Algorithmic Trading - III

In the previous article, we discussed that algorithmic trading allows performing transactions in a matter of seconds and thanks to the high speed of this method, making profits out of small changes in prices can be possible. Some traders believe that making profits with small increments are more profitable and more realistic than hunting for big opportunities and deals. These traders are known as scalpers and their method for carrying out transactions is called scalping. This method has actually proved to be very useful and practical, if the traders have significant and deep insight into the matter, and small amounts of profits have been accumulated to large amounts thanks to this method. Placing many small-scale trades per day can bring in big profits. Scalping is not only about investing, but also planning for decent exit strategies – an exit strategy, in short, is a measurement for closing or shutting down an unprofitable trade or business.

The aim of scalping is to sell or buy shares within a few seconds to hours (basically intraday) and make profits through small amounts by trading fast. This operation is thoroughly based on asking prices quickly and setting strategies based on selling or buying within a day and before the end of the trading session. Precision in timing and taking action, experience and insight all are the kingpins of conducting a successful trade. Scalpers focus on day time trades and aim to maximize their profit by analyzing most shares possible in the shortest amount of holding time. This requires focusing on one-minute or five-minute candlestick charts, and moving average convergence divergence (MACD), or relative strength index (RSI) are commonly used in scalping by traders.

For price support and resistance levels, references such as pivot points and moving averages are used. The main aim of scalping is buying low and selling high, or buying high and selling even higher, etc. Thus performing constant technical analysis and identifying the short time price fluctuations are essential aspects of this type of trade. It is evident (also because of overuse of leverage), that scalping can be a rather risky business. Moreover, common mistakes such as rushed strategies, overleverage, late entries or exits, over-trading, and wrong timing can all be the factors that drive away investors from this way of trading stocks. It can be also stressful due to scalping generating heavy commissions for carrying on many trades in a short span of time. On the other hand, professional scalpers are aware of the benefits of per-share commission pricing and take advantage of it.

All these factors require traders who are very organized and can make firm decisions in a short span of time, and committing themselves firmly to their business. They should also have a flexible mindset for taking into account various options and gauging the cons and pros of transactions in a very fluid manner, in accordance with the nature of the market.

Of course for maintaining the balance in the stock market obeying the pattern day trader (PDT) is a very important point. The number of trades conducted (four or more day trades) is limited in a particular span of time (five days regularly). Therefore, scalpers are required to possess account equity with a minimum of USD 25,000.

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