An Introduction To Scalp Trading

By: Ben Tippen

Scalp Trading is a expression that is thrown around a lot whenever you hear day traders chat but really scalp trading is a precise style of day trading. It is a method that entails a high frequency of order tickets utilizing a revenue target of merely a very few pennies. The profit occurs from the size of the orders. A ordinary scalp investor at almost all of the Proprietary Trading Firms employs among 5,000 and 15,000 shares for every position with the larger investors going upwards to two hundred thousdand shares per trade. This form of trading is not necessarily commonly accomplished by retail investors on retail accounts for a couple of major motives, great cost structure and specific order routes.

The commission arrangement in which the typical retail broker offers you is too pricey for this style to be feasible. The majority of retail brokers may offer you $6 to $7 per one thousand share trade with the best deals about $5. A scalp trader wants to be capable to earn money via simply a one penny move. So even with the best retail deal of five dollars, a one penny move would generate you $10 but would cost you ten dollars ($5 to buy and $5 to get rid of) in commission rates which would leave you zero net profit. At a Proprietary Trading Firm, investors can acquire a commission structure anywhere from 30 cents to $1 per 1000 shares. Now if you add it all up: a one cent move with one thousand shares grosses $10 however will simply cost you 60 pennies to two dollars which of course allows for a a lot more attractive net profit margin.

This brings us to ECNs and who one need to be routing your orders through. If you add liquidity to the order book also acknowledged as the level 2 then normally the ECN you routed to will furnish you a rebate. On the other hand, if you remove liquidity from level 2, the ECN will charge you. You might be considering precisely what does it necessarily mean to take or add liquidity? Well as an example; suppose you want to purchase a car. You open a auto trader journal. In the front portion of the journal are ads from people who would like to acquire autos. These people are detailing the mileage and value they are able to pay. Now in the rear part of the magazine are people advertising autos for sale. Well you may be questioning why don't the people in the front part of the journal contact the people in the back part of the journal? This is due to the fact there is a variation in price amongst what the buyers want to buy at and the sellers prefer to sell at. Now these folks whom have placed these adverts in this auto journal are all adding liquidity. The people whom read the journal and eventually either sell their vehicle to one of the purchasers or purchase a automobile from 1 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 referenced to as the "BID". The right part of the level 2 screen is similar to the back section of the car journal and is referenced to as the "ASK" or "OFFER".

I talked about before the ECN routing. So exactly what is an ECN? ECN is short for for Electronic Communication Network. Any time you look at the level 2 screen you will witness numerous ECNs, Exchanges and Market Makers at each price point and it is your option which one you distribute your orders to. Your selection will be primarily based on how rapid the route can fill your trade along with how much it will cost you or how much your rebate will be based on whether or not you are adding or taking liquidity.

Exclusive routes: A few routes will fill you quite speedily but will still charge you even though you are adding liquidity. It is these routes that retail traders trading using retail accounts do not have access to. Traders at Prop Trading Firms will have access to these routes passing along to them an edge above the competition. These specialized routes are not essential to being lucrative in scalp trading however they do help make the job very much simple and easier.

Now that you realize what scalp trading is, you will need to realize the essential tools. The most crucial instrument is your platform. You will need a Level 2 Direct Access Trading Platform which there are various to select from.

You will furthermore need a media service such as Briefing or Trade-The-News. When scalp trading, you need to be observing a small number of stocks. They will need to be low priced and have excellent volume on the Bid and Ask.

Regarding each one of the stocks you study you ought to have a level 2 display and also time and sales. Furthermore, you need to have a daily chart for each one of the stocks you follow. Believe it or not, the daily graph is the most critical chart for intra-day traders, which additionally includes us scalp traders. Last but not least, you should have a 5- and 15-minute graph of the overall market. To look at the market, the Standard and Poor is best. You may observe this by watching the ES futures or the SPY. There are various other things you may need to include to this set-up which I will discuss within my next article, but the previously mentioned are the most necessary.

Article Source: http://yourfinance.co.za

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