The commission framework in which the regular retail broker offers you is too expensive for this style to be workable. Most retail brokers may offer $6 to $7 for each one thousand share trade with the best bargains around $5. A scalp trader needs to be able to generate money via just an one penny move. So even with the greatest retail deal of $5, an one penny shift would make you $10 but would cost you $10 ($5 to buy and $5 to sell) in commissions which would leave you zero net profit. At a Proprietary Trading Firm, traders may obtain a commission structure anywhere from 30 cents to $1 per 1000 shares. Now if you do perform the sum: an one cent move with 1000 shares grosses $10 but will simply cost you 60 pennies to $2 which of course gives a more appealing net profit margin.
This brings me to ECNs and who one ought to be routing your orders through. If you add liquidity to the order book also known as the level 2 then normally the ECN you sent to will pass on to you a kickback. Having said that, if you remove liquidity from level 2, the ECN will charge you. You may possibly be considering exactly what does it mean to take or add liquidity? Well as an analogy; suppose you need to shop for an auto. You open an auto trader magazine. In the front area of the magazine are advertising from individuals who need to purchase cars. These people are showing the mileage and worth they are in a position to pay. Now in the back section of the journal are individuals promoting automobiles for sale. Well you might be asking why don’t the people in the front portion of the magazine contact the individuals in the back segment of the journal? This is due to the fact there is a variation in price between what the buyers really want to buy at and the sellers expect to sell at. Now these folks whom have put these ads in this auto journal are all adding liquidity. The people whom read the journal and ultimately either sell their vehicle to 1 of the buyers or acquire an auto from one of the sellers are removing liquidity. This is actually how the stock market operates and the left side of the level 2 screen is like the front segment of the auto journal and is referred to as the “BID”. The right side of the level 2 screen is like the back segment of the car magazine and is referred to as the “ASK” or “OFFER”.
I pointed out before the ECN routing. So precisely what is an ECN? ECN is an acronym for Electronic Communication Network. Whenever you look at the level 2 monitor you will find various ECNs, Exchanges and Market Makers at each price levels and it is your choosing which one you transmit your trades to. Your selection will be based on how quickly the route will fill your order and how much it will cost you or how much your rebate will be dependent on whether or not you are adding or removing liquidity.
Particular routes: Several routes will fill you quite quickly but will still charge you even though you are adding liquidity. It is these routes that retail investors buying and selling using retail accounts do not have access to. Investors at Prop Trading Firms will have access to these routes giving them an edge above the competition. These special routes are not essential to being lucrative in scalp trading however they do help make the job a great deal easier.
Now that you recognize what scalp trading is, you will need to realize the necessary tools. The most necessary tool is your system. You will require a Level 2 Direct Access Trading Platform which there are various to choose from.
You will also need a news service such as Briefing or Trade-The-News. When scalp trading, you should be viewing a handful of stocks. They must be lower priced and possess great volume on the Bid and Ask.
Regarding each one of the stocks you follow you must have a level 2 screen along with time and sales. In addition, you must have a daily chart for each and every one of the stocks you follow. Believe it or not, the daily graph is the most critical chart for intra-day traders, which additionally includes us scalp traders. Last but not least, you must have a 5- and 15-minute graph of the overall market. To view the market, the Standard and Poor is preferred. You can watch this by viewing the ES futures or the SPY. There are some other things you will wish to add to this set-up which I will address within my next article, but the above are the most required.
Affinity Trading is a proprietary trading firm that provides daytrader education for those wanting to become professional day traders. They educate and empower professional traders on the art of micro trading.
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