Scalping is a short-term trading strategy in which the trader repeatedly takes small profits to secure market share. Although forex and equities products attract many scalper traders, futures and options are also ideal markets for the implementation of this powerful methodology.
Let’s take a closer look at scalping and what is required to make money as a scalper over the long haul.
The Ins and Outs of Scalping
The modern financial markets are diverse arenas featuring minimal barriers to entry. Because of the accommodative atmosphere, thousands of people enter the markets every year. Many new traders view scalping as a surefire way of making some easy money. Unfortunately, it’s a bit more complicated than that.
From a practical standpoint, scalping has several attractive features:
- Frequency: Scalping is an active trading strategy that requires executing a high number of trades on a daily basis. If you’re seeking action, rest assured that you’ll never be bored.
- High winning percentage: Traditional day and swing trading strategies typically aim for modest 25-30 percent winning percentages to stay in the green. Scalpers shoot for much higher success rates, with most being above 50 percent. Because of the small profit targets, the odds of a scalp cashing in are much greater than those found in traditional trades.
- Reduced risk: Scalping strategies are designed with ultra-short-term trading horizons in mind. Holding positions for only seconds or minutes vastly reduces exposure to systemic risk. If the market crashes or breaks out, scalpers are unlikely to suffer a negative impact.
There’s no denying that scalping offers a collection of unique benefits. Reduced risk exposure, high winning percentages, and constant action are factors that frequently gain the attention of novice traders. Action and limited risk? Where do I sign up?!
Despite the upsides, the scalper trader faces a long list of necessities that are vital to success. It isn’t enough to have a viable strategy—consistent execution is an absolute must. To accomplish this feat, all trade-related efficiencies need to be optimized. These five inputs are essential for anyone interested in becoming a profitable futures and options scalper trader:
Direct Market Access
To be a successful scalper, you have to be fast. Direct market access (DMA) enables you to transfer data to and from the market free of intermediaries. The result is reduced trade-related latencies facing order entry and active position management.
Liquidity
The success of any scalping strategy depends on how efficiently it’s traded. From the standpoint of the market, maximum depth and liquidity are ideal. Deep markets feature tight bid-ask spreads and robust participation―two factors that minimize slippage and promote desirable order fills. Market liquidity is one area in which the futures and options markets are especially receptive to scalping. Equities indices, energies, metals, and bonds all offer contracts that are inherently liquid and tradable.
Volatility
Securities that exhibit constant pricing volatility are the best targets for the scalper trader. Although capitalizing on small price movements is the objective, the greater the volatility, the better. Large daily ranges and regular periods of heavy participation are common attributes of a volatile market. Many futures and options contracts offer consistent volatility. Three of the most active are WTI crude oil (CL), gold (GC), and the E-mini S&P 500 (ES).
Stamina
The backbone of any scalping strategy is the execution of significant volumes. For other disciplines, such as day or swing trading, patience is a virtue. Scalping is a different animal―you must be aggressive and ready to capitalize on all opportunities. Because scalpers take small profits, the number of trades executed is a primary driver of the bottom line. Missed trades are as bad as lost trades, which means the successful scalper trader must have the stamina to identify and execute trades all session, week, month, and year long.
Low Costs
Sunk costs are the amount of capital required to sustain operations. To active futures and options traders, this means commissions, exchange fees, data fees, and platform fees. One thing you can do to minimize your sunk costs is to deal with a good broker. Strong brokerage firms often provide their clients with complimentary trading platforms and data feeds. Reduced or tiered commission structures can also help mitigate the cost of buying and selling large volumes of contracts on the open market.
Want to Become a Scalper Trader?
Perhaps the single largest benefit of scalping is flexibility. As a primary or supplementary methodology, scalping futures and options can help you pursue your financial goals with limited risk. For more information on this exciting trading strategy, speak with an experienced StoneX broker today.
