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Introduction to Scalping



Scalping

Scalping is probably what most people think when they hear “day trading”. A scalper takes many small trades a day based off short term price movement in the market. A scalp trader keeps his stop loss extremely tight and enters the market at minimal risk to his account, looking to be in and out of the market usually between 1-5 minutes. Depending on if scalping is your main source of profit, you could be looking at taking over 20 trades a day easily, depending on your profit goal.

The theory behind scalp trading is simple: Smaller price movements are much more frequent than bigger ones. These small movements are much easier to trade off of since they happen daily, even in low volume markets. Finally since you’ll only be in the market for a brief period of time your risk exposure to the market is kept to a minimum.

Despite this simplistic approach, scalping is one of the most demanding and nerve-racking trading styles out there. Here are some things a new scalper will need to consider before they start:

Commissions: You’ll want to know your commission rate regardless of your trading style however it’s especially important for scalpers due to how frequently they will be entering the market. Commission is a fee your broker charges you every time you enter the market regardless if you win or lose. Thankfully as a futures trader your commission fee should be reasonably low, usually around $1.00-$10.00 per contract depending on your broker and service type. Don’t be afraid to browse around and negotiate your commission fees, especially if your going to be an active day trader.

Slippage: Slippage is when you go to enter into a trade at an expected price, but your order is actually filled at a different price. When you hear about high slippage, they are referring to the difference between the expected entry price and the price you are actually entered into. Since scalpers trade tick by tick this is a big deal. As a scalper you’ll want to pick your markets carefully, markets with good liquidity. Slippage can happen in any market but usually occurs most frequently when big economic events introduce extra volatility. Be sure to plan for these events ahead of time.

Chart types: Scalp traders use several different charts to help monitor market conditions and possible trades. You should familiarize yourself with the different chart types and what works best for you. Many scalpers will use a Minute based chart or a tick chart to help them enter the market at a precise price and use a bigger time-based chart to watch larger intra-day patterns.

Account Size/Tick Size: Consider your account size and compare it to the market(s) contract price that you’ll be trading. Even though you’ll only be in the market for minutes and your stop loss will be tight, make sure you can handle several losses to your account, often times several a day especially for new traders. For example, a trader starting off with a $5000.00 account might start scalp trading with a stop loss at .5% of his account- $25.00. If they decide to trade on the E-Mini S&P which has a tick size of $12.50 that means they only have a two tick stop loss. Even if they are correct about the direction of the market, with a stop loss that tight they can easily get stopped out before their trade has time to form.


Conclusion

Scalping can be a great way to trade the markets with low risk exposure. It is a very active style of trading that will keep you glued to the screen for most of your trading sessions. However, scalping is not for every trader, micromanaging dozens of trades a day can be extremely nerve-racking and leaves room for error. New traders should make sure they have plenty of capital to trade with as well as having plenty of Sim account experience to make sure they understand the markets they are trading.

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