explain 'scalping' to a newbie

Quote from 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?
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I've traded some illiquid stocks that trade in a narrow range and have a wide B/A. By offering a penny more than the bid, I became the best bid so if someone sells, it's mine. The same holds true for shorting (offer a penny below the ask).

I set price alerts so if someone comes in a penny better, I add 2 cts to become best B or A again, at least until the spread narrows enough not to be attractive anymore.

I lean more toward buying when near the bottom of the range (especially when there's a near term ex-div) and shorting when near the top of the range. Often, the UL will run up a bit going into ex-div as well as after an ex-div. A caveat is not to get caught short thru a div because then you pay it out. At times the spread has been wide enough to where I've been both best bid and ask.

If I have a position, I might place double the size on the other side so that if filled, 1/2 is closed for some or all of the spread and I then have a new position on the other side. Obviously, with the first fill, it's directional and there's always the risk that the UL moves against me. But given that I'm buying near the bid or selling near the ask, if I want out, I'm not losing the spread. In most cases, I've held on or added more shares.

I think that there was one last year where I had 90+ Sched D trades - about 75 were winners and maybe 10-12 of the gains were larger than the biggest loss (the number of actual trades was less than 90 due to single order fills at various prices and flips). It won't get you rich but it adds some nice pocket change when they're biting which is something you can only determine by stepping up to the plate.

Again, this is illiquid stocks, not the futures that you asked about. And I'm retail so no advantage over anyone.
 
Quote from 1flyfisher:

what exactly is disinformation or incorrect about the post?
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Uhh the part saying retail traders can't enter limit order ECNs (which is what he says... not being able to earn the spread means not being able to place limit orders on ECNs).
 
Quote from stock777:

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.
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Why's that?
 
Because futures orders are filled on TIME priority. Who ever is first, gets the first fill.

Because of this, when a level moves up or down, a retail trader does NOT have the speed that a firm with a computer 50 feet from the exchange, to place their bid before the big boys do. This makes it EXTREMELY difficult to get BOTH orders filled (bid and offer), before a level rolls through.

Stocks are different however as you can use priority routes such as EDGA, NQBX, BYX and CBOE.
 
Quote from julian0625:

Because futures orders are filled on TIME priority. Who ever is first, gets the first fill.

Because of this, when a level moves up or down, a retail trader does NOT have the speed that a firm with a computer 50 feet from the exchange, to place their bid before the big boys do. This makes it EXTREMELY difficult to get BOTH orders filled (bid and offer), before a level rolls through.

Stocks are different however as you can use priority routes such as EDGA, NQBX, BYX and CBOE.
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I didn't know that. Thanks!
 
Quote from 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?
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Scalping doesn't really work in liquid markets with a 1 tick bid/offer spread. That spread isn't big enough to offset the risk of the market running over one's position, as you rightly pointed out.

Scalping works best in less liquid (but not totally illiquid) markets where there is some activity and movement, but a relatively wide bid/offer spread. A good example is volatile growth stocks, small cap stocks, and the smaller commodity futures markets. The reason is that you can get filled on the bid, then turn around and try to exit on the offer, and you might earn 5, 10, 20 ticks on the trade. If you are wrong, and have placed your bid well, you can exit with a 1, 2, 3 tick loser.

Of course you don't just bid or offer because there's a spread. You also do things like look at the market momentum, how extended any move is, how the market reacts at key levels, any breaking news, and - perhaps most importantly - you watch the price action in related markets. A classic scalping technique is to look at a leading indicator, typically a related major market. For example if you were scalping gasoline or natural gas futures you would follow crude oil too. If crude rallied big you might get on the bid etc.

Scalping is now dominated by algorithmic computer trading programs. Some of these may be the big banks, but I doubt it's their main income. Usually the banks trading desks make money from market-making, which is trading in off-exchange products. Because there aren't many liquidity centres for these products, prices are opaque and the banks have a privileged position in knowing customer order flow, positioning, and so on. This makes it easy for them to exploit customers, as well as earning the natural bid-offer spread anyway.
 
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.
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You are dreaming...Dreams and reality differ...
 
Quote from stock777:

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.
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You are dreaming...the problem is you convey your dreams to others as reality...
 
Quote from intradaybill:

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.
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:D
 
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