The tastytrade financial network recently launched a new six-part series focusing on Scalping - and no, this does not piggyback on frontiersman themes from the forthcoming movie - The Revenant.

While "scalping" was made popular in North America many years ago, this particular interpretation relates to financial markets and trading.

Scalping is of course an intraday trading strategy that attempts to make profits on small price changes. The number of scalp trades deployed in a given day will vary greatly by trader and market conditions, but the philosophy remains constant - to harvest profits from many small moves as opposed to one big one.

The Scalping series (tastytrade edition) will span six episodes that focus on the following high-level topics:

  • Define, Expect, Explain
  • Searching Opportunities
  • Trade Execution
  • Waiting Until You Are Right
  • Market Awareness is Key
  • Building Consistency

Most traders of niche securities will have their own system of tiering products for scalping. However, for the purposes of this series, we'll be talking in terms of liquidity, with the breakdown looking like this:

  • First Tier: /ES, /NQ, /ZB
  • Second Tier: SPY, AAPL, NFLX, AMZN, GLD, TLT, QQQ, TWTR, FB, /NG, /GC, /6E, /ZN, /CL, /VX
  • Third Tier: Derivatives on the above products

Scalping starts with a clear understanding of the risks involved with the product that will be scalped. That effectively means a trader needs to understand the notional value of the product being utilized, the capital implications of scalping a particular product, the tick size of the product, and the average expected intraday trading range of the product.

To get a sense of scale, the Scalping team developed a chart showing the move and ensuing dollars at risk for 100 shares of stock in the symbols listed below. The plus/minus shows essentially the amount of dollar risk (profit/loss) a trader has put in play with 100 shares about 68% of the time, on average.

Tony Battista expands on the importance of understanding risk and scale by introducing some similar data that helps traders understand the amount they have at risk in futures products as well.

Ensuring that one is comfortable with the dollars at risk and the expected range of the products is absolutely critical before a trader embarks on strategy based on scalping. For example, if we look more closely at /ES, we can see that a range of five points is extremely common for this product. On the other hand, 30 ticks represents a much more rare move. With that understanding, a scalping trader can at least get an understanding of what represents a “typical” move versus an “outsize” move. This data is illustrated below:

Some other critical factors to consider when scalping include the following:

  • Full understanding of proper sizing (tick risk)
  • Familiar with corresponding products (options, ETFs, pairs)
  • Ability to multitask (following multiple intraday positions)
  • Sufficient capital
  • Ability to trading within risk and capital limits
  • Setting realistic goals for profit
  • Ability to recognize an adverse move
  • Ability to follow market (time intensive)

The hosts of the Scalping series, Tom Sosnoff and Tony Battista, both have extensive experience employing scalping strategies across a diverse group of trading products.

We encourage you to watch the Scalping series when your schedule allows.

Also, don’t hesitate to contact us at support@tastytrade.com with any questions or comments.

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.