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2010-05-06, 15:26:51 return
Why Trade in the Scalping Style?
The average scalp trade lasts about 10 or 15 minutes, at the most. This is in sharp contrast to the buy and hold trading style where a trade may last for years. To some, this style of trading does not make sense. After all, doesn't Warren Buffett recommend buying and holding stocks for the long haul?

Scalping is a style of trading that carves out small gains throughout the course of the day. The average scalper usually takes from 5 to 8 trades during an average trading session. Scalpers use a variety of indicators, including the Commodity Channel Index, the Stochastic Index, price action, Simple Moving Averages and a host of other indicator variations. Regardless of which indicator a scalper uses, he or she is trying to determine in which direction a small spurt of momentum might be heading.

There are some distinct advantages to scalping. We don't hold any trades overnight, all trades occur during the normal trading session. Further, it is easier to glean short-term trends than longer-term trends. Why? There are an infinite number of variables that are discounted into the pricing of an equity, and a reduction in the holding period takes some of the variables out of the equation. For example, natural disasters often affect the price of a stock. With a short holding period the scalper and generally can ignore these broader market variables since his or her exposure to these variables is very limited.

That being said, there are still plenty of variables to consider when scalping and the market is full of surprises, some unexpected. Most scalpers pay close attention to the announcement of economic data by the government as these announcements can often send market prices into gyrations. These gyrations are particularly important to scalpers because the scalping style generally entails using fairly tight stop losses and excessive market noise can cause the equity price to prematurely hit the scalpers stop loss point.

So the average scalper is more concerned about short-term market volatility than anything, and there is no shortage of short-term market volatility, especially during uncertain economic times. Generally speaking, scalpers perform best when markets that are trending either up or down. Unfortunately, studies have shown that the market trends about 30 to 40% of the time, so scalpers are forced into a waiting game as the next trend develops. This is an area where scalpers often get into trouble, as they try to trade non-trending markets. Without a clear trend, many of the indicators used by scalpers can be misread or even be misleading. It is not unusual for two different indicators to indicate trades in different directions. To the experienced scalper this is a clear indication not to trade. However, less experienced are often tempted to trade in these situations and find themselves at the whim of the market.

It's important for a scalper to trade the market, and not let the market force when a trader to initiate a trade. This is to say that experienced scalpers only take high probability trades and leave the lower probability trades alone. For a scalper, the evaluation of trade probability is the essence of his or her trading style. For the most part, high probability trades occur when trading with the trend and not trading against the trend. Most scalpers use multiple time frames to determine both the short and intermediate trends. While some scalpers are interested in longer trends, it is uncommon for a scalper to worry excessively about longer-term trends as they may not come into play for the average scalp trade.

In summary, evaluating short-term trends to find high probability trades is what scalping is all about. We sleep better than most traders because we keep all of our money in cash overnight, and avoid longer holding periods.

I am a long time retail and institutional trader who now only trades part time, usually in the morning. I enjoy writing informational articles about my style of trading so others may benefit.










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