Scalping & Scalpers

S

Slim Harpo

When I first came here I had no idea what members here were talking about when they mentioned scalping...being a scalper etc....Now I do know it means making many trades but getting in and out very quickly taking even pennies profits on each trade with the objective of making many small and fast profitable trades to build up wealth....Am I basically correct?

If I am correct or close to it, my question and the reason for posting this is how do taxes play a role in this?.....are these considered short term capital gains/losses? and how does one keep track of so many trades...and does the tax angle hurt scalpers (scalping) big time by eating into profits?...and finally, are there any books anyone can recommend on scalping?...thanks
 
You are correct in your basic assessment of scalping. It’s a strategy that less dependent on specific market conditions and less likely to result in an account crippling loss on a single trade (although many small losses do add up quickly).

Stock positions that are held for less than a year are taxed at the short-term capital gains rate, which is your marginal income tax rate. Also, there is something called a wash sale rule on stock trades that can limit your ability to write off losses and complicate your tax filing. From a tax perspective, scalping broad based stock index futures, which are considered commodities by the IRS, is better because there are no wash sale rules and you only report the bottom line (gain and/or loss) at tax time. Also, 60 percent of your gains from commodity trading are taxed at the long-term capital gains rate (15 percent), and the remaining 40 percent of your gains are taxed at the short-term rate. This means that commodities gains are taxed at a minimum rate of 13 percent up to a maximum rate of 23 percent.

So with index futures trading your taxes are most likely less, your tax return filing is easier, there is no pattern day trading rule, and no uptick rule on short sales. The down side is that futures are generally more risky than equities due to the leverage involved (which you should fully understand and consider despite the nice tax treatment). Also, commissions can be more expensive than trading stocks, depending on your broker and volume.

I would recommend paper trading for a few weeks prior to committing real funds (don't forget to write down the bad trades as well as the good ones), and begin real trading with just a single contract (gains and losses can rack up very quickly with just one). Avoid the mini S&P 500 index, as the learning curve is much more expensive than other products (the mini Dow on CBOT, symbol YM, is relatively gentle). Finally, developing good money management skills early is key to holding on to your capital.

Good luck.

Regards,
 
Quote from FuturesTrader71:

Do you have the cost structure and infrastructure to be able to scalp?
More...

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What kind and what do you mean by cost structure and infrastructure?

Would you say if you do have the ability to scalp then is it always more profitable and more sure way of making money? Afterall if all you do is try to get as many small spreads as you can then you might have a 90% accuracy as compared to larger spreads which might have 60-70% probability.
 
Quote from JangoFolly:

You are correct in your basic assessment of scalping. It’s a strategy that less dependent on specific market conditions and less likely to result in an account crippling loss on a single trade (although many small losses do add up quickly).

Stock positions that are held for less than a year are taxed at the short-term capital gains rate, which is your marginal income tax rate. Also, there is something called a wash sale rule on stock trades that can limit your ability to write off losses and complicate your tax filing. From a tax perspective, scalping broad based stock index futures, which are considered commodities by the IRS, is better because there are no wash sale rules and you only report the bottom line (gain and/or loss) at tax time. Also, 60 percent of your gains from commodity trading are taxed at the long-term capital gains rate (15 percent), and the remaining 40 percent of your gains are taxed at the short-term rate. This means that commodities gains are taxed at a minimum rate of 13 percent up to a maximum rate of 23 percent.

So with index futures trading your taxes are most likely less, your tax return filing is easier, there is no pattern day trading rule, and no uptick rule on short sales. The down side is that futures are generally more risky than equities due to the leverage involved (which you should fully understand and consider despite the nice tax treatment). Also, commissions can be more expensive than trading stocks, depending on your broker and volume.

I would recommend paper trading for a few weeks prior to committing real funds (don't forget to write down the bad trades as well as the good ones), and begin real trading with just a single contract (gains and losses can rack up very quickly with just one). Avoid the mini S&P 500 index, as the learning curve is much more expensive than other products (the mini Dow on CBOT, symbol YM, is relatively gentle). Finally, developing good money management skills early is key to holding on to your capital.

Good luck.

Regards,
More...

Thank You for answering the questions I had....very helpful to me , especially the tax situation....I, at this time, do not wish to scalp or attempt to be a scalper..I just find those who do use this approach to make money very interesting and was wondering how taxes fit in with this kind of trading style and where I can read more about it....

Thanks again...I appreciate your thorough reply..
 
Cost stucture and infrastructure to me would mean do you have the commision schedule and platform to perform these types of trades. Scalping 1-2 pennies means your execution fees must be under a dollar per round trip. And with pass throughs you need a platform with lightning fast order execution on all ECN's to work the fees as best as you can.

After you have this, being 90% accurate i would say is pretty much impossible, because you have to keep your losses small (1-2 cents). This will mean that even in trades where you are right, you can be shaken out either by the specialist or a market maker depending on where your stock trades.
 
what about a stock that has some volume to it. Can a specialist or market maker shift it away from you that easily? Seems the will of the masses might be more focused on the forest and a tree or two.
 
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