The Art of Scalping

schizo · Apr 4, 2010

Quote from Dackster:

To try and view the market in the terms or context of big and small is somewhat self defeating, because the bigger players will size down and become more frequent. The market works in a collective or composite manner.
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That's what I meant by "a flood of 1 lot crossing the tape within a matter of seconds." The order flow is still there, only more rapid in speed. However small the orders get chopped down in size in order to cover their tracks, they still must get printed on the tape. Of course, they're not so readily apparent but if you look hard enough you can see some distinct patterns.

MohdSalleh · Apr 4, 2010

Remember

"The art of scalping is of vital importance to the trader. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected."

Dackster · Apr 4, 2010

Quote from schizo:

That's what I meant by "a flood of 1 lot crossing the tape within a matter of seconds." The order flow is still there, only more rapid in speed. However small the orders get chopped down in size in order to cover their tracks, they still must get printed on the tape. Of course, they're not so readily apparent but if you look hard enough you can see some distinct patterns.
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Absolutely.

This is where prop traders have an edge over the retailers. They have no spread to pay, so working within the bid/ask is profitable and strategies like low ticking can be implemented properly.

LoosenUp · Apr 4, 2010

Quote from Dackster:

Absolutely.

This is where prop traders have an edge over the retailers. They have no spread to pay, so working within the bid/ask is profitable and strategies like low ticking can be implemented properly.
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I dun have any idea about prop trading at all. Why is it that they have no spread to pay? What do you mean by working within the bid/ask? Can't retailers do that as well?

schizo · Apr 4, 2010

Quote from gianthorn:

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 stocks will complete the first stage of a movement (a stock will move in the desired direction for a brief time but where it goes from there is uncertain); some of the stocks 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 stock to make a 10 cent move than it is to make a $1 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. Quote systems Nasdaq Level II, TotalView and/or Times and Sales are essential tools for this type of trading. Automatic instant execution of orders is crucial to a scalper, so a direct-access broker is the favored weapon of choice.

Supplementary Style
Traders of other time frames can use scalping as a supplementary approach in several ways. The most obvious way is to use it when the market is choppy or locked in a narrow range. When there are no trends in a longer time frame, going to a shorter time frame can reveal visible and exploitable trends, which can lead a trader to scalp.

Another way to add scalping to longer time-frame trades is through the so-called "umbrella" concept. This approach allows a trader to improve his or her cost basis and maximize a profit. Umbrella trades are done in the following way:

* A trader initiates a position for a longer time-frame trade.
* While the main trade develops, a trader identifies new setups in a shorter time frame in the direction of the main trade, entering and exiting them by the principles of scalping.

Practically any trading system, based on particular setups, can be used for the purposes of scalping. In this regard, 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 or her position for a scalp trade at $20 with an initial stop at $19.90, then the risk is 10 cents; this means a 1:1 risk/reward ratio will be reached at $20.10.

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 a cup and handle or triangle, can be used for scalping. The same can be said about technical indicators if a trader bases decisions on them.

Three Types of Scalping
The first type of scalping is referred as "market making", whereby a scalper tries to capitalize on the spread by simultaneously posting a bid and an offer for a specific stock. Obviously, this strategy can succeed only on mostly immobile stocks that trade big volume without any real price change. This kind of scalping is immensely hard to do successfully as a trader must compete with market makers for the shares on both bids and offers. Also, the profit is so small that any stock's movement against the trader's position warrants a loss exceeding his or her original profit target.

The other two styles are based on a more traditional approach and require a moving stock where prices change rapidly. These two styles also require a sound strategy and method of reading the movement.

The second type of scalping is done by purchasing a large number of shares that are sold for a gain on a very small price movement. A trader of this style will enter into positions for several thousand shares and wait for a small move, which is usually measured in cents. Such an approach requires highly liquid stock to allow for entering and exiting 3,000 to 10,000 shares easily.

The third type of scalping is the closest to traditional methods of trading. A trader enters an amount of shares on any setup or signal from his or her system, and closes the position as soon as the first exit signal is generated near the 1:1 risk/reward ratio, calculated as described earlier.

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.
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So it turns out that you folks are merely regurgitating what's already written elsewhere on the Internet, eh?

Thanks but this identical description of scalping, word-for-word might I add, has already been posted above. Why do you folks omit references?!!

Here's the proper reference: http://www.investopedia.com/articles/trading/05/scalping.asp

schizo · Apr 4, 2010

By the way, I was asking what YOUR definition of scalping is derived from your own experience, not a textbook definition!

schizo · Apr 5, 2010

Well, I ain't no moralist but ya should have cited the damn source for the article that you've ripped off. Plus, it speaks volumes about your character, both as a human being and a trader (since you lack knowledge about the subject matter you pretend to claim as yours.)

Anyway, enough said about plagiarism.

trader#21 · Apr 5, 2010

someone quoting articles from a encyclopedia and thinks that the general public information will be useful for some 7 year olds looking to complete a school project, such a fantastic job.

this thread is done

schizo · Apr 5, 2010

Quote from trader#21:

someone quoting articles from a encyclopedia and thinks that the general public information will be useful for some 7 year olds looking to complete a school project, such a fantastic job.

this thread is done
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Well, you already know where I hang out during the day. Just head over to CL Redux and I'll be more than happy to take the other side of your trade.

Scalp on!

fullautotrading · Apr 5, 2010

Quote from schizo:

Well, I ain't no moralist but ya should have cited the damn source for the article that you've ripped off. Plus, it speaks volumes about your character, both as a human being and a trader (since you lack knowledge about the subject matter you pretend to claim as yours.)

Anyway, enough said about plagiarism.
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) ahah poor schizo! It's not nice to see, in a thread one has started, material that can be found on the web, as the value of this forum should be mostly that of exchanging personal opinions and experience.

Anyway, I tried to be original and honor your thread. Did you like my personal definition about what is the art of scalping ?

[Another thing I personally think, as a constructive criticism, is that the very questions you place may cause answers in a direction which is already abused, and well known not to be working.]

Tom