent are scalps, larger is possible drawdown (as well as possible profit).
    If scalps are too small, commissions may be very important. Profit increases much more than linearly when scalp size reduces (but also drawdown does).

    The size of the scalp should also depend on capital available, and drawdown one can withstand.

    May also want to change the entry size dependig on market conditions.

    The real challenge are effective hedging schemes. Scalps should be "arranged" (in automated systems) in such way they also provide a "hedging action".

    2. 3. ...

  7. A scalper is a newbie who has not figure out yet a way to go for the big bucks with position trading or trend-following.

    You asked for a definition, didn't you?

    By the way, do not confuse scalpers with professional HFT or pit traders who see the order flow. Your average scalper is a noise trader.
  8. Please can you elaborate on this?


  10. schizo


    With the exception of the uninvited nonscalper, thanks goes out to you all for sharing your variegated experience as scalpers. As for myself, of course I know what scalping is and how tough it is to make a living as a retail trader. But I also firmly believe that you need to fully understand what scalping is in order to become a successful trader.

    Now I would like to expand the subject of scalping a bit. Scalping these days is not the same as it was in the early part of the Internet revolution. With the emergence of HFT, the rule of the game has completely changed. Hence, it's crucial to understand the market dynamics from the angle of HFT.

    For those who are unfamiliar with HFT, I suggest you check out this video and other related videos in that series:

    <object width="400" height="230"><param name="allowfullscreen" value="true" /><param name="allowscriptaccess" value="always" /><param name="movie" value=";;show_title=1&amp;show_byline=1&amp;show_portrait=1&amp;color=&amp;fullscreen=1" /><embed src=";;show_title=1&amp;show_byline=1&amp;show_portrait=1&amp;color=&amp;fullscreen=1" type="application/x-shockwave-flash" allowfullscreen="true" allowscriptaccess="always" width="400" height="230"></embed></object><p><a href="">High-frequency trading</a> from <a href="">Marketplace</a> on <a href="">Vimeo</a>.</p>
    #10     Apr 3, 2010