Scalping is a method of trading that many traders try to implement, but many fail to take hold of its benefits due to conflicting mindsets unique to each trader. The purpose of a scalping strategy is to take advantage of small price movements throughout the day using large leveraged positions.
The idea is to enter and exit quickly to ensure minimal risk and exposure to market forces. Entries and exits are carefully planed and calculated prior to the trade being executed. Due to the high leverage and larger positions, scalpers have small stop-loss and targets – a risk-reward ratio of 1:1.5 (10 pips risk, 15 pips reward) is common while scalping. Market exposure is limited, too. Scalpers try to be in an active trade for less than five minutes to avoid adverse price action due to their micro-time frame.
The mindset of a scalper:
- Know the platform and/or brokerage – Due to the limited time to act and react, a scalper must know their platform inside and out to ensure trades are executed in the most efficient manor. Some platforms offer different indicators, strategies, etc. Some brokerages do not allow or discourage scalping.
- Detail Oriented – Know the risk-reward prior to order execution. Use limit and stop-loss orders to pre-define profit and losses. Once these orders are in place, do not fiddle with them.
- Effective use of leverage – Know that leverage is a double-edge sword. Leverage can multiply both profits and losses. Keep targets and stop-orders limited. Small profits add up over time.
- Cool as a cucumber – Scalping often involves high levels of stress. Scalpers are often in front of their computers several hours a day scanning for trading opportunities. Scalpers also trade during times of high volatility, such as economic data or geopolitical reports.
Trader Profile: Paul Rotter
Paul Rotter became infamously known as “the flipper” for his style of scalping. He pushed through the ranks of investment banking, and then he started trading German Bunds and interest rates with Greenhouse Capital Management from Dublin, Ireland. His unique trading style infuriated other market participants because he would place huge block order trades on both sides of the order book, even though some he would close prior to execution.
Rotter would make roughly a few hundred to a few hundred-thousand round trip orders (both an entry and exit) each day, while reportedly earning $5 million per month over a period of a decade.
He was effective because he was not biased. In an interview he stated “a trader should not have an opinion. The stronger the opinion, the harder it is to get out of a losing position.” Rotter would also trade the most liquid instruments and would spread out his trades in various markets.