Scalping : Small Quick Profits Can Add Up
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 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.
A scalper intends to take as many small profits as possible, not allowing them to evaporate. This 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 with 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 while keeping profits roughly equal or slightly bigger than losses.
Scalping as a Primary Style
A pure scalper will make a number of trades a day, perhaps in the 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 in as close to real time as possible. Supporting systems such as Market Advance Predictor (MAP) is essential for this type of trading.
- Smaller moves are easier to obtain: A bigger imbalance of supply and demand is needed to warrant bigger price changes. For example, it is easier for a stock to make a Rs.10/- move than it is to make a Rs.100/- move.
- Smaller moves are more frequent than larger ones: Even during relatively quiet markets, there are many small movements that a scalper can exploit.
Tips for Novice Scalpers
With low barriers to entry in the trading world, the number of people trying their hands at day trading and related strategies such as scalping has increased. Newcomers to scalping need to make sure the trading style suits their personality. Scalping requires traders to follow a disciplined approach, make quick decisions, spot opportunities and constantly monitor the screen. Traders who are impatient and feel gratified by picking small successful trades are perfect for scalping.
That said, scalping is not the best trading strategy for rookies, as it involves fast decision-making, constant monitoring of positions and frequent turnover. However, there are a few tips that can help novice scalpers.
Order Execution: A novice needs to master the art of efficient order execution. A delayed or bad order can wipe out what little profit was earned and even result in a loss. Since the profit margin per trade is limited, the order execution has to be accurate. As mentioned above, this requires supporting systems such as Market Advance Prediction [MAP] Software.
Frequency & Costs: A novice scalper has to make sure to keep costs in mind while making trades. Scalping involves numerous trades, as many as hundreds during a trading session. Frequent buying and selling is bound to cost in terms of commissions, which can shrink the profit. This makes the decision to choose the right online broker crucial. The broker should not only provide the requisites like direct access to markets, but also competitive commissions.
Trading: Spotting the trend and momentum comes in handy for a scalper, who can even enter and exit briefly to repeat a pattern. A novice needs to understand the market pulse, and once the scalper has identified that, trend trading and momentum trading can help achieve more profitable trades.
Trading Sides: Beginners usually are more comfortable with trading on the buy side and should stick to that before they gain sufficient confidence and expertise to handle the short side. However, scalpers eventually must balance long and short trades for the best results.
Technical Analysis: Novices should equip themselves with basics of technical analysis to combat increasing competition in the intra-day world. This is especially relevant in today’s markets dominated by high-frequency trading, as well as the increasing use of dark pools.
Volume: Scalping as a technique requires frequent entry and exit decisions within a short time frame. Such a strategy can only be successfully implemented when orders can be filled, and this depends on liquidity levels. High-volume trades offer much-needed liquidity.
Discipline: As a rule, it is best to close all positions during a day’s trading session and not carry them to the next day. Scalping is based on small opportunities that exist in the market, and a scalper should not deviate from the basic principle of holding a position for a short time period.
The Bottom Line
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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