Scalp trading Definition
Scalp trading is one of the most challenging styles of trading to master. It requires unbelievable discipline and trading focus. Scalp trading has been around for many years, but has lost some of its allure in recent times. Traders are attracted to scalp trading for the following reasons:
- less exposure to risk
- you can place up to a hundred trades or more per day
- ability to fight the greed, since your profit targets are very small
- greater number of trading opportunities
Years ago when stocks were quoted in fractions, there was a standard spread of 1/16 of a dollar or a “teenie”. This spread allowed scalp traders to buy a stock at the bid and immediately sell at the ask. Hence the teenie presented clear entry and exit levels for scalp traders. The scalp trading game took a turn for the worst when the market converted to the decimal system. The decimal system closed the “teenie” often times to within 1 penny for high volume stocks. This overnight shifted the strategy for scalp traders. A scalp trader now had to rely more on their instincts, level II, and time and sales window.
How to Scalp Trade
A scalp trader can look to make money in a variety of ways. One method is to have a set profit target amount per trade. This profit target should be relative to the price of the security and can range between .%1 – .25%. Another method is to track stocks breaking out to new intra-day highs or lows and utilizing Level IIto capture as much profit as possible. This method requires an enormous amount of concentration and flawless order execution. Lastly, some scalp traders will follow the news, and trade upcoming or current events that can cause increase volatility in a stock.
Winning is Critical
Unlike a number of day trading strategies where you can have a win/loss ration of less than 50% and still make money, scalp traders must have a high win/loss ratio. This is due to the fact that losing and winning trades are generally equal in size. The necessity of being right, is the primary factor scalp trading is such a challenging method of making money in the market.