explain 'scalping' to a newbie

P

pauk

Can someone explain the concept of 'scalping'
Now, by scalping, I am talking about earning the spread.
(I always thought scalping was just trading using a very small timeframe charts, but im told its all about theroretically becoming a marketmaker and providing liquidity)

How does it actually work though?

Say the ES is trading at 1288 bid x 1288.25 ask
You'd put a limit buy in at the bid and a limit sell in at the ask? correct?
So if they both get hit then you have earnt the spread. A Successful scalp.
But what if you get filled on your long at the bid and then price just plummets without getting filled on your sell limit order? YOu're screwed, no?

Or is there a way of timing the trade using information to have a good possibility of getting hit on both of your orders.

When people discuss this concept of 'scalping' 'earning the spread' etc, they make it sound like 'free money'.
Am I right in my example above?

im a newbie but its just something that i want to at least get my head around, because at the moment, i dont get it.

Is this how the big banks make their money?
 
Before you get further you have to understand the basics, which you don't.

The bid is the price at which people are willing to buy from you and the ask is the price at which people will sell to you.

If you come to the market, you can buy at the ask and sell at the bid. You immediately lose the spread. You cannot win the spread.

Brokers make the spread because they match buyers and sellers. They use the inventoty of the sellers to fill the orders of the buyers. They even pay for inventory (liquidity) a share of the spread.

Assuming you are a big player you can make markets but that is not without risks.
 
There are two types of scalping.

1. Directional scalping. This is when you trade a highly volatile instrument like crude oil (CL) and you try to profit say 5 cents a trade. Your average time in the market trading like this can be anywhere from 1-200 seconds usually, as oil can move 5 cents in seconds. This type of trading requires a high amount of discipline and great risk management. Usually your reward to risk will be WORSE than 1:1 and you will be paying the spread. This type of trading requires a high winning percentage 70%+. This is VERY HARD for a newbie. I do not recommend it.

2. Rebate Trading. This is when you trade stocks such as C, BAC, F, S and this is when you can "make" the spread. You can "make" the spread by using NYSE floor routes, or routes such as EDGA, NQBX. You also try to make money off of the sheer volume you do through ECN rebates. YOU CAN ONLY TRADE THIS WAY THROUGH SOME SORT OF PROPRIETARY FIRM, THAT SPECIALIZES IN THIS TYPE OF TRADING. It is impossible for a retail account to trade this way. This is probably what you heard of from your friend.

I trade both ways myself, as naturally I like to be in and out of the market quickly.

If you are new, start with the higher timeframes. Scalping is extremely fast paced, and is HIGHLY stressful for a new trader.

Hope that helped!

Julian
 
Quote from stock777:

ignore the last post, its disinformation
More...

If you mean my post, be specific. Tell us how with a retail account through a retail broker you can buy at the bid and sell at the ask.

I want to see if you have ever traded retail.
 
scalping = taking profits (usually very quickly) after a small movement.

So instead of buying at 1,200 and selling at 1,205 or whatever, you might buy at 1,200 and sell at 1,200.50.

So that's half a point, but some people scalp with a bunch of contracts so that half a point might still be worth a few hundred dollars.

Scalping is very difficult, and if price goes against you and you have a large amount of contracts, you can get screwed.

Don't forget with such small profit targets, commission is going to be a bigger factor.

For example, say your round trip comission on an ES trade is $4. If you buy one contract at 1,200 and sell it at 1,205, that's 5 points, or $250 for your one contract, and after commission it's $246. Who cares.

But say you're scalping with 5 contracts and you buy at 1,200 and sell at 1,200.50, that's half a point times 5 contracts = $125, and then commission is $4 times 5 contracts or $20, so you only have $105 profit.

A lot of people talk a big game about scalping, but it's very difficult to do successfully. Don't believe most of what you read on this forum from all the millionaire scalpers. They're either trying to make you jealous or sell you something.
 
Quote from intradaybill:

If you mean my post, be specific. Tell us how with a retail account through a retail broker you can buy at the bid and sell at the ask.

I want to see if you have ever traded retail.
More...

Uhm. If the bid is 15.01 and the ask is 15.02, you can place a limit BUY at 15.01 and a limit SELL at 15.02. You are now on the bid, and on the ask.

If you go to an ES broker and bid 1280.25 and offer 1280.50, you will also be trying to earn the spread. When you post 1280.25, say, 10 lots, the bid size will increase from, say, 406 lots to 416 lots. When you offer 1280.50, the ask size will now increase from 525 lots to 535 lots. Now you need 416 contracts (or less, if people in front of you cancel) to trade at 1280.25 and 535 contracts to trade at 1280.50. When both events happen, you heave earned the spread.

Being retail or not retail doesn't have ANY effect whatsoever upon being able to earn the spread except retail pays higher commissions.
 
Quote from NY0BScalper:

Uhm. If the bid is 15.01 and the ask is 15.02, you can place a limit BUY at 15.01 and a limit SELL at 15.02. You are now on the bid, and on the ask.

If you go to an ES broker and bid 1280.25 and offer 1280.50, you will also be trying to earn the spread. When you post 1280.25, say, 10 lots, the bid size will increase from, say, 406 lots to 416 lots. When you offer 1280.50, the ask size will now increase from 525 lots to 535 lots. Now you need 416 contracts (or less, if people in front of you cancel) to trade at 1280.25 and 535 contracts to trade at 1280.50. When both events happen, you heave earned the spread.

Being retail or not retail doesn't have ANY effect whatsoever upon being able to earn the spread except retail pays higher commissions.
More...

I'm assuming this is much easier said than done.
 
Quote from NY0BScalper:

Uhm. If the bid is 15.01 and the ask is 15.02, you can place a limit BUY at 15.01 and a limit SELL at 15.02. You are now on the bid, and on the ask.

If you go to an ES broker and bid 1280.25 and offer 1280.50, you will also be trying to earn the spread. When you post 1280.25, say, 10 lots, the bid size will increase from, say, 406 lots to 416 lots. When you offer 1280.50, the ask size will now increase from 525 lots to 535 lots. Now you need 416 contracts (or less, if people in front of you cancel) to trade at 1280.25 and 535 contracts to trade at 1280.50. When both events happen, you heave earned the spread.

Being retail or not retail doesn't have ANY effect whatsoever upon being able to earn the spread except retail pays higher commissions.
More...

I'll cut the guy a little slack, and say that if he meant retail as in Etrade, then buying the bid is much harder. As for futures, what he said was horseshit.
 
Quote from 1a2b3cppp:

I'm assuming this is much easier said than done.
More...

I simply stated what has to be done to give one a chance of earning the spread and what events must transpire in order for it to workout successfully. I made no comments as to the probability of one earning the spread in a given situation.
 
You must log in or register to reply here.
Back
Top