Scalping is a fast trading strategy used in proprietary trading. You make many small profits off small price moves throughout the day.
This requires a good understanding of market trends and being able to react to live data. As a proprietary trader creating a scalping strategy means creating a system to find opportunities, execute trades quickly and manage risk.
At its core a scalping strategy in proprietary trading is all about trade planning and execution. It’s understanding the platform, understanding the instrument, and being disciplined to cut losses and let profits run.
As a trader you need to have clear rules for entering and exiting trades and preserve capital and manage the risks that come with this style of trading.
Key Points
- Scalping is fast trading and small price moves.
- Good scalping strategies require quick execution and risk management.
- Proprietary traders must be disciplined and use a system in scalping to win.
Scalping in Proprietary Trading
In proprietary trading scalping is a method that makes profits off small price moves. Your success in this will depend on high volume trading, quick decisions and discipline.
Scalping Basics
Scalping is making many trades throughout the day, each to make small profits. As a scalper you will use technical analysis to find exact entry and exit points in the minute by minute market moves.
The key is to trade fast and minimize risks which means you need to have a good understanding of market indicators and be able to act on them quickly.
Scalping vs Other Trading Strategies
Unlike longer term strategies scalping requires presence. You will be trading in minutes or even seconds. Here are some differences:
- Time: Scalping is holding positions for a very short time, unlike day trading or swing trading which can be hours or days.
- Volume: You will be trading more volume than other strategies
- Profit Targets: Your profit per trade will be small not big.
Characteristics of a Good Scalper
To be good at scalping you must:
- Focus: You must be able to focus intensely on the markets as the high volume of trades requires constant attention.
- Discipline: Set your trade exit points and stick to them to preserve your capital.
- Technical Skills: Be technical analysis proficient to find trading opportunities.
Add these to your proprietary trading and you will be more efficient and effective in scalping.
Create a Scalping Strategy
To be good at scalping as a proprietary trader your strategy should have precise market analysis, smart instrument selection and well defined entry and exit rules. All of these should be backed by tight risk management.
Market Conditions
Before you start scalping check the market volatility and liquidity. These are key to short term trades.
Use technical indicators like moving average to understand the trend. High liquidity will allow you to trade at your desired bid and ask prices and volatility will give you the price moves to hit your profit targets.
Choosing the Right Instruments
For scalping you need to choose instruments that have the right balance of risk and reward.
Major forex pairs (e.g. EUR/USD, GBP/USD) with lower spreads and higher liquidity are good candidates. This is because of their tight bid-ask spreads and high volatility.
Entry and Exit Points
Your entry and exit points should be defined by technical indicators and price action.
Common indicators are moving average to track the trend and Parabolic SAR for reversals.
Your entry strategy can be to buy at ask when indicators show uptrend and sell at bid when the reverse is indicated.
Profit Targets and Stop Loss
Set your profit targets and stop loss.
Your profit target can be a percentage above your entry price and your stop loss should limit your loss at a certain threshold. This will give you a good risk reward ratio and protect your capital from market reversals.
Risk Management in Scalping
In scalping risk management is the foundation of your trading strategy as even the smallest mistake can lead to big losses. Your ability to manage risk is directly proportional to your ability to make sustainable profits.
Costs and Risks
Transaction Costs: As a scalper you are trading on thin margins so your broker’s spread and transaction costs are important.
You want the lowest spread to minimize the cost of entering and exiting trades quickly.
List of costs:
- Broker’s commission
- Bid-ask spread
- Slippage
Check each cost against your expected profit per trade. High frequency trading will magnify the effect of these costs.
Risk Analysis: What is the risk of each trade? Set a limit on your loss per trade.
You must decide how much of your capital you are willing to risk and stick to it.
Risk Control
Stop-Loss and Take-Profit: Use stop loss to limit your losses.
Determine the pip range for your stop loss that fits your risk tolerance. Then pair it with a take profit target that gives you a good risk reward ratio.
Money Management: Trade only a small percentage of your capital per trade to preserve your capital over time.
Stick to your money management system so you can survive the losses that comes with high frequency trading.
Consistency: Risk management must be applied consistently.
Don’t deviate from your rules even if you are tempted by potential gains or anxious of accumulating losses.
Leverage in Scalping
Leverage: Leverage can amplify your gains but also your losses. Be careful with leverage; excessive use is a common mistake that can blow your account fast.
- Leverage is a tool that gives you more exposure with less capital.
- Keep your leverage at levels that fit your overall risk management plan.
- Avoid excessive leverage that will turn small gains into big losses.
Trading Scalping
When trading scalping, precision is important. You must be fast to get into trades and efficient to manage your trades to be profitable.
Choosing the Right Broker and Platform
Choosing a broker that has a platform for scalp trading is key to your success. You need a platform that has real time market data and executes orders fast.
Look for platforms that has advanced limit orders as this will be part of your strategy. Here’s a quick check list to make sure you have the right setup:
- Real Time Data: Your platform should update in real time.
- Order Execution: Fast and reliable execution is non negotiable.
- Tools for Scalping: Charting, indicators and analysis tools should support quick decision making.
Order Execution Speed
Order execution speed can be the difference between profit and loss in scalp trading. A second delay can make a big difference in your trade outcome especially when you are trading multiple times. Here’s what to focus on:
- Latency: Lower is faster.
- Technology: Make sure your broker uses the latest technology for trade execution.
- Execution Policy: Understand your broker’s policy on slippage and order fills.
Practice and Refine
Before you trade live, split your time into two. First, practice your strategy with a demo account. This will give you a feel of the speed and pressure of scalp trading without risking real capital.
Consistent practice will refine you where you can:
- Use simulators to test execution speed.
- Record and review every trade to improve your process.
- Adjust your strategy to the market sentiment to find the best trades.
Remember, practice is important but it can’t replicate the emotional and financial risk of real trading. So, be careful when you move from demo to live.