The Basics Of Scalp Trading PDF Print E-mail
Written by Ben Tippen   
Saturday, 02 October 2010 15:42
Scalp Trading is a word that is tossed around a great deal when you hear day traders speak but actually scalp trading is a certain technique of day trading. It is a form that consists of a large frequency of order tickets with a earnings target of only a small amount of pennies. The return occurs from the size of the orders. A typical scalp investor at a lot of of the Proprietary Trading Firms employs approximately 5,000 and 15,000 shares per position with the even larger investors going up to two hundred thousdand shares for every position. This type of investing is not necessarily usually carried out by retail investors on retail accounts for a couple of main reasons, great price structure and exclusive order routes.
by BenTippen


Scalp Trading is a word that is thrown about a great deal any time you hear day traders talk but really scalp trading is a unique approach of day trading. It is a style that consists of a substantial frequency of order tickets utilizing a earnings target of only a few cents. The profit comes from the size of the orders. A typical scalp investor at almost all of the Proprietary Trading Firms utilizes among 5,000 and 15,000 shares for every position with the greater investors going upwards to 200,000 shares for each trade. This method of trading is not usually done by retail traders on retail accounts for two major motives, excellent cost structure and unique order routes.

The commission framework which the common retail broker offers you is too pricy for this style to be feasible. Most retail brokers may offer you $6 to $7 per one thousand share trade with the better bargains close to $5. A scalp trader needs to be capable to earn money from merely a 1 penny move. So even with the best retail deal of five dollars, a 1 penny move would make you $10 but would cost you ten dollars ($5 to acquire and $5 to get rid of) in commissions which would leave you $0 net profit. At a Proprietary Trading Firm, investors can easily get a commission structure anywhere from 30 cents to $1 per 1000 shares. Now if you do perform the sum: a 1 penny move with 1000 shares grosses $10 however will simply cost you 60 pennies to $2 which of course gives you a more desirable net profit margin.



This takes us to ECNs and who we should be routing your orders through. If you add liquidity to the order book additionally recognized as the level 2 then ordinarily the ECN you sent to will give you a kickback. Having said that, if you remove liquidity from level 2, the ECN will charge you. You may perhaps be contemplating exactly what does it necessarily mean to take or add liquidity? Well as an analogy; imagine you intend to acquire a car. You open a auto trader magazine. In the front section of the journal are adverts from individuals who would like to acquire automobiles. These people are detailing the mileage and value they are ready to spend. Now in the back section of the magazine are folks advertising autos for sale. Well you may be questioning why don't the individuals in the front part of the journal call the folks in the back segment of the journal? This is because there is a variation in price amongst what the buyers wish to buy at and the sellers intend to sell at. Now these individuals whom have put these adverts in this car journal are all adding liquidity. The persons whom read the magazine and ultimately either sell their automobile to one of the purchasers or acquire a automobile from one of the sellers are removing liquidity. This is actually how the stock market works and the left side of the level 2 screen is like the front section of the car journal and is referenced to as the "BID". The right side of the level 2 screen is like the back segment of the auto journal and is referenced to as the "ASK" or "OFFER".

I pointed out previously the ECN routing. So just what is an ECN? ECN is an abbreviation for for Electronic Communication Network. Any time you look at the level 2 monitor you will view distinct ECNs, Exchanges and Market Makers at each price level and it is your choice which one you transmit your orders to. Your selection will be primarily based on how quickly the route will fill your trade as well as how much it will cost you or how much your rebate will be dependent on whether or not you are adding or taking liquidity.

Exclusive routes: Several routes will fill you extremely fast but will still charge you even though you are supplying liquidity. It is these routes that retail investors buying and selling using retail accounts don't have access to. Investors at Prop Trading Firms will have access to these routes passing along to them an edge above the competition. These specific routes are not crucial to being effective in scalp trading though they do make the job much less difficult.

Now that you are aware of what scalp trading is, you will need to understand the required tools. The most critical instrument is your platform. You will need a Level 2 Direct Access Trading System which there are a number of to pick from.

You will additionally require a news service such as Briefing or Trade-The-News. When scalp trading, you must be observing a small number of stocks. They should really be lower priced and have very good volume on the Bid and Ask.

Pertaining to each one of the stocks you play you ought to have a level 2 display and also time and sales. Equally, you ought to have a daily graph for each one of the stocks you watch. Believe it or not, the daily graph is the most crucial chart for intra-day traders, which also includes us scalp traders. And finally, you ought to have a 5- and 15-minute chart of the overall market. To see the market, the Standard and Poor is ideal. You can view this by watching the ES futures or the SPY. There are various other items you may desire to include to this set-up which I will cover in my subsequent article, but the above are the most valuable.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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