Futures Scalping: Warp-Speed Day Trading That Takes No Prisoners

There’s day trading and then there’s day trading at the speed of light—a strategy known as scalping. A futures scalper makes dozens or even hundreds of trades per day, working to make a profit…often pennies at a time…off the bid-ask spread.

To do this, the scalper attempts to buy at the bid price (the immediate execution price for quick sellers) and sells at the Ask price (the immediate execution or market price for quick buyers).

Not Too Much Volatility Please…
Most commodities traders make money off of price movements, which, to them, are far more important than the absolute cost of contracts. But scalping doesn’t depend on market trends. In fact, a scalper’s theoretical best friend would be an asset that was sitting dead in the water, enabling the investor to make the same trades, over and over, without getting caught in a sudden adverse price movement. In the real market world, the closest thing is an asset such as that is on which is bobbing up and down within a small price range and which has no major break outs.

Need for Speed and Capital
Scalpers leave themselves exposed to the market for brief periods only, which decreases their chances of running into big adverse movements that can create huge losses. (Note that decreasing their chances does not equate to eliminating them. Scalpers must have strict risk management strategies in place.) However, since the possible profit (or loss) per contract is very small, scalpers need to trade large, or at great speed, to make these earnings significant. Scalping isn’t for the small-capital trader or the laid-back investor, so if you’re lacking in both investable cash and round-the-clock energy, you need not apply.

Because speed is their friend, scalpers generally prefer to trade in very liquid markets. The flip side of this is that the more liquid the markets and products are, the tighter the spreads are, lowering the potential profit (or loss) on each transaction. Less liquid markets can be profitable however, if the spreads are wide enough.

Trading Strategies—Fundamental and Technical
If you’re interested in trying your hand at scalping, one basic strategy works in both the fundamental and technical worlds, and that’s to keep a lookout for major events that impact market direction.

Yes, we did say scalping doesn’t depend on market trends, but scalpers can benefit from knowing when those trends might take off. Success doesn’t depend on the direction the trend takes, however, so one type of guesswork is eliminated.

Many novice commodities traders look to ride the spurt of volatility that occurs right after a scheduled announcement such as a major economic or industry indicator. However, the time frame for taking profits (or losses) here can be excruciatingly tight, and it is notoriously difficult to predict the direction of indicators or the market’s reaction,in advance. On the other hand, if we eliminate any concern about direction, price action around these announcements is quite predictableand the scalper can use this to his advantage.

The price action around these events follows three key stages. Stage one is the approach. As time for an announcement grows near, volatility goes quietly Zen. The big players are avoiding taking major stands in fear of an unfavorable surprise— they either hold on or try to hedge. Prices steady within a relatively narrow fluctuation range. During stage two—the information release and the minutes afterwards—activity and volatility surge, as players large and small scramble to trade the data up or down. In phase three, which occurs after those first few minutes of frantic activity, the market settles into a directional bias that’s clear to see.

It’s in the Zen period that the scalper can find himself. What appears to the traditional trader as a formless, untradeable mess, is the zone in which the scalper can repeatedly trade in and out for small spread-based profits (or losses), with a tight stop-loss point setup just outside the fluctuation range.

If you prefer technical analysis over fundamental analysis, this strategy still applies. Key points of support (the price level that an asset has been staying above) and resistance (the price level an asset has been staying below) act much like planned fundamental announcements. (If you’re not sure how to identify support and resistance levels, you may be interested in learning pivot point calculations, which are often used in the commodity futures markets.) We can see these key points coming and they herald a potential change in market behavior. Whether this market change is a mathematical or psychological artifact may be unclear, but the price action pattern is crystalline and follows the same three key stages delineated above. Find the Zen and make the deals.