Trading Futures/Forex By Scalping, No It's Not A John Wayne Western Movie
A big question for futures traders is...can I make a living "Scalping". How do I do this, can I be consistent? Why would anyone want to scalp. For that matter what is "Scalping?" According to Wikipedia, "scalping" is "the act of removing another person's scalp or a portion of their scalp, either from a dead body or from a living person." Ooopss. That is the John Wayne version of scalping. Wikipedia has a second definition, more closely aligned with trading..."Scalping "involves taking quick profits while minimizing risk (loss exposure). It applies technical analysis concepts such as over/under-bought, support and resistance zones as well as trendline, trading channel to enter the market at key points and take quick profits from small moves. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and the trading range expands." Now that's a breathful. Let's put the definition in layman's terms. A "Scalper" is someone who buys and sells quickly to take advantage of small price fluctuations. A scalper buys at the Bid and Sells at the Ask. Scalpers actually provide liquidity to the Market. A trader who looks for trades in this fashion has been nicknamed a "Scalper" because these traders attempt to take small spread differences between the Bid and Ask price. In every Market, there is a difference between what a buyer can buy an asset for and what a seller is willing to sell that asset for. The sellers always want more than the buyers are willing to pay.
"Scalpers" do not enter positions and carry them overnight. In any market, there are buyers and sellers. Whether you are selling real estate, antiques, or stock shares, there is always someone who is willing to buy and someone who is willing to sell. When larger ticket items are involved (such as homes or automobiles), there is generally some sort of negotiation. The seller wants a certain price that the buyer may not be willing to pay. The price the seller wants is known as the Ask price (the price the seller is asking to receive). The price the buyer wants to pay is the Bid price (the price the buyer is offering to pay). Essentially the difference in price between the highest price that a buyer is willing to pay and the lowest price for which a seller is willing to sell is the Bid/Ask Spread. In the case of EMini Futures Trading, the spread is 1 Tick or 1 price fluctuation.
Why does "Scalping" work with EMinis or Forex? Scalpers used to primarily trade the NASDAQ stock exchange. The Bid / Ask spread was large enough to make a good profit. But when the NASDAQ converted to decimalization, the spread on many stocks dropped to as little as 1cent. If you trade 100 shares of stock, 1cent gets you $1.00 With EMinis, while the spread is still 1 price movement, the payout is leveraged so instead of making $1, you make $12.50. You can make a nice profit even on 1 tick scalped.
Scalping is successful when you increase the number of contracts. Say you trade with 5 contracts. 1 tick movement gives you $50 after commission. Just a one tick/pip movement. So Scalpers go for 1 tick/pip instead of going for 2 or 3 or 4. There are 4 reasons why Scalping works: 1) You limit your exposure to risks. 2) You are in the market for only a brief moment, thereby diminishing the probability the market can take you out. 3) Smaller tick/pip moves are easier to obtain. It is easier to get a 1 tick win than a 4 tick/pip win. 4) Smaller tick/pip moves are more frequent than larger ones. Even during relatively quiet market times there are many small movements that you can exploit.
You can use the 1 minute chart as confirmation when you want to scalp a tick/pip.As a Scalper, you Short on the Ask or Buy on the Bid. When the market price breathes between the Bid and Ask, bouncing back and forth, you "steal" the tick on the bounce. The question is: which one do you enter. Do you Buy on the Bid or Short on the Ask? The market is breathing between both of them. Which direction should you take? The truth is, it makes little difference, since the Market is "breathing" back and forth between the bid and ask. Remember, you are only going for 1 tick/pip.
Visit Shadowtraders.com and check out other articles on Futures and Forex
Copyright © Shadowtraders.com