What is Scalping?

Although the term scalping most likely originated in the heritage of the wild, wild American West, the contemporary trend for outrage at the mere mention of ethnic issues prompts me to side-step the derivation of this term. Simply stated, the scalper attempts to trade futures markets for only several ticks, taking advantage of fairly narrow trading ranges in order to "buy the bid and sell the offer". The scalper, who is usually a floor trader, attempts to capitalize on relatively quiet times in the markets, buying at the prevailing price (the bid price) or hopefully at one or two ticks below the anticipated fair price and selling at a slightly higher price or what is called the offer price. The best way I can drive home the point of what it is that scalpers do is to state succinctly that scalpers attempt to buy at wholesale and sell at retail.

As you can understand, the price markup from wholesale to retail, although very high in some businesses, is not too high in the scalping business. Frequently, the markup amounts to only one or two price ticks. However, at $30 or more per price tick in Treasury bond futures, the prospects for profitable scalping are considerable. If the trader is paying very small commissions ($14 or lower per trade), then a good portion of each price tick per contract is profit. What the scalper may give up in the way of price movement, he or she can compensate for in terms of position size. From the scalpers point of view, a trade of two ticks profit on 500 contracts works out to 1000 ticks-1000 ticks after approximately $15 in costs (which is a very high cost for the floor trader) works out to roughly $16,000 profit. Assuming a commission rate of $8 and often much, much lower for the floor trader, the profits are even more substantial.

It is now possible for traders who are not on the floor of the various exchanges to trade in a fashion very similar to what floor traders do when they scalp the markets. Using some of the techniques discussed in this book, the average trader who is willing to sit at the computer screen and watch the market tick-by-tick all day long can scalp in a fashion similar to floor traders. During the last few years, many floor traders, realizing that scalping is possible without being on the floor of the exchange, have left to become upstairs traders. An upstairs trades as if he or she were on the floor but is, in actuality, trading from an office, usually located in the exchange building.