Scalping

Scalping is a technique that is implemented widely throughout trading circles and different instruments. Its application within the futures market is particularly widespread, largely because it presents traders with an effective technique for profiting from short-term fluctuations in what are essentially long-term instruments. Further, given the nature of the strategy, the cost of carry and financing outstanding positions is less of a burden compared to other trading strategies, exaggerating the profit portion from the same trading decisions. So how exactly is the scalping strategy executed, and what advantages can it bring to the average futures trader?

Scalping is the process of trading purely for immediately short-term gains. A scalping strategy will be executed generally over the space of a few hours or even minutes – certainly not even as long as one trading day. The theory is that as underlying asset prices fluctuate over the course of the trading day, traders can enter and then exit positions to take a small, incremental profit.

It’s a ‘little and often’ type strategy – as the trader, you will be more constantly engaged with the markets, scouting out opportunities to bank small profits, with a view to aggregating the total earnings from all your profitable positions at the end of the trading day. Naturally, this means the costs of trading can be increased in the sense that individual transaction commissions will be more frequently incurred, but this is largely offset by the reduction in carrying, and indeed delivery costs.

Scalping also means it is possible to trade both cash and physical settled futures with ease – after all, it is very unlikely you will hold your futures anywhere near long enough to incur the relative obligation.

Why Scalping?

So why is scalping an advantageous strategy, particularly for new traders? Scalping is designed as a risk-reduction strategy first and foremost, aiming to cut out much of the risks with holding on to longer-term futures positions. If a scalper is banking a few pounds here and there, it is unlikely that he is going to experience the full wrath of a swing against his position, and if markets do head south, losses are cut just as quickly as profits are taken.

The difficulty with scalping lies primarily in being able to understand when opportunities for significant scalping opportunities present themselves. First, the futures contracts you are trading must be sufficiently volatile in order to deliver the potential for returns over a short period of time. In addition to that, you will be required to have adopted a certain outlook for prices over one trading day, which can often be unpredictable and doesn’t necessarily go anyway to guaranteeing results.

Scalping as a futures trading strategy can be a gentle introduction to the futures market, and it can help new traders in particular to trade in a low-risk environment while they find their feet. Even for experienced traders, it can prove a profitable strategy, although it is important to bear in mind that it is by no means an easy option.

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