Why Don't Most Day Traders Scalp?

[iamwalex 10]

I'm not sure what I'm missing, but it seems that scalping is incredibly profitable with enough capital.

Start with 3k

Open an account with Interactive Brokers.

If you find a stock that oscillates about .1 percent, you'll be making a minimum of a dollar profit every time you trade after spending about two dollars for a round trip purchase.

Let's say you trade once every minute, that pretty much guarantees you sixty dollars each hour and usually it's way more than that.

Imagine the same oscillations except with more base capital. 30k equals at least six hundred dollars each hour...that's 5.1k in a day. My parent's didn't make that much in a month.

 

So why don't many people scalp? When does it fail?

[SIUYA 11]

http://www.traderslaboratory.com/forums/f229/rethinking-scalping-concepts-8296.html

[Marko23 10]

I'm not sure what I'm missing, but it seems that scalping is incredibly profitable with enough capital.

Start with 3k

Open an account with Interactive Brokers...

 

I suggest, you do just that and open another account with 200K for paper trades with IB.

 

Then you oscillate with your paper account to answer your question.

It can be easily refilled and you will need it.

[subterfuge 10]

Im not at all sure what you mean.

Trades dont always move into profit.

Can you illustrate what you mean with a chart??

[electroniclocal 10]

So why don't many people scalp? When does it fail?

They don't know how.

[Tradewinds 12]

One reason could be the ratio of trading fees to profit. I've practice traded at times when my account showed a "profit", but because I had so many trades, the fees were bigger than the profit. My cash balance was negative. It's important to look at your cash balance if you are going to scalp.

 

The other potential problem that comes to mind is the issue of successful fills. The order may not always fill at your needed price on either side of the trade.

 

The third issue is the problem of minimizing your profits, when they could have been larger. That is only a problem if you get one big looser. But it's easier to wipe out a small profit very quickly, than a large profit.

 

Don't misunderstand me, I'm not against taking small profits as they happen.

 

The appeal to scalping is the attempt to assure profits, and put your fears at ease. That's understandable, and not necessarily a bad objective. But the market rewards risk, not safety. Please don't interpret that as a rationale to go start taking wild risks.

 

I'm not against scalping as NEEDED, I'm not sure that it's a viable strategy to scalp on every single trade.

 

I think it's important to avoid the issue of severely limiting your gain on a trade by scalping, when you could have made a little more money. You should know the market you are trading well enough to be able to reasonably guess when price is going to continue in the same direction.

[Yorkid 10]

They don't know how.

 

IS there a "how" to know? If so, why aren't there a lot more scalping daytraders?

[summerwind25 10]

It puzzles me too. BUT, the downside of scalping is covering your spread, not staying in the more profitable moves and dealing with ranging markets. It is also very intense - no problem if you want to be that active and you win a lot more than you lose.

 

You read a lot about 90% or whatever ratio of new traders failing. We also see many people saying that you shouldn't scalp but trade on daily/hourly or whatever chart. Hmmm. I say if it works for you, stick with it.

 

I've spent a fair bit of time with 50 tick and 100 tick charts attempting do do what you describe. I have to tell you that for me its been more profitable to deal on a longer time frame. Not that much longer - 15 min, 5 min and 3 min charts for strategy and 1 min for in and out decisions.

 

The reason I changed from ticks to time is that my platform won't carry through support and resistance lines on tick charts.

[subterfuge 10]

Isn't scalping ,buying on the bid and selling the ask? When traders 'earn the spread'? making hundredes of trades oer day? That's what I think of when i hear 'scalping'.

 

Im not sure what the OP means though.

He says, 'find a stock that oscillates about .1 percent and you'll make a minumum of a dollar profit every time you trade'

How so? What if you buy at the bottom of the typical oscillation and it carries on going down? 'A Trade every minute pretty much guarantees you $60 each hour'. how? What trade?

 

LOL.

Am *I* being stupid hear and everyone else understands his opening post?

[kookeboy 10]

I would think there are very few people who make a living doing this.

 

Really basic, I think scalping is 1:1 risk/reward. So the win:loss ratio is critical. Let's say you get 2:1 consistently. Then take out your brokerage or spread or commissions and see if it works. Or work it back the other way and see what win:loss you'd need to make to be profitable. I doubt it would stack up.

 

Anyone who has done this for a while says the money comes in letting winners run. Scalping doesnt achieve that.

 

And besides, if you are trying to set this up as a business, which does not rely on you working every single day to keep making money, then scalping isn't ideal.

[Elroch 10]

"Scalping" used to mean making money from the spread, as one poster said. I have observed the term get (mis)used in an increasingly different way, with people claiming to scalp off hour charts or even overnight.

 

In response to the first poster, what he describes sounds great, except you need to be right a lot, and it is a lot easier to be wrong and lose a pip or two on your average trade. It is true that the trading costs are important. You need a sizeable edge just to break even if you trade for a few pips.

 

But some can achieve results approaching perfection going for a few pips when everything is perfect, and make millions (proof by example). Good advice would be not to assume you can do this without plenty of hard evidence.

[maxr 10]

Sorry - content edited out as this message somehow posted in the wrong thread, and I can't find how to just delete post.

Edited August 14, 2010 by maxr
Posted in wrong thread by accident - sorry.

[hunter1 10]

I am a scalper. Trade emini. oso set for 3 tics start with a 6 tic stop loss then adjust it lower after entry is filled. usually use limit orders but not always. Also quickly adjust profit target if I dont get immediate fill. never stay in a trade longer than 45 seconds. maybe 1 minute if lunch time. Friday was typical summer day. 27 trades filled 3 losers, 1 4 tic, 1 3 tic,1 2 tic. 2 winners less than 3 tics. 80% of trades are with my trend . Have only 2 against trend set ups I will take. I use just 1 chart for trading. Use mkt profile and cycles.

 

A trade example is is hit VAH and get a short signal. Go short. get my 3 tics . Using MP I am expecting price to continue to rotate down Next target is either POC or a cycle point. If I have at least 6 tics room to target I go short again on next short signal..I deal stop is still above VAH but depends on entry and what price is doing. Profit target is also adjusted depending on volume at upcoming prices.

 

Example profit target should be 84.25 but heavy volume is at 84.50 will move to 84.50 on a short from 85.

 

After costs still make over $8 on a 1 tic trade so even if I just take all 1 tic trades I make $. For me this is a job so I need to make a daily paycheck. I used to trade other methods that meant staying in for the ride but I got very tired of making 15 points one day and losing 10 the next.

[electroniclocal 10]

IS there a "how" to know? If so, why aren't there a lot more scalping daytraders?

 

Most people just look at the price fluctuations and see the opportunity. They don't make a trading plan, they don't back test they don't do the due dilligence that a person would carry out before they start a new business. And most importantly, they assume they have the required skills without having developed/learnt them.

 

The competition out there is huge. People are not "entitled" to succeed. You need to earn your place in the order flow.

 

EL

[TheDude 10]

Most scalpers I know (ie taking a tick) typically take their tick 25% of the time. the other 75% of trades scratch.

 

The key to this is reading the order book. I've NEVER seen a true scalper use a chart (using the definition above).

 

Key to scalping is very low commissions. That means you are not with a retail broker - because of the high number of scratched.

 

Additional money is often made through exchange rebates (not available to retail traders) on those scratches.

 

Always good to remember gambling theory. Statistics dictate that with a 75% win rate, we have to trade 5 times before being CERTAIN of a win in a worse case scenario (assuming a mechanical type of trade management, not moving a stop etc - for purposes of a simple example). That means if your stop is 2x larger than your target, you're gunna get nailed for sure sooner or later. I'd imagine taking a string of 4 losses would be pretty hard as you'd have to get over 8 straight winners to cover the loss - and then some to cover retail commissions. a string of say 10 wins is pretty tough for most. It would take a long time to dig your self out of that hole, and if you're like most people, you'd probably jack the system in and go back to the drawing board to find another.

 

This is where putting the time in that EL eludes to is vital.

Edited August 15, 2010 by TheDude

[Patuca 13]

I recently started scalping the ES. Today I took 20 trades. They varied from 1 contract to 3 contracts. Stop loss was discretionary and varied from .50 to 1.50 depending if I was directly trading with the very immediate trend or contrarian to the very immediate trend. When I say immediate trend I mean on a 1 min, 5 min, and 15 min chart. I also look at 30 min and 1 hour and daily charts for a view towards the longer trend. Here is what happened on the trades.

 

Total profit gross: $412.50

 

1) 18 winners. 2 losers ...89% win rate.

2) Average win $24.31

3) Average loss $25.00

 

I had 29 RT so I traded 58 contracts over these 20 trades.

 

Comm 145.00

 

Net 267.50.

 

I have some questions:

 

1) Is the reward to risk ratio as important to maintain at least a 2:1 ratio when scalping ES?

 

2) How do you maintain a 2:1 ratio scalping when the system I use takes 1 to 6 ticks as its profit target. Usually .50 to .75 pts is more the norm. It is hard to have a 2:1 Ratio when going for such small targets. I can't make my stoploss less or I will get stopped out too much?

 

3) Those of you that scalp the ES what is your average stoploss and average profit?

 

4) I actually scalp off the 1 hour chart but use the 30 min, 15 min, 5 min, and 1 min, for trend confirmation. But my setups are on the 1 hour chart. Those of you who scalp the ES what chart you use?

 

I know..the brokers like this sort of trading...but I consider simply a business expense. The only way I could lower the comm would be to make less trades and go for bigger profits but the system seems to work best taking ,50 to .75 pts profit each time and an occasional 1 to 2 pt profit.

 

Any ideas anyone or suggestions to me?

 

Patuca

[wrbtrader 10]

Yes, brokers love scalpers as long as the scalper stays in business or as long as brokers have a consistent turnover rate from one scalper to a new one.

 

Also, I'm not sure if you qualify as a scalper because the information you've provided is not scalping. Simply, it seems like you're just day trading.

 

Scalpers have special commission rates because of a high number of trades and/or negotiated special rates with their broker...some even have exchange seats or large trade rebates. Scalpers usually stay in trades less than a few minutes. Scalpers main system involves order flow, times & sales screens, market depth, DOM et cetera that involves tape reading. In contrast, a minority of scalpers use charts as their main system and those charts tend to have intervals of 1min or less and possibly tick charts. Trade latency is a big issue for scalpers and they usually have something in place that measures such from one trade to the next trade. Scalpers have their computer equipment setup for scalping to make it more efficient (e.g. keyboard macros). The few profitable scalpers I've met...they don't use risk:reward ratios.

 

However, I know you didn't explain everything but the stuff you've did mention falls in line with just a day trader.

 

I recently started scalping the ES. Today I took 20 trades. They varied from 1 contract to 3 contracts. Stop loss was discretionary and varied from .50 to 1.50 depending if I was directly trading with the very immediate trend or contrarian to the very immediate trend. When I say immediate trend I mean on a 1 min, 5 min, and 15 min chart. I also look at 30 min and 1 hour and daily charts for a view towards the longer trend. Here is what happened on the trades.

 

Total profit gross: $412.50

 

1) 18 winners. 2 losers ...89% win rate.

2) Average win $24.31

3) Average loss $25.00

 

I had 29 RT so I traded 58 contracts over these 20 trades.

 

Comm 145.00

 

Net 267.50.

 

I have some questions:

 

1) Is the reward to risk ratio as important to maintain at least a 2:1 ratio when scalping ES?

 

2) How do you maintain a 2:1 ratio scalping when the system I use takes 1 to 6 ticks as its profit target. Usually .50 to .75 pts is more the norm. It is hard to have a 2:1 Ratio when going for such small targets. I can't make my stoploss less or I will get stopped out too much?

 

3) Those of you that scalp the ES what is your average stoploss and average profit?

 

4) I actually scalp off the 1 hour chart but use the 30 min, 15 min, 5 min, and 1 min, for trend confirmation. But my setups are on the 1 hour chart. Those of you who scalp the ES what chart you use?

 

I know..the brokers like this sort of trading...but I consider simply a business expense. The only way I could lower the comm would be to make less trades and go for bigger profits but the system seems to work best taking ,50 to .75 pts profit each time and an occasional 1 to 2 pt profit.

 

Any ideas anyone or suggestions to me?

 

Patuca

Edited December 30, 2010 by wrbtrader

[Patuca 13]

Yes, brokers love scalpers as long as the scalper stays in business or as long as brokers have a consistent turnover rate from one scalper to a new one.

 

Also, I'm not sure if you qualify as a scalper because the information you've provided is not scalping. Simply, it seems like you're just day trading.

 

Scalpers have special commission rates because of a high number of trades and/or negotiated special rates with their broker...some even have exchange seats or large trade rebates. Scalpers usually stay in trades less than a few minutes. Scalpers main system involves order flow, times & sales screens, market depth, DOM et cetera that involves tape reading. In contrast, a minority of scalpers use charts as their main system and those charts tend to have intervals of 1min or less and possibly tick charts. Trade latency is a big issue for scalpers and they usually have something in place that measures such from one trade to the next trade. Scalpers have their computer equipment setup for scalping to make it more efficient (e.g. keyboard macros). The few profitable scalpers I've met...they don't use risk:reward ratios.

 

However, I know you didn't explain everything but the stuff you've did mention falls in line with just a day trader.

I am not sure either. I considered it scalping because of the small amount of profit per trade. I look at different frame charts 1 hr, 30,15, 5,1 min. to get a sense of intraday trend. My setups are on the 1 hour chart because of the nature of the system however most trades last 5 minutes or less. Many last less than 1 minute. I take entry based on 5 minute and 1 min charts but as long as they agree with some things I look for in the 1 hour chart. So I don't know whether it is scalping or daytrading????

 

Since market opened this morning I have made 3 trades taking 1.5 pts out of the ES. The 3 trades lasted 14 min, 7 min, 6 min. All winners and all to the short side and all made in second hour of the open. These were holding longer than normal as that second hour it was range bound between1252.75 and 1254.75 on a 1 hour chart.

 

Maybe this is day trading???? Anyway, whatever it is I suppose really doesn't matter but what about the reward/risk ratio in these type of trades? I can't seem to find a way to trade this way and have a decent reward/risk ratio. If I shorten the stop I will get stopped out to often. If I go for bigger profits on a 1 hour chart the chances of getting them are slim unless it is trending. Basically I try to capture 1/4 to 3/4 of the movement made on a 1 hour chart. That is I get a slice out of that hours movement. In the example above the movement was 2 points. I got 1.5 points of that but using 3 trades.

[Patuca 13]

Yes, brokers love scalpers as long as the scalper stays in business

Are you saying that most scalpers don't last? If so, why do you think that they don't last? It would seem to me that one is only at risk when in the market. Therefore, if ones time frame is very short term then there is less risk????? Providing one is disciplined and uses stops fanatically and takes the blows when they come, moving stops only when a trade is moving in ones favor or volatility necesitates a moving of the stop. Of course, it seems to me that such a system would by nature require a very high win rate???? Most traders probally bite the dust in the end because of not preserving their capitol by taking stop losses when they ought to take them. Most people can't stay in this game/war ,,whatever..and be undisciplined in that area. In this short term system my ultimate hard stop is 4 points. That is, I am out of the market at this point no matter what. However, that isn't the working stop I use. The working stop is discretionary..looks at volatility and can be anywhere from .50 to 1.50. But if I make a wrong decision in the heat the ultimate stop is non negotiable ..it can't be changed. I am not allowed to move it. It is fixed. I will allow a max drawdown of 4 points per contract on the ES. Is it unfeasible to think that such a strategy will work over the long haul?? I don't want to be just another short-term trader that bites the dust. My limit for any daily loss on the ES is 800.00. That is if I am trading 4 cars and I loses the max allowed I am finished for the day. I have just started using this system trading the ES so I am still refining it. I have used it for quite some time with stocks swingtrading, mostly, with a mixture of some daytrading. Edited December 30, 2010 by Patuca

[rigel 10]

Have a look at the link:

Brooks Price Action - The Mathematics of Trading

[Patuca 13]

Have a look at the link:

Brooks Price Action - The Mathematics of Trading

Thanks for the link. I couldn't read the articles..i suppose because I wasn't registered there but i did register and awaiting confirmation of the registration. From the book title looks like it is about some classical tape reading skills???

[Patuca 13]

Today I took scalped/daytrade 37 trades. They ranged from 1 to 5 contracts each trade. I traded a total of 80 RT ES contracts.

 

Gross Profit $862.50

 

Total winners 34. Losers 3 .....Win/loss ratio 92%

Average win $25.37

Average Loss $100.00

Commissions RT $400.00

Net Profit $462.50

 

The win/loss ratio is still good. I took two fairly good size losses ($100.00 and $150.00 and one small loss of $50.00) that really skewed the average loss figures. I just judged the direction wrong and bit the bullet when I had to. Average win figure about the same as yesterday. What is killing me is the brokerage commisions. It costs me 2.50 each way. I have never approached a brokerage about getting a good rate for scalping purpose. Today I traded 160 contracts. That is I bought 80 and sold 80. The 5.00 RT makes the commissions 400.00. Makes one feel like they are working for the broker. Not so sure I like this method. Does anyone know about what I should be paying for commissions trading this way. Lets say I buy on average 60 contracts and sell 60 per day. What kind of commission rates should I be talking to my broker about??

 

Thanks

Edited December 31, 2010 by Patuca

[Patuca 13]

Scalped/daytraded ES today.

 

Gross Profit $1400.00

Contracts traded: Bought 125 and sold 125

Trades 35 trades

Winners 31

Losers 4

Win Rate 89%

Average loss: $100.00

Average win: $45.6

Commisions $625.00

 

NET PROFIT $775.00

 

I decided to trade some in 10 lots. usually would take 1 to 3 tick profits. Among other things I also use fib levels. I trade on an hourly chart but I look at the 3 fib levels on the previous day chart. Also on the precious 1 hour bar. Also on the intraday 1 hour bar in which I am trading. When fibs line line up in all the price frames and price trades close to one of the fib levels and just hangs there I will scalp multiple times until it breaks thru the level or drops back off. That is one of the techniques I use. I can sometimes get 1/2 point over and over until price breaks down or breaks out. When the intraday trend is down on 1min,5min,15min,30min and one hour chart I will short retracements back up to one of the fibs if price hold there for a while. Especially, if it is a fib line that shows up close in all three chart. Present 1 hour. Previous 1 hour and previous days chart.

 

What is still hitting hard is the commissions. Does anyone have any idea what price range I should try to negociate? Figuring trading 60 to 80 contracts RT a day???

 

Also when scalping the ES I am learning that if I want to capture 1/2 point I have to go for 1 pt and allow 1 tick for entry and one tick for exit...slippage.... etc. The ES moves fast. The ES is new to me. That is, scapling the ES. I have scalped stocks and swingtraded stocks for years but am trying my methodolgy on the ES. Next will be NQ and YM. I want to try and figure how to trade 2 or 3 instruments. I get tired of the analysis of multiple stocks...etc. Trying to simplifiy things. One thing I don't like is the commissions when scalping. It irks me. I know it is a cost of business but I didn't realize just how costly it is when scalping ES. It runs up real fast. If anyone knows a broker that gives better deal on say 80 cars RT day let me know. I pay 2.50 each way per contract. Is that a bad price? Have a happy New Year everyone!

Edited January 1, 2011 by Patuca

[jackb 10]

Patuca,

 

It shows that you have been a TL member since 2007. Have you been trading live since that time (or maybe before or just recently)? You said you just started scalping the ES. Is that live or sim? Have you ever scalped other markets?

 

Happy new year.

[bakrob99 11]

. If anyone knows a broker that gives better deal on say 80 cars RT day let me know. I pay 2.50 each way per contract. Is that a bad price? Have a happy New Year everyone!

 

If you are going to trade more than 50 RT per day you definitely need to LEASE a seat on the exchange and eliminate your exchange fees. Then you can reduce your commission rate by about another .60c for a total RT a little under $3. Ask your broker how to do this... or email the exchange (CME).