Scalp Trading 101 For Scalp Traders
Scalp Trading is a word that is thrown about a lot any time you hear day traders chat but really Scalp Trading is a unique method of day trading. It is a type that involves a large frequency of order tickets using a earnings target of just a few cents. The return occurs from the size of the orders. A common scalp investor at many of the Proprietary Trading Firms employs in between 5,000 and 15,000 shares for every position with the even larger investors going upwards to two hundred thousdand shares per execution. This technique of investing is certainly not commonly done by retail investors on retail accounts for two key factors, great cost structure and particular order routes.
The commission structure which the normal retail broker gives is too costly for this particular style to be viable. Most retail brokers may offer you $6 to $7 for every one thousand share trade with the better deals around $5. A scalp trader wants to be capable to make money via merely a 1 penny move. So even with the greatest retail deal of five dollars, a 1 penny move would generate you $10 but would cost you $10 ($5 to buy and $5 to get rid of) in commission rates which would leave you $0 net profit. At a Proprietary Trading Firm, traders may get a commission structure anywhere from 30 cents to $1 per one thousand shares. Now if you do perform the sum: a 1 penny move with 1000 shares grosses $10 but will simply cost you sixty pennies to two dollars which of course provides a a lot more appealing net profit margin.
This brings me to ECN’s and who one need to be routing your orders via. If you add liquidity to the order book additionally recognized as the level 2 then generally the ECN you sent to will give you a rebate. Having said that, when you remove liquidity from level 2, the ECN will charge you. One might be wondering just what exactly does it mean to take or add liquidity? Well as an analogy; imagine you would like to acquire a car. You open a auto trader magazine. In the front part of the journal are advertising from people who would like to obtain autos. These people are itemizing the mileage and worth they are in a position to spend. Now in the rear segment of the magazine are folks advertising cars for sale. Well you might be asking why don’t the folks in the front part of the journal call the individuals in the back section of the magazine? This is because there is a variation in price amongst what the buyers wish to buy at and the sellers prefer to sell at. Now these people who have placed these ads in this car journal are all adding liquidity. The persons who read the journal and eventually either sell their auto to 1 of the purchasers or buy a automobile from one of the sellers are removing liquidity. This is how the stock market performs and the left part of the level 2 screen is like the front section of the auto magazine and is referenced to as the “BID”. The right side of the level 2 screen is similar to the back section of the car journal and is referred to as the “ASK” or “OFFER”.
I talked about previously the ECN routing. So precisely what is an ECN? ECN stands for Electronic Communication Network. When you look at a level 2 monitor you will find varied ECN’s, Exchanges and Market Makers at each price levels and it is your selection which one you provide your orders to. Your selection will be primarily based on how swift the route can fill your trade and also how much it will cost you or how much your kickback will be based on whether or not you are adding or removing liquidity.
Special routes: Several routes will fill you very quickly but will still charge you even though you are adding liquidity. It is these kinds of routes that retail investors buying and selling with retail accounts do not have access to. Traders at Prop Trading Firms will have access to these routes giving them an edge above the competition. These specialized routes are not essential to become effective in scalp trading although they do help to make the job far easier.
Now that you recognize what scalp trading is, you will need to know the essential tools. The most critical tool is your platform. You will need a Level 2 Direct Access Trading System which there are a number of to select from.
You will also require a media service such as Briefing or Trade-The-News. When scalping, you ought to be viewing a small number of stocks. They should really be lower priced and possess great volume on the Bid and Ask.
Regarding each one of the stocks you view you should have a level 2 display as well as time and sales. Furthermore, you should have a daily chart for each one of the stocks you watch. Believe it or not, the daily graph is the most important chart for intra day traders, which furthermore includes us scalp traders. And finally, you ought to have a 5- and 15-minute chart of the general market. To look at the market, the Standard and Poor is most effective. You can monitor this by observing the ES futures or the SPY. There are several other things you will wish to include to this set-up which I will include within my subsequent article, but the previously mentioned are the most vital.
Penny Stock Protection #1