Why Scalping Works So Well

I am often asked, even criticized, for aiming for just a few cents with my scalps. They say “If you know the stock will move three points, then your option should move a dollar and a half. Why would you take only a dime?”

This is a good point, but my reply is, “You know that for sure? How much of your hard-earned money would you put on that bet? Because that’s what it is, a bet. Maybe you know, but I certainly don’t know anything for sure. I can only anticipate it.”

What I do know for sure is that I am much more confident that the stock will move 30 cents than three dollars, even if my long-out indicators suggest it. If I gain $0.15 on the trade, that is 15 cents I didn’t have before, and 15 cents less that I need to earn on my way to the three-dollar move on the stock. Stocks do not move in straight lines. They bounce up and down, even on a good upward trend. I follow a longer-term five- or 15-minute trend but trade off a one-minute chart. If the trend is climbing, I can pick up the bounce off an exponential moving average, make my 15-cent gain and then wait until the stock retraces and bounces off that moving average again for another buy-in.

If I follow this pattern of trading, I may make my total expected gains much sooner than if I wait until the stock moves up that $3 I thought it would, if it, in fact, does make that move. Not only do I make my gains sooner, but I can make more money because I took advantage of the retracement and bought back in for a lower price than what I previously sold for. Like building a house, one brick at a time, it will likely be much stronger than if I choose to live in a prefab, vulnerable to the first strong wind.

Another reason scalping works well is because I develop a cushion as I scalp up. If I earn, say, $300 that day by inching up my profits, I then have that $300 to absorb any losses should the market turn against me. I can generally earn that $300 within the first half hour, usually much sooner. If I only execute one trade a day, that works out to $1,500 a week, or about $75,000 a year. Most Americans work much longer and harder for much less.

There are never any guarantees in trading. Even though I may expect the market to move $3, given my in-depth analysis, the market may surprise me and reverse course, leaving me with a loss. Usually, that loss is more than just financial. I am often left with a bruised ego, knowing I had a good profit in that trade but decided to hold out for more. I know you have all been there, done that… the true cost of greed and ego.

I also enjoy trading, and as such, I get the same dopamine rush with a win, whether it is 15 cents or $1.50. Admittedly, the $1.50 gain does feel better, but I would rather take 10 gains of 15 cents each as they last longer and without undue stress.

Scalping is also fast, usually over within a matter of minutes — sometimes seconds. Considering that I have a high confidence level in a smaller gain, I can invest more money in the trade and take profits quickly. Where I would normally buy 10 contracts on longer-term positions, I would not hesitate investing in 20, 30 or more contracts, and be in and out quickly for six to 15 cents, depending on the momentum.

To me, scalping is where it’s at. With such market volatility, I see no reason to stay with a position in hope of it reaching my target price, all the while losing precious theta.

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