Introduction To Types Of Trading: Scalpers
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20091115
Introduction To Types Of Trading: Scalpers
One of the most confusing aspects of the trading profession is there is no single definition of "trader". Traders come in many different shapes and sizes, colors and varieties.
Traders generally focus on a specific class of security, mostly common stocks, but they may also trade equity options, commodity futures, [You must be registered and logged in to see this link.] futures, futures options, bonds, foreign markets, and so forth. The security of choice also dictates the specific market(s) on which they trade: [You must be registered and logged in to see this link.] or [You must be registered and logged in to see this link.], [You must be registered and logged in to see this link.], [You must be registered and logged in to see this link.] and so on.
When trading [You must be registered and logged in to see this link.], professionals will generally undertake one of several styles and stick only to that style. This is an important point since traders are always at the risk of being distracted by the din of ubiquitous market commentary and conflicting trading styles. Traders are constantly soul searching and questioning their own chosen approach. Some amount of experimentation is advisable, particularly at the beginning of your trading career, but deviating from a disciplined, focused approach can be disastrous later when you are establishing your style.
Some of your first decisions will determine where your niche is and what type of a trader you want to be. There are at least five distinct styles of common-stock trading, each completely unrelated to the others. The style that you choose will likely reflect your intellectual strengths, your understanding of various aspects of the markets' operations and your temperament.
Here are the major styles of equity trading:
Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their [You must be registered and logged in to see this link.] knowledge and experience with a style to which they feel they can devote further research, education and practice. Entire textbooks are devoted to each style, although many titles such as "Day Trade Online" or "How to Get Started in Electronic Day Trading" are unclear about what type of trading they espouse.
I devote the balance of this article to explaining [You must be registered and logged in to see this link.], a trading technique which which the trader scalps small profits by exploiting the [You must be registered and logged in to see this link.] of a slow-moving stock. Here are articles that explore the other types of trading: momentum trading, technical trading and fundamental trading and swing trading.
The Scalper
The scalper generates trading profits from stocks that are not moving, make tiny (or [You must be registered and logged in to see this link.]) profits from each trade by buying a stock on the bid and then turning around and selling at the ask. Provided that the stock does not move, scalpers can profit all day by making dozens (or hundreds) of trades, buying at the highest price at which they feel comfortable and selling at the lowest price that guarantees sufficient profit while still being attractive to buyers.
The scalper's role is exactly the same as that of the [You must be registered and logged in to see this link.] (also known as the [You must be registered and logged in to see this link.]), a dealer who, by trading stock from his or her own inventory, maintains an orderly market in any given stock. The specialist is basically a scalper on steroids, as the specialist trades many times more volume per day than the average scalper. The specialist, however, is bound by strict exchange rules while the individual trader is not. For example, on the Nasdaq all market makers are required to post at least one bid and one ask at some price level, thereby making a two-sided market for each stock that they cover.
Due to the overlap of roles, the scalper is always competing with the market maker for profits. Unfortunately, the lowly scalper is almost always at a disadvantage due to the market maker's advantages: superior execution speed, perhaps a greater knowledge of trading and the ability to "bluff" the market by placing a bid or ask that exaggerates his or her own true position.
The other factor working against the scalper is [You must be registered and logged in to see this link.], whereby stock prices that were previously quoted in fractions are now quoted in decimals. With fractions, scalpers were always aiming for at least a sixteenth of a point in profit, also known as a teenie, equating to 6.25 cents per share. On a 1,000-share trade, for example, buying a stock at 10 and selling it at 10 and one sixteenth, a scalper would generate $62.50 in profits before commissions.
With the advent of decimalization, teenies are now toast, and the difference between bid and ask may be a single penny. On the 1,000-share trade described above, buying at $10 and selling at $10.01 generates only $10 in profits, most likely not even enough to cover trading commissions.
This is not to say that scalpers' opportunity for profits have been lost. Depending on the stock traded and its liquidity, spreads may remain much higher than a penny, allowing scalpers to generate even more than a teenie. By increasing the number of shares bought and sold (trading 2,000 instead 1,000, for example), scalpers can compensate for any realized decline in spreads, but this comes at the expense of increasing their risk. As for any style of trading, finding a niche from which he or she can derive profits is the trader's utmost goal. Once that niche is found, the scalper can refine his or her technique, successfully trading for pennies just as he or she was trading for teenies.
Again, here are other articles on the other types of trading: momentum trading, technical trading and fundamental/swing trading.
Traders generally focus on a specific class of security, mostly common stocks, but they may also trade equity options, commodity futures, [You must be registered and logged in to see this link.] futures, futures options, bonds, foreign markets, and so forth. The security of choice also dictates the specific market(s) on which they trade: [You must be registered and logged in to see this link.] or [You must be registered and logged in to see this link.], [You must be registered and logged in to see this link.], [You must be registered and logged in to see this link.] and so on.
When trading [You must be registered and logged in to see this link.], professionals will generally undertake one of several styles and stick only to that style. This is an important point since traders are always at the risk of being distracted by the din of ubiquitous market commentary and conflicting trading styles. Traders are constantly soul searching and questioning their own chosen approach. Some amount of experimentation is advisable, particularly at the beginning of your trading career, but deviating from a disciplined, focused approach can be disastrous later when you are establishing your style.
Some of your first decisions will determine where your niche is and what type of a trader you want to be. There are at least five distinct styles of common-stock trading, each completely unrelated to the others. The style that you choose will likely reflect your intellectual strengths, your understanding of various aspects of the markets' operations and your temperament.
Here are the major styles of equity trading:
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I devote the balance of this article to explaining [You must be registered and logged in to see this link.], a trading technique which which the trader scalps small profits by exploiting the [You must be registered and logged in to see this link.] of a slow-moving stock. Here are articles that explore the other types of trading: momentum trading, technical trading and fundamental trading and swing trading.
The Scalper
The scalper generates trading profits from stocks that are not moving, make tiny (or [You must be registered and logged in to see this link.]) profits from each trade by buying a stock on the bid and then turning around and selling at the ask. Provided that the stock does not move, scalpers can profit all day by making dozens (or hundreds) of trades, buying at the highest price at which they feel comfortable and selling at the lowest price that guarantees sufficient profit while still being attractive to buyers.
The scalper's role is exactly the same as that of the [You must be registered and logged in to see this link.] (also known as the [You must be registered and logged in to see this link.]), a dealer who, by trading stock from his or her own inventory, maintains an orderly market in any given stock. The specialist is basically a scalper on steroids, as the specialist trades many times more volume per day than the average scalper. The specialist, however, is bound by strict exchange rules while the individual trader is not. For example, on the Nasdaq all market makers are required to post at least one bid and one ask at some price level, thereby making a two-sided market for each stock that they cover.
Due to the overlap of roles, the scalper is always competing with the market maker for profits. Unfortunately, the lowly scalper is almost always at a disadvantage due to the market maker's advantages: superior execution speed, perhaps a greater knowledge of trading and the ability to "bluff" the market by placing a bid or ask that exaggerates his or her own true position.
The other factor working against the scalper is [You must be registered and logged in to see this link.], whereby stock prices that were previously quoted in fractions are now quoted in decimals. With fractions, scalpers were always aiming for at least a sixteenth of a point in profit, also known as a teenie, equating to 6.25 cents per share. On a 1,000-share trade, for example, buying a stock at 10 and selling it at 10 and one sixteenth, a scalper would generate $62.50 in profits before commissions.
With the advent of decimalization, teenies are now toast, and the difference between bid and ask may be a single penny. On the 1,000-share trade described above, buying at $10 and selling at $10.01 generates only $10 in profits, most likely not even enough to cover trading commissions.
This is not to say that scalpers' opportunity for profits have been lost. Depending on the stock traded and its liquidity, spreads may remain much higher than a penny, allowing scalpers to generate even more than a teenie. By increasing the number of shares bought and sold (trading 2,000 instead 1,000, for example), scalpers can compensate for any realized decline in spreads, but this comes at the expense of increasing their risk. As for any style of trading, finding a niche from which he or she can derive profits is the trader's utmost goal. Once that niche is found, the scalper can refine his or her technique, successfully trading for pennies just as he or she was trading for teenies.
Again, here are other articles on the other types of trading: momentum trading, technical trading and fundamental/swing trading.
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