Scalp trading has been performed for a long time by traders. The reason why only trades perform it is because it has a short time limit. Also the traders specifically involved in scalp trading are known as scalpers. This particular trading lasts for maximum intraday and the average trade limit is for a few minutes. The reason is such trades are executed only at the support or resistance levels i.e. The breakout levels and the profit booking is a rapid process in the same. This trading method involves a numerous amount of trades executed on one single trading day. The unique point in this method is that there are small profits spread across lots of trades. This makes the losses minimal and maximizes the profits earned. This method is all about quantity of trades and higher volumes of stocks.
Strategies For Scalp Trading
There are many prominent strategies among which the traditional ones are followed the most. The first traditional strategy is referred to as quantity buying. In this methodology the scalper executes numerous trades with a high quantity of stocks. The stock positions are in thousands and the profits booked for the same are roughly across 5000 to 10000 Rs. Hence there will be just a minor price movement while booking the profits in the stocks. This way the need for liquidity is maximum to take the maximum margin for leverage. Higher liquidity enables having more stocks and this increases the opportunities to earn more profit.
In the next strategy the positions are taken with an aim to make equal profits or suffer least losses. This means the prices set for profit booking and sell stop are at equal distances. This calculates an equal amount of profit earned or loss made. Hence the gains and losses are calculative before the trades are placed in such an approach. It is also named as the 1:1 risk reward method. In other trades such a ratio is set at 1:3. Thus profits are set at thrice the price then the stop loss points.
The Umbrella Strategy
This strategy enables creation of multiple positions at the same time to avoid extra losses from any position. This strategy kicks in the long position creation concept. Through this the scalper creates a long position in a particular stock or index. After that he or she continues to execute the scalp trades on opportunities seen. This creates a safety net with high probability of profits in one long term position and on other side the scalping method is applied. Hence main trade keeps evolving with long time frame and on other hand risks are taken with scalp trading.
How Scalper Places Trades
Scalp trading is all about high volumes of trade at small intervals. The trades are executed in high numbers. Profits booking is done in small numbers and corpus of profit is gathered at the end. The scalpers have to calculate a lot of charges that are applied per trade. Given the high quantity of trades, having the broker with the least charges would capitalize most for the traders.
The scalper constantly monitors the trend of the stock and places trades on the basis of chart movement and price actions. Also there is strict point selection for profit booking and stop loss. Thus placing trades on the basis of the daily chart movements and price actions.
There are certain parameters that are taken into consideration before placing trades :
Executing the Orders
There are multiple big players who watch each and every possible movement done by small traders. This is done by various software. In the U.S.A such software is Level 2. Through this one can watch the ask and bid prices set at different price levels. Also the volumes of such trades are displayed. This makes it easy to decide at which point there would be maximum movement in the share price as the price fluctuations are mostly based on the supply and demand pattern. One can get access to such software before placing orders for having maximum gains at any given price level.
Liquidity and Quick Decisions
Such a method is totally based on the volumes of the shares traded. Hence liquidity is a very important feature in the same. More the cash, more the position. It is often required to execute quick trades in order to gain the maximum benefit of fall or rise in stock or market movements. For such purposes it is really important to have a broker who can execute trades in a quick manner. Often many brokers do not allow scalp trading.
Sticking to the Game Plan
It requires high discipline to stick to the game plan regardless of the future opportunities seen or loss in positions. Thus one should always place the stop loss points or profit booking points forehand. If not, the stop loss point should be fixed and one should firmly act on it.
Such a method requires less patient personality as there is a quick shift into stock positions. Also less fundamentals are applied in scalping and more technical and trend analysis is emphasized upon. Some famous techniques that can be used are Moving average method and RSI method. Also Bollinger bands can be utilized given the trend identification involved in the same.
Some Disadvantages Of Scalping
Scalping is a time consuming method. One has to constantly monitor the price movements so that the opportunities are not missed. It is also important to keep a watch on the transaction costs. The high volumes result in higher transaction costs applied to the trades executed. The most inevitable disadvantage to this method is that without high liquidity one can never earn more in the market. Higher liquidity can benefit the scalper to get more stocks under his portfolio. Hence more profit booking is possible. Given the small margins available for profits it is important to have high liquidity for scalp trading.