These days, spreads on stocks with large trading volumes have become smaller. Before the market converted to decimal pricing, the standard spread was 1⁄16 of a dollar or a “teenie.” A “teenie” equals 6.25 cents. A scalper who bought at the bid and sold immediately at the ask would make the spread of 6.25 cents per share.
If the commission was a penny per share, the scalper would still make money. The scalper must be right more often than not. Three things can happen: The stock can go against you, stay the same, or move in your favor. Two of the three possibilities are bad.
When the market went to decimal pricing, the spread on the high-volume stocks became a penny or less. This has made it impossible for scalpers to profit. Another scalping technique involves momentum trading. Scalpers try to ride on the back of institutional trading. They learn to spot opportunities on Level II, then jump in at the beginning of a move and get out before the momentum dies. On any given day, there will be short bursts of activity when buy or sell orders from large institutions reach the market. The sheer size of these orders tends to move the market in the direction of the order. A sell order tends to move the market down, whereas a buy order moves the market up. It takes effort to learn to spot these activities.
Rather than looking for specific stocks, momentum scalpers watch for news events, earnings reports, and business news that can set a particular stock in motion. They watch the various queues for signs of a potential burst of activity. Usually, this is done by watching the activities of the market makers.
Another method the scalper uses is “shadowing the ax.” The “ax” is a large institutional player that is actively participating in the movement of a stock. Usually, the institution has received a large buy or sell order. To get it delivered, the institution will employ different tactics to confuse the trading public about its true intentions.
To make money using this strategy, scalpers need to have a clear understanding of how each of the different market-making operations act. Otherwise, they can get on the wrong side of the trade. I do not discuss all the various scalping tactics here, but now you have the basic idea.
A scalper has to constantly watch the Level II screen and quickly react to the information it provides. Unfortunately, the screen does not slow down and allow the scalper to interpret the information. Decisions must be made in less than a second.
Once a decision has been made, scalpers must react before the price moves away from them. Execution skills come into play. Scalpers with less than optimum execution skills will not succeed. They will always be late, unable to get the shares they want. Scalping is not for everyone.
Read More : Scalping Trading System
