Timeless Advice for New Traders…Scalp!

BellaBella Daily Update

My timeless trading advice for new traders is….scalp.  Okay, let me explain why.

What I heard too often 

During a recent team monthly trader meeting, I heard too often something that I wasn’t crazy about.  I was particularly not so thrilled hearing it from the younger traders.  While I wasn’t so thrilled, this did offer an opportunity to set expectations for most traders at this monthly meeting and particularly the newer guys.  I suspect many in the trading community, and perhaps you, can learn from this as well.  It may help you set better expectations and focus more appropriately on the best trading strategies, as you build your trading career.

(The Quickest Way to Profitable Trading: “Easy Money Trades”)

During this monthly meeting, I heard too much of “there were not a lot of big opportunities this month so I was essentially flat for the month.”  Now this was said by a hugely successful trader, one who has cleared 8-figures in trading profits during his career, and then was repeated to often by other traders on the team.  The younger traders were attributing being flat for the month, not losing or making money, to there NOT being any huge opportunities.

Relying on 6-figure trades

Now by huge opportunities we mean 6-figure trade opportunities.  Said better, the ability to make over 100k in one trade.  This hugely successful trader was not expressing that there were no 6-figure trade opportunities.  There were a few and they didn’t work out for him.  And for sake of clarity this star trader was expressing that there were not many 6-figure trade opportunities for how he trades.  And we trade as a team, with traders stationed on various teams at the firm.  So the younger traders are likely to share the opinion of the more senior traders, particularly a trader as successful as this trader, about these 6-figure trade opportunities.

I was listening and listening and listening to all of this and sensing something was just not right with this narrative.  And this narrative was particularly off for the younger traders.

Now look a hugely successful trader who has made more than 8-figures in a trading career may not be interested in smaller trades.  They may have graduated to the level of waiting for the big trading opportunities to visit and then focusing on them.  This can be particularly true as veteran traders seek more life balance as they have reached financial freedom.  This is not true for all or even many veteran traders, but it can be true for some.  And that is fine.  That is where they are in their trading careers.  That is what is most important to them.  We get it.

And these widely successful traders are still engaged daily in markets.  They are still researching to build out new strategies.  They are still communicating with younger traders about trades to help them develop.  They are still making an important contribution to the firm.  But they are preserving their financial, emotional, and monetary capital for the big opportunities.  They have earned the right to do so.

Flat is not flat

And maybe for some veteran traders like this, February ends up flat when only a few big trades visit and they do not work out for them.  But but but this should not be the mindset of a developing trader.  Flat is not flat for a developing trader.  Let me say that again, flat is not flat for a newer trader.  Flat is negative.

Here’s why.

A developing trader, a new trader, should NOT be focusing exclusively on big money trades.  They should be focusing on EZ Money Trades and then also big money trades.  EZ Money trades for active traders are made up mostly of scalping strategies.  Scalps where the price action is not sustainable and likely to revert to the mean.  Scalps where a stock is ready to break important technical levels and move quickly in one direction.  And these trades visit every day.  These trades help you bank consistent daily, weekly, monthly profits.  And as a developing trader, you should be building a profitable business with these trades.  So that your floor for the month is not flat.  Your floor for the trading month is above that.  Well above that.  Your trading floor is 10k or 20k or 30k or much better depending on your skill level.

And then from your floor, you add these big money trades.

Let me say it again, flat is not flat.

Scalping made easier

(Scalping Was Hard, Until He Discovered This Little Trick)

One of the most promising developments I see on the desk is traders gathering on Saturday to review EZ Money Trades.  This is giving traders more reps for these most high quality scalps.  This helps the traders internalize profitable scalp trades.  This allows them to learn from others.  This allows them to raise their floor.  Flat is not flat.

We have found traders are much more effective with their scalping when they build technology to spot their favorite scalps.  Jeff Holden has led the effort to build alerts for the desk’s favorite scalps, with the newer traders.  When these alerts fire newer traders have more confidence to take their favorite scalps.  This can help with overtrading as well.  If a new trader is considering a scalp, but an alert for their favorite scalps is not also present, this may inform the trader to pass on the trade.

Flat is not flat.

Objections to Scalping

Let me address 3 common objections traders express about scalping.  Unfortunately, there is still way too much misinformation spewed to the trading community about scalping.  This misinformation can negatively affect your trading career.

There are some who will conclude that they can’t scalp.  They can’t do it.  Perhaps they have tried this in the past with poor results.  Perhaps they have heard it is not possible in today’s market to scalp because lightening fast algos- HFTs.   Perhaps they have been led to believe they can’t make enough to make this strategy worthwhile.

Wrong!  Wrong!  Wrong!

For those who have tried and failed, did you have a very clear and specific PlayBook for your favorite scalps?  Did you archive EZ Money scalps and study them?  Did you overtrade on low quality scalps?  Did you have technology that alerted you to your favorite scalps?  Come on, why not give scalping a try the right way?

For those who were brainwashed you can’t make enough money scalping, I will just say this….there are traders who make six-figures a month consistently on this strategy.  I do not know where you’re from, but where I’m from that is still pretty good money.

For those who insist HFTs preclude active traders from banking consistent profits, I say…we are not competing against the HFTs.  We find scalps that co-exist with HFTs.  We find scalps that do not compete with HFTs.  We find targeted spots in the markets where we can execute excellent risk/reward scalps, while letting the HFTs play their game.  We do not play their game.  We play our game.

Okay now as the great trading coach Dr. Steenbarger tells our traders, after going on a rant like the one above debunking a market myth, “I am gonna go take my meds.”

Solutions to raise your trading floor

  1. Scalp
  2. Archive EZ Money Scalps for your PlayBook
  3. Study them with your team
  4. Build a PlayBook of your favorite scalps from trades working for you
  5. Build alerts for your favorite EZ Money scalps
  6. Raise your trading floor by scalping- flat is negative

Scalping is a day trading strategy that has worked since the beginning of markets.  It works now.  It will work in the future.  The game changes.  The players change.  Sure scalping strategies need adaptation.  But scalping has worked, works now, and will always work, as long as there are markets.

From all of us at SMB, train and trade well.

Important disclosures

Mike Bellafiore is the Co-Founder of SMB Capital, a proprietary trading desk, and SMB Training, which provides trading education in stocks, options, and futures. Bella, @MikeBellafiore, is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected].