What Is Scalp Trading?
Scalp Trading is a phrase that is tossed about a lot any time you hear day traders talk but really scalp trading is a particular technique of day trading. It is a method that entails a substantial frequency of order tickets using a profit target of merely a small amount of pennies. The return occurs from the size of the orders. A common scalp trader at almost all of the Proprietary Trading Firms employs among five and fifteen thousand shares for every position with the even larger investors going upwards to 200,000 shares for every execution. This manner of investing is not usually accomplished by retail traders on retail accounts for 2 significant reasons, good price structure and special order routes.
The ” transaction fee ” structure in which the regular retail broker offers is too expensive for this kind of style to be worthwhile. Most retail brokers will provide $6 to $7 per one thousand share trade with the best bargains close to $5. A scalp trader wants to be capable to gain money via merely a one penny move. So even with the best retail deal of five dollars, a one cent shift would earn you ten dollars but would cost you ten dollars ($5 to acquire and $5 to sell) in commission rates which would leave you $0 net profit. At a Proprietary Trading Firm, traders could obtain a commission structure anywhere from 30 cents to $1 per 1000 shares. Now if you add it all up: a 1 penny move with one thousand shares grosses $10 but will merely cost you sixty pennies to $2 which of course gives a much more appealing net profit margin.
This brings us to ECNs and who one must be routing your orders thru. If you add liquidity to the order book also known as the level 2 then commonly the ECN you routed to will give you a rebate. On the other hand, when you take liquidity from level 2, the ECN will charge you. Most people might be thinking what does it mean to remove or add liquidity? Well as an example; imagine you want to acquire a automobile. You open a auto trader journal. In the front section of the journal are advertisements from people who would like to acquire autos. These people are itemizing the mileage and price they are prepared to pay. Now in the back section of the magazine are individuals promoting autos for sale. Well you may be asking why don’t the folks in the front part of the magazine contact the people in the back part of the journal? This is due to the fact there is a difference in price amongst what the buyers wish to buy at and the sellers would like to sell at. Now these folks who have placed these adverts in this car journal are all adding liquidity. The folks who read the journal and ultimately either sell their car to 1 of the buyers or acquire a vehicle from one of the sellers are removing liquidity. This is how the stock market performs and the left side of the level 2 screen is like the front segment of the auto magazine and is referred to as the “BID”. The right part of the level 2 screen is like the back area of the car journal and is referenced to as the “ASK” or “OFFER”.
I pointed out previously the ECN routing. So precisely what is an ECN? ECN is an acronym for Electronic Communication Network. Any time you look at a level 2 monitor you will observe diverse ECNs, Exchanges and Market Makers at each price levels and it is your choosing which one you submit your orders to. Your selection will be based on how rapid the route can fill your trade along with how much it will cost you or how much your kickback will be depending on whether or not you are adding or removing liquidity.
Particular routes: A number of routes will fill you rather promptly but will still charge you even though you are adding liquidity. It is these routes that retail traders investing using retail accounts do not possess access to. Investors at Prop Trading Firms will have access to these routes offering them an advantage above the competition. These specialized routes are not essential to become effective in scalp trading although they do help to make the job considerably simple and easier.
Now that you know what scalp trading is, you will need to realize the needed tools. The most important tool is your system. You will require a Level 2 Direct Access Trading System which there are several to pick from.
You will likewise need a news service such as Briefing or Trade-The-News. When scalping, you ought to be observing a small number of stocks. They ought to be lower priced and possess excellent volume on the Bid and Ask.
With regard to each one of the stocks you follow you ought to have a level 2 display along with time and sales. Equally, you ought to have a daily chart for each one of the stocks you monitor. Believe it or not, the daily graph is the most critical graph for intra day traders, which also includes us scalp traders. And finally, you must have a 5- and 15-minute graph of the general market. To view the market, the Standard and Poor is preferred. You may observe this by monitoring the ES futures or the SPY. There are some other things you may desire to include to this set-up which I will include in my following article, but the earlier mentioned are the most significant.
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