Scalping Day Trading Strategy
Scalping is a form of day trading the involves the rapid buying and selling of one or more security, usually stocks, with the goal of suffering only small losses and giving yourself the opportunity of a large number of small gains and also possibly large gains.
By its very nature, scalping involves some factors that work in the trader's favor as well as other factors that work against traders. This article discusses the various factors traders should keep in mind before considering this trading strategy.
Commissions
Since scalping involves very rapid day buying and selling, there are a lot of transactions that will can rack up serious commissions charges. Traders should look for a brokerage that charges a flat fee per month for unlimited trade or charges a smaller fee per share that will keep commissions charges at a minimum. In addition, the principal put at risk needs to be large enough so as to make the commissions negligible as compared to the gains.
Ability to Limit Losses with Stop Losses
One key ingredient to making scalping successful is to use stop losses. This prevents large losses due to rapid movement or the psychological impulse to stay in bad trades hoping for a turnaround. Stop losses aren't full proof however because of gaps, so scalp trades are better done intraday (not held overnight) and on very liquid heavily traded stocks.
Possibility of Large Gains
While trades can have limited losses with stop losses, the upside is unlimited if a stock moves the right way. One strategy that works well is to gradually adjust the stop-loss with upwards (or downwards on a short sale) by giving it enough room not to trigger with small fluctuations but not enough to wipe out large gains. By experiencing larger gains than losses, it is possible for a trader to make money even if more than 50% of trades are losses.
Investing on Margin
Investors that use margin intraday but exit the positions before the market closes generally don't have to pay margin interest on the margin used. Therefore, scalpers can take advantage of the power of margin without paying for it. This increases the buying power and earning potential of the trades.
Work the Spread
The bid/ask spread can work both both for and against scalping trades. Experienced scalpers will use larger spreads to make money on market orders by submitting limit orders. On the other hand, securities with larger spreads are harder to make a profit on because (in a long position) one sometimes must enter on the ask price but sell on the bid.
Related Sites (exchange links with this article)
SF Veritas Financial Education Services - ProTrader Ed's Emini Day Trading Method and Style
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