Introduction to Scalping Futures
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The document is a comprehensive guide on manual futures scalping, discussing its evolution from pit trading to modern electronic markets, and emphasizing the need for scalpers to adapt to changing conditions and strategies. It highlights the importance of understanding market mechanics, identifying different types of traders, and managing risks to maintain profitability. The author, Gary Norden, draws from his extensive trading experience to provide practical advice and encourages ongoing practice and mentoring for aspiring scalpers.
Introduction to Scalping Futures
- 1. SCALPING FUTURES A PRIMER ON SCALPING FUTURES MANUALLY
- 2. AN INTRODUCTION TO DAY TRADING FUTURES AND THE BUSINESS OF SCALPING. PRESENTED BY ONLINE FINANCE ACADEMY INC. AUTHOR: GARY NORDEN 2017 ©
- 3. In the beginning... First wave of futures day traders were former pit traders Many struggled with computerized trading; they couldn’t see the markets as they used to Screen trading provided (larger) traders with new opportunities to fake orders/iceberg etc that weren’t available in pits. Scalpers needed to work out ways to combat these Some turned to technical analysis and chart based trading (which they couldn’t use in the pits) but still struggled Result= many pit traders gave up trading online
- 4. New breed of traders Prop shops opened up; aggressive recruiting; large training programs; traders given very limited risk limits With dozens of traders making thousands of trades per day/week, prop shops were able to quickly learn some of the new aspects of computerized trading These ideas spread
- 5. Then came the retail traders As platforms and commissions became cheaper, an increasing number of retail traders came into the futures markets As always they brought with them various poorly performing techniques and other forms of noise. The fact that their techniques are unreliable does not necessarily mean they won’t be popular. They are aggressively (and misleadingly) marketed and often appeal to poor traders looking for a quick route to success. In my book “An End to the Bull” I call these techniques ‘financial junk food” – people swallow them because they are cheap and appealing but they are not good for you!
- 6. HFTs (high frequency trading) Increasing activity since mid-2000s Employ a range of strategies; not all are successful Add a different dynamic But we should not fear them – if we use the right techniques we will either be on the same side as them or avoid them altogether
- 7. Where does that leave manual scalping? Some believe that manual scalping is dead. Not true. Scalpers have had to adapt but this should not be news to traders. Traders will always need to adapt to changing conditions. If you are using a style of trading that has had the same basis for years or decades then it is likely to be misguided. Scalpers have had to develop some more defensive techniques and disciplines to protect themselves. They need to be aware of many more issues than just price and volume. These are no longer as important as they were in the old pit trading days.
- 8. What do scalpers need to consider? Electronic futures markets are very different from the old pit trading types. Therefore philosophies and techniques that were used by floor scalpers may no longer be appropriate: https://www.youtube.com/watch?v=rbBOyRB4T4Q The first question that scalpers (and any trader needs to ask) is, ‘How does this market work?’ We must learn how participants send their orders and what opportunities this may create.
- 9. Developing a scalping career Scalpers need to understand how they get filled – again working out the mechanics of how the market works We need to work out who we can beat with consistency; who do we have edge over? If you can’t answer this basic question then you shouldn’t trade Scalpers need to understand their strengths and weaknesses. They are small, quick traders – they do not necessarily need huge volumes/liquidity nor do they have the resources to hold trades for too long and risk running into some odd action
- 10. Developing a scalping career So look for opportunities that get you in and out quickly. Identify the circumstances that will provide those opportunities. The longer you hold a trade the more chance you have of running into a big trader or some odd action. Trying the traditional methods of identifying larger trades and jumping with them became more and more difficult as large traders utilize an increasing range of spoiler strategies. Some scalpers still try to do this but results are mixed.
- 11. Identifying different orders/large volume There are many reasons why trying to follow large orders is not as straight forward as it used to be. In the pit days it was easy to see what each bank etc was doing and so following large orders and changes to open interest was quite straight forward for a good trader or broker. Now we don’t see who is doing what – we just see volumes. It is far more difficult to follow the trail.
- 12. Identifying different orders/large volume Just seeing volume isn’t enough in my opinion. For example, even if you can identify that there is a large buyer; what if that trader is covering a short position (i.e. exiting a trade)? What if that short trade had been losing money (they have been stopped out)? Would you still want to follow them? What happens when they finish buying (answer =nothing) This is just one of the issues associated with trying to follow large orders on screen traded markets.
- 13. Identifying Different Traders So, while some scalpers still try to identify various orders, I prefer to identify different types of traders and trade against those I have an edge over. Retail traders are easy to identify based on a number of factors, including: trading size, the price levels they trade at, and the way they input orders. I learn ways to identify larger traders but then try to avoid them because I believe that I don’t have an edge over them (and because trading against retail traders is easier!). Chances are that if you have been trading futures, you have been using retail techniques and have been easy prey for professional traders.
- 14. Scalping Some scalpers prefer to trade only a small number of times per day but increase their trading size. My preference is for far more trades per session. I prefer my yearly P+L to be the result of many small things compounded rather than a few larger ones. This enables me to make small adjustments to my trading but with great effect over a longer period. For example, if a 30Year Bond Futures trader can just improve a 1 tick losing trade to a scratch trade he would be better off by around $30. But if he can implement this every day, it is worth around $7,500 per year.
- 15. Scalping I prefer not to use charts, indicators, volume profile etc. Why? Because I want to trade ‘the moment’. I look for a quick scalp opportunity and then move on to the next moment Charts present data on a time basis (minute by minute/hour by hour etc) but markets don’t work that way. Markets work on a trade by trade basis so I want to watch the market trade by trade As with all trading, I believe it is best for a trader to be as objective as possible. Indicators etc can cause traders to view markets through a subjective filter. A scalper who understands how a market works, how orders come in and out and understands how to watch markets trade by trade does not need charts or indicators.
- 16. Market-making The style that I choose is a market-maker style. I’m not looking for direction, just trying to work out ‘value’ and pick off traders who trade away from that. (Note that value does not refer to volume profile or market profile). Some of the bond yield curve spread trading techniques (see OFA’s Spread Trading course by Mark Shlaes) can also be characterised as a market making style. These market-making styles of trading require good background knowledge and high level of skill. But they are more professional styles of trading than simply trying to pick market direction.
- 17. Market-making Market-makers are highly skilled traders who use a combination of techniques and information. Futures scalpers do not need all the skills of a dedicated market-maker but if they can learn some of the basic techniques they will have edge over many traders. Their aim is to act in a bookmaking type role – not trying to predict the outcome (direction) but instead moving in and out of the flow of business, picking off poorly placed orders. It can take longer to learn this style but for if you are serious about a career as a trader, the skills are well worth it.
- 18. Which market to trade? A key question for all traders. The answer will depend on many factors including your time zone and personality. Some traders prefer faster moving markets but most professional futures day traders prefer slower moving contracts and trade somewhere along the bond curve. Liquidity is less of an issue for scalpers because we typically trade in small sizes. So the fact that a contract has say 1000 contracts on each side of the spread is less relevant for us if we are trading 2 or 5 lots.
- 19. Scaling Up Successful scalpers will face the decision on whether to scale up their trading size A key issue to bear in mind is that the more contracts we trade the more opportunities there are for partial fills which can make exits more difficult. Some aspects of exit trades can be automated particularly in slower markets. So it is not always beneficial to scale up particularly if you trade a fast moving market. However, these markets tend to provide dozens of trading opportunities per session.
- 20. Losses Losses must be kept small and exited quickly – i.e. 1 or 2 ticks. Larger losses not only hurt our P+L but holding losing trades prevents us from entering new, better trades Scalpers need to understand a.s.a.p. whether their trade is good, bad or average so they can calculate their exit strategy accordingly. I do this by identifying as soon as the entry trade is filled whether it meets certain criteria. So I know as soon as the entry trade is filled whether it is a good, bad or average setup and I can act accordingly.
- 21. The business side of scalping We need to remember that scalping is a business and so we must treat it that way. Professional level scalpers need to use a professional level trading platform. Select a broker that offers discounts for higher volumes as scalpers will be high volume traders. Select a broker who offers smaller margins for intraday traders and keep the minimum needed in the account (broker risk).
- 22. The business side of scalping Use the best internet connection you can get. A good, high specification computer is also essential. Continually look for small improvements in these aspects of your scalping business (for example, can you negotiate cheaper commissions?)
- 23. Practice Be prepared to practice hard in a practice account environment. Don’t practice with real money (professional golfers don’t practice new techniques in a tournament – they practice on the practice ground). So find a practice environment that is realistic (unfortunately not all practice platforms are realistic). Practice as if it is real (don’t trade as if it isn’t real because you will not be able to learn the right lessons and improve).
- 24. Win rate Aim for a high win rate-over 70% for most markets. I look for 1-3 ticks per trade (depending on the market conditions) and cut losses at 1-2 ticks. However, I look to scratch bad trades rather than lose on them. Low win rates but good money management (which many trading styles rely on) can lead to more random rewards which are addictive. We want a clearer correlation between cause and effect (trade and win). For more information on this psychological aspect of trading see my book “An End to the Bull”).
- 25. Mentoring All traders need someone they can refer back to for help from time to time. Experience as well as a fresh perspective can be of significant help. The traders associated with onlinefinanceacademy.com are all available for ongoing mentoring. I work with all my scalping students for some months after the initial course to help them through the practice and transition to real money.
- 26. Biography Gary Norden Gary Norden began his trading career at a major Japanese Investment Bank at the age of 18. He was given control of a derivative trading book just a few months after leaving high school. He was the youngest ever trader at the firm By the age of 20, Gary was already teaching new and experienced traders at his firm in addition to running the largest trading book on his desk
- 27. Biography Gary Norden Aged 22, Gary moved to the options trading pits on the London futures exchange (LIFFE) and became an options market maker. At 23 he was appointed Head of LIFFE Options for NatWest who were then the largest bank in the UK. Gary then spent several more years on LIFFE as an options market maker, as well as heading an options trading desk for Credit Lyonnais Rouse and a role as senior Convertible Bond Trader for ING. Gary ran trader education courses at every bank for which he worked.
- 28. Biography Gary Norden Gary’s LIFFE trading badge
- 29. Biography Gary Norden Since moving to Australia, Gary has established an international reputation as a trader, educator and writer and has been trading for over 27 years. He has written two books, ‘Technical Analysis and the Active Trader’ and ‘An End to the Bull.’ More information can be found at www.scalpfutures.com or www.organicfinancialgroup.com and at Gary’s YouTube page - https://www.youtube.com/channel/UCyhuEif33w7uZd48lG66qEQ
- 30. How to register for Gary’s course: Day Trading Futures - Scalping Gary personally interviews each prospective student and only accepts a minority of applicants. His classes are either one-on-one or in groups of 2. Every class Gary teaches is supported by ongoing mentoring. To apply for this exclusive course, send an email to: info@onlinefinanceacademy.com and indicate your time of availability, your trading experience - if any - and an email or number where he can reach you. If you have not taken the OFA Master in Trading core course, you should contact us for a brief interview to ensure suitability to the Scalping Futures course.
Editor's Notes
- #4: Changed computerised to computerized