The Strategy:
I am sharing here a method by which I learned scalping. I have discussed it with many pro scalpers and it works well for most people. If you haven't read the previous primer about four most important factors, read it here:
http://www.traderji.com/day-trading-stocks/22291-scalper-s-forum-7.html
1. Trade with 1 share at a time or the minimum size
until you seemingly become profitable. Don't think about paper trading, even when starting, trade with
real money.
2. The moment you take a position assume that you are wrong,
unless the market proves you right. This means the moment you buy, your sell window must be popped up with the size and price you want to exit. If the stock moves towards the exit you simply press sell button. If however, the stock moves towards your target price
exit by placing the offer. I have illustrated for buying but vice versa for going short.
3. Practice exiting trades at no-loss: using a 1-2*RF target. Always remember you should not take a position when you can't expect that movement. For that you need two stops: 1/3*RF soft stop (mental stop) and a one RF hard stop. Never
allow the market hit your hard stop. Exit by moving your target toward your hard stop, not by moving your hard stop towards your target. With time, all of this must become a reflex. You wont always be able to keep your losses down to soft stop, but only on rare occasions should you find yourself letting the market hit your hard stop. (
Rarely means only about once every 50-100 trades after you get the hang of it.)
Even though your entries wont be good enough in the beginning to make a profit trading these tight soft stops, your entries will gradually improve until you turn the corner and become profitable.
Learn exits and entries separately. Dont let the one influence the other.
Taking losses this way takes dedication and discipline, so stick with it. Its the key to
confident trading. If you never take large losses (and rarely medium size ones), the fear of loss pretty much goes away, and your confidence grows. Especially after your entries improve enough to support a scalping type exit strategy.
4. Every trade
in all market conditions begins as a scalp. Let me clarify this: if youre in a choppy market and youre looking to get small gains, like a point or so, manage your initial hard and soft stops
exactly the same way you would in a quick trend or any other type of market. That means keeping losses as close to 1/3*RF as possible, taking
lots of break even trades and
exiting every time the market doesnt give you instant gratification (within a minute or so).
No matter what the market is doing, you must demand that it moves in your favor right after you enter, otherwise you get out as close to break even as possible.
This means youll be closing a lot of trades near break-even within the first minute. This is the foundation of learning to trade for consistent gains.
5. Dont worry about the commissions on no-loss trades. If you do, youll hold on to losing positions, begging them to turn around for you. This is called *hoping.* In this business, this type of *hoping* is the kiss of death. Your money-making trades must move your way in the first minute or less. When trades dont act right in the first minute, most of them will hit your hard stops.
So dont get hung up on the fact that your broker loves you. Who cares if he/she makes a living?
Your concern is
limiting losses. I care more about this than anything else in trading. (Well-timed entries make my tight soft stops possible, so theyre almost as important as the exits.)
6. Practice your entries until your timing is so good that you can
reasonably expect the market to go your way immediately, before it goes more than 2 ticks against you. This is not easy at first,
but if you stick with it, youll get it.
7. Rarely, if ever,
chase the price for your entries. Wait for a pullback to get onboard a trend.
I favor shorts over longs I can get out of a short position quicker than I can get out of a long position. I dont know why. I like to say that I see gravity better than helium. In the rare strong-trending markets where I may chase an entry, its going to be a down trend, not an uptrend. I dont trust up trends enough to chase them. Maybe its just a personal quirk and maybe not. I honestly dont know.
But its interesting to note that most (not all) professional traders Ive met are Bears and prefer short positions over longs. You should give it some thought and find out which direction works better for you. Are your losses bigger on shorts or longs?
8. Never let a gain turn into a loss. This will mean getting out of most trades a little (or a lot) too soon. You just have to live with it. Swing for home runs (greed) will ruin your trading. Do
not search for a mechanical formula , (such as, move your stop to break even after you get 3 ticks gain) that will work. You have to develop a feel for how the market is acting at the moment, and use your feel to reduce your target or advance your hard stop. This comes with experience.
