REAL WORLD
Controversial? Risky? You Decide
Scalping As A Trading Style
by Vadym Graifer
Scalping got a bad name during the 1998-2000 market boom,
mostly thanks to the media. Does scalping really deserve the bashing?
Scalpers inhabit an area of fairly small
trade movements and feed off the table of bigger fish. The casualty rate
is high (although this statement cannot be limited to scalpers only), but
those who survive are well prepared to profit, in spite of the constantly
changing trading environment. This ability to adjust immediately is worth
it, as such a skill is necessary to prosper in difficult and quickly changing
markets.
BUT WHAT IS SCALPING?
The basic definition of scalping is a trading style in which a trader
takes a profit on the first leg of a movement, not allowing the stock any
meaningful retreat. It is based on an assumption that it is easier to get
a higher amount of winning trades when profits are taken faster, minimizing
the cases when relatively small profits evaporate and turn into a loss.
This is contrary to the more conventional and commonly accepted approach
where a trader lets profits run, risking losing them on a reversal or a
severe pullback, and trying to make up for a diminished win/loss ratio
by a bigger ratio of winner vs. loser.
Scalping is based on the following main premises:
1. Lessened exposure limits risk. Being in the market for a
relatively brief period of time decreases the chances of running into extreme
adverse movements, causing huge losses.
2. Smaller moves are easier to obtain. Obviously, it takes a bigger
imbalance of potential buyers and sellers to cause bigger price changes.
A stock can move 15 cents with relative ease; it takes more time and more
volume to make a $1 move. It also exposes a trader to more setbacks, which
are often difficult to cope with.
...Continued in the October issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the October 2005
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
Return to October 2005 Contents
