Primary StyleA pure scalper will
make a number of trades a day, between five and 10 to hundreds. A scalper will mostly utilize one-minute charts since the time frame is small and he or she needs to see the setups as they shape up as close to real time as possible. Quote systems Nasdaq Level II, TotalView and/or
Times and Sales are essential tools for this type of trading. Automatic instant execution of orders is crucial to a scalper, so a direct-access
broker is the preferred weapon of choice.
Supplementary StyleTraders of other time frames can use scalping as a supplementary approach in several ways. The most obvious way is to use it when the market is
choppy or locked in a narrow
range. When there are no trends in a longer time frame,
going to a shorter time frame can reveal visible and exploitable trends, which can lead a trader to scalp.
Another way to add scalping to longer time-frame trades is through the so-called "umbrella" concept. This approach allows a trader to improve his or her
cost basis and maximize a profit.
Umbrella trades are done in the following way:
- A trader initiates a position for a longer time-frame trade.
- While the main trade develops, a trader identifies new setups in a shorter time frame in the direction of the main trade, entering and exiting them by the principles of scalping.
Practically any
trading system, based on particular setups, can be used for the purposes of scalping. In this regard, scalping can be seen as a kind of method of risk management. Basically, any trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio. This means that the size of the profit taken equals the size of a
stop dictated by the setup. If, for instance, a trader enters his or her position for a scalp trade at $20 with an initial stop at $19.90, then the risk is 10 cents; this means a 1:1 risk/reward ratio will be reached at $20.10.
Scalp trades can be executed on both long and short sides. They can be done on
breakouts or in
range-bound trading. Many traditional chart formations, such as a
cups and handles or
triangles, can be used for scalping. The same can be said about technical indicators if a trader bases decisions on them.
SEE:
Forex: How To Scalp Fundamentally
Three Types of ScalpingThe first type of scalping is referred to as "market making," whereby a scalper tries to capitalize on the spread by simultaneously posting a bid and an offer for a specific stock
. Obviously, this strategy can succeed only on mostly
immobile stocks that trade big volumes without any real price changes. This kind of scalping is immensely hard to do successfully as a trader must compete with
market makers for the
shares on both bids and offers. Also, the profit is so small that any stock movement against the trader's position warrants a loss exceeding his or her original profit target.
The other two
styles are based on a more traditional approach and require a
moving stock where prices change rapidly. These two styles also require a sound strategy and method of reading the movement.
The second type of scalping is done by purchasing a large number of shares that are sold for a gain on a very small price movement. A trader of this style will enter into positions for several thousand shares and wait for a small move, which is usually measured in cents. Such an approach requires highly liquid stock to allow for entering and exiting 3,000 to 10,000 shares easily.
The third type of scalping is the closest to the traditional methods of trading. A trader enters an amount of shares on any setup or signal from his or her system, and closes the position as soon as the first exit signal is generated near the 1:1 risk/reward ratio, calculated as described earlier.
SEE:
Does Your Personality Match Your Trading Methods?
Read more: http://www.investopedia.com/articles/trading/05/scalping.asp#ixzz24vuuBS1v
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