What Is Scalping?
Scalping is a trading strategy geared towards profiting from market moves on a small timeframe like minutes or seconds. Traders who implement this strategy place anywhere from 10 to a few hundred trades in a single day with the belief that small moves in stock price are easier to catch than large ones; traders who implement this strategy are known as scalpers. Many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses.
Why Scalping
Some prop firms use borrowing money for asset allocation between their top-performing traders, there are lots of prop shops that give money to talented traders. The bonuses of Prop Traders in the US range from $42,373 to $793,331, with a median bonus of $203,679. The middle 57% of Prop Traders makes between $203,679 and $400,084, with the top 86% making $793,331.
Basics of Scalping
Scalping utilizes larger position sizes for smaller price gains in the smallest period of holding time. It is performed intraday. The main goal is to buy or sell a number of shares at the bid—or ask—price and then quickly sell them a few cents higher or lower for a profit. The holding times can vary from seconds to minutes, and in some cases up to several hours. The position is closed before the end of the total market trading session, which can extend to 8 p.m. EST.
Type of strategies
Scalpers buy low and sell high, buy high and sell higher, or short high and cover low, or short low and cover lower. They tend to utilize Level 2 and time of sales windows to route orders to the most liquid market makers and ECNs for quick executions. The point-and-click style execution through the Level 2 window or pre-programmed hotkeys are the quickest methods for the speediest order fills. Scalping is not purely based on technical analysis and short-term price fluctuations and also on fundamentals catching big trending moves. Due to the extensive use of leverage, scalping is considered a high-risk style of trading.
Some of the common mistakes that scalpers make are poor execution, poor strategy, not taking stop-losses, over-leveraging, late entries, late exits, and overtrading. Scalping generates heavy commissions due to the high number of transactions. A per-share commission pricing structure is beneficial to scalpers, especially for those who tend to scale smaller pieces in and out of positions.
Psychology Behind Scalping
Scalpers need to be disciplined and need stick to their trading regimen very closely. Any decision that needs to be made should be done so with certainty. But scalpers should also be very flexible because market conditions are very fluid and if a trade isn’t going as expected, they’ll need to fix the situation as quickly as possible without incurring too much of a loss.
Why scaling within a group of traders and hiring a risk manager
Trading alone from home is not a great idea, based on my experience group of traders with risk managers always have an edge of more ideas and cutting losses quickly avoiding gambling that mostly happens when traders trade alone at home.
