Scalping: Day Trading the ASX

Submitted by Sharemarket News on 9 May, 2011 - 16:40

Learn about scalping.

Making a killing on small price changes when share trading is called scalping. Scalpers, as these traders are called, will generally place hundreds of trades in one day, inundating the market with orders. Their goal is to trade a lot of shares at the asking price and sell them as fast as possible at a slightly lower or higher price for profit.

The logic behind scalping is the belief that small price movements are easier to catch than big ones. After all, a number of small profits can easily turn into large gains. To prevent huge losses, the 'trick' scalpers use is to use a stringent exit strategy.

When your goal is to make from five to hundreds of trades daily, you will generally need one-minute charts because of the small time frame. Auto-instant order execution is needed and a direct access broker is usually employed.

Scalping is not "illegal", but you do run a couple of risks. Most traders would caution greenhorns against scalping, as investment can be wiped out without stops. To be an efficient scalper, your eyes need to be literally glued to the screen. This means higher stress levels than ordinary trading. Apart from brokerage and tax issues, you need to know when the price will go up (if it will go up). You may see more stocks decline than rise.

Here are some points to consider before scalping:

  • Stops. Have strict and detailed stops that you follow.
  • Timeframes. It makes no sense to hunt for a short term scalp if you are willing to hold the stock if it drops.
  • Indexes, futures and forex. These work best for scalpers because of the larger volume and lower brokerage fees.

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