10 Most Important Do's and Don'ts of Scalping
Whether one is trading stocks, ETFs, futures or Forex, a novice day trader or scalper would be wise to heed these rules and follow them religiously in order to maintain profitability in these efficient and very competitive markets:
1. Master Order Execution Technique
Efficient order execution is vital to the bottomline of any scalper due primarily to the low profit targets. A couple of cents difference in the order fill can be the difference between profit or loss.
2. Identify and Know the Trend
A day trader has to know if a market is strong or weak. Trading with the trend and momentum will produce high probability of wins. Many scalpers can also make good profits trading counter trend but these traders are normally very experienced and have technological tools at their disposal which the novice trader does not have.
3. Difficulty in Getting Order Fill
When a trader tries to enter a trade in the direction of the momentum, it is generally slightly more difficult to get a fill. This knowledge is vital intelligence in gauging the strength or weakness of the instrument traded.
4. Don't Overtrade. Keep a close eye on trading costs.
Take only trades which are of high probability and positive expectancy. Every new trade will generate commisions for the broker and help keep the Porsche in his parking lot. Commissions can add up quickly, although they appear small.
5. Learn to Trade From The Long and Short Side
Novice traders normally only trade from the buy side. Once they experience the exhiliration of the short side because markets normally fall faster than they rise, scalpers shift to the "dark side" and maintain a short bias. Those short bias traders that survive a violent short covering rally will tell you that a balance of both long and short trades is essential for succesful scalping.
6. Know the Basics of Technical Analysis
When markets approach popular moving averages (e.g. 10, 20 50 or 200 MAs), pivot points or Fibonacci levels, chances are there will at least be a slight retracement. A nimble day trader will be able to take advantage of these conditions for a quick profit. Even if you don't believe in TA, the fact that many other market participants do means that it pays to keep an eye on the various technical levels.
7. Don't Chase the Price
Good order fills are very important for a scalper. If the entry point is missed, it is prudent to wait for another. Remember, there are many other opportunities in the market and it is not wise to chase the price and get caught up in the euphoria.
8. Look for Good Volatility and Volume
A scalper needs to enter and exit a trade at will in order to successfully implement his trading strategy. If volume is lacking and there is hardly any liquidity, a trader will end up not getting a good price for his order fill. As a guide, trade stocks with at least a volume of 500,000 shares a day (e.g. KLAC) and futures of at least 100,000 contracts a day (e.g. ES or NQ futures).
9. Adjust Size During High Volatility
A good scalper is cognizant of the volatility levels in the market and will adjust his trading size accordingly. High volatility markets can force brokers to raise intraday and overnight margins which may then in-turn, force day traders and scalpers who are under-capitalized to suffer a margin call and cut their positions prematurely.
10. Never Take Home a Scalp Trade
Finally, the cardinal rule, never ever let a scalp trade become a long term hold. Once a trader slips into "hope" mode, chances are it will not end well.