16 Aug Proprietary Trading Firms Cater To Scalp Trading
Scalp Trading is a word that is thrown around a great deal any time you hear day traders chat but really scalp trading is an unique technique of day trading. It is a type that entails a large frequency of order tickets using a revenue target of only a few cents. The profit occurs from the size of the orders. An ordinary scalp investor at many of the Proprietary Trading Firms employs around 5,000 and 15,000 shares per position with the bigger investors going upward to 200,000 shares for each position. This technique of investing is not really commonly done by retail traders on retail accounts for 2 significant reasons, excellent price structure and particular order routes.
The ” transaction fee ” structure in which the average retail broker offers you is too steeply-priced for this particular style to be possible. Most retail brokers will provide $6 to $7 per one thousand share trade with the best offers close to $5. A scalp trader needs to be capable to gain money from simply an one penny move. So even with the best retail deal of five dollars, a 1 penny shift would earn you $10 but would cost you $10 ($5 to buy and $5 to get rid of) in commission rates which would leave you zero net profit. At a Proprietary Trading Firm, investors can obtain a commission structure anywhere from 30 cents to $1 per one thousand shares. Now if you add it all up: an one penny move with one thousand shares grosses $10 however will merely cost you sixty pennies to two dollars which of course presents a much more attractive net profit margin.
This takes us to ECNs and who we should really be routing your orders through. If you add liquidity to the order book also acknowledged as the level 2 then usually the ECN you routed to will furnish you a rebate. However, if you remove liquidity from level 2, the ECN will charge you. One could be pondering precisely what does it mean to remove or add liquidity? Well as an example; suppose you want to shop for a vehicle. You open a car trader magazine. In the front area of the magazine are ads from individuals who want to buy vehicles. They are showing the mileage and price they are willing to pay. Now in the back section of the journal are folks advertising cars for sale. Well you might be questioning why don’t the folks in the front part of the journal speak to the people in the back part of the journal? This is due to the fact there is a difference in price amongst what the buyers want to purchase at and the sellers would like to sell at. Now these folks whom have put these adverts in this auto magazine are all adding liquidity. The people whom read the magazine and ultimately either sell their car to one of the purchasers or obtain a vehicle from one of the sellers are removing liquidity. This is how the stock market operates and the left side of the level 2 screen is like the front part of the car magazine and is referred to as the “BID”. The right side of the level 2 screen is similar to the back area of the car journal and is referred to as the “ASK” or “OFFER”.
I pointed out before the ECN routing. So just what is an ECN? ECN is an abbreviation for for Electronic Communication Network. When you look at a level 2 display you will view numerous ECNs, Exchanges and Market Makers at each price level and it is your choosing which one you dispatch your trades to. Your choice will be dependent on how quickly the route can fill your trade as well as how much it will cost you or how much your rebate will be depending on whether you are adding or taking liquidity.
Special routes: A number of routes will fill you very promptly but will still charge you even though you are adding liquidity. It is these kinds of routes that retail traders trading with retail accounts don’t possess access to. Traders at Prop Trading Firms will have access to these routes allowing them an advantage over the competition. These special routes are not crucial to become prosperous in scalp trading although they do help make the job significantly simpler.
Now that you know what scalp trading is, you will need to learn the required tools. The most necessary tool is your platform. You will require a Level 2 Direct Access Trading Platform which there are many to choose from.
You will furthermore need a news service such as Briefing or Trade-The-News. When scalping, you must be viewing a small number of stocks. They must be lower priced and possess very good volume on the Bid and Ask.
For each one of the stocks you view you ought to have a level 2 display along with time and sales. Also, you ought to have a daily chart for each and every one of the stocks you watch. Believe it or not, the daily chart is the most critical chart for intra-day traders, which furthermore includes us scalp traders. Last but not least, you need to have a 5- and 15-minute graph of the general market. To see the market, the Standard and Poor is ideal. You can observe this by monitoring the ES futures or the SPY. There are additional things you may desire to include to this set-up which I will write about within my next article, but the above are the most recommended.