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.
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