Taking Scalps

While "I bought in front of a huge bid, and made a quick 20 cents in $XYZ" isn't as sexy as "I made 100 points in a month on a nice $TSLA trade", the first trade was most likely the smarter trade and offered more edge. The short-term trading style of scalping has always flown under the radar. Instead, traders are fixated on catching monster moves off exotic candle stick patterns, and while it is possible to get filthy rich while position trading, the odds are success are a lot better for the skilled scalper.

Here is an excerpt from Cash Rules: Reminiscences of a Day Trader, in which I delve into my preferred method of trading: scalping

"let me first quickly categorize the different trading styles. For simplicity's sake, I will put them into two groups.

Scalping describes a style of trading in which trades are held for seconds, minutes, or, in some cases, hours. The skilled scalper takes profits quickly and covers losing trades even more quickly.

Position Trading (as well as Swing Trading) revolves around holding positions for hours, days, weeks, months, and maybe even years. The position trader relies on technical and fundamental analysis and hopes to ride the momentum of the markets.

You could say I started my trading career as a position trader. My initial trading strategy consisted of buying a stock, or basket of stocks, and hoping the market would show me mercy. If the market was unmerciful, which it tended to be, I would typically hold my position until my daily loss limit was met, and I was forced to cover. My reason for entering one of these “wing and a prayer trades” was typically some exotic technical pattern, maybe a “bullish pennant” or a “cup and handle pattern”. I might occasionally hit a home run, but the vast majority of my trades were strikeouts. I was basically using the same strategy that 90% of the traders on Twitter use, and despite their bluster, I’m almost certain they suffer the same results.

Scalping is different; it’s more about reacting than hoping. The skilled scalper is still technically at the mercy of the markets, but is constantly adapting to the dynamic situation, staying nimble and not attaching themselves to one side of the market. A scalper realizes that even though a trade setup might look perfect, the markets might not want to cooperate, and there is no point in fighting the markets. The trick is to look for warnings that the market is kind enough to share and act accordingly.

A warning could be a big seller in the order book, breaking news, or a sudden nosedive in the broad market. For example, it might look like the perfect long position, but if a huge seller pops into the order book, the skilled scalper will use their tape reading skills and quickly cover their position and look for the next opportunity–which may even mean switching sides and shorting that same stock in front of the big seller.

Scalping revolves around agility and speed, making it more like video gaming, but discipline is the most essential trait for any successful scalper. Cutting and keeping your losers as small as possible becomes paramount when your winners aren’t as big. Although home runs are possible, the scalper aims to hit singles and doubles. These winning trades don’t have to be huge, just bigger than the losers. If a trader (any trader) can follow this mantra, he or she doesn’t even need to be right most of the time–even in my best months, my win rate typically hovers around 50%.

It all makes perfect sense to me, and that's why I have always resisted the temptation to switch sides and become a position trader. I don’t want to go to bed knowing that some random geopolitical event overnight in Asia could destroy my trading account; scalpers sleep like babies. Why would I leave myself to the whims of the market? The position trader speculates by thinking or hoping that a stock will go up–and that sounds like gambling to me.

I say “gambling” partly tongue in cheek because I know successful position traders, and certain position trades offer plenty of edge, such as that $LVS trade I spoke about earlier. But ultimately, for me, it makes sense to scalp. Why not use these amazing tools available, such as order books, and why not operate mechanically instead of being totally exposed to the unpredictability of the markets?"