Getting Started - Scalping Basics - 03

So here is the review of Part 3 of the Six part series. This one is titled "Trade Execution" 

Part 3 of 6 - Trade Execution

Previous parts here - Part 1 of 6 - "Define, Expect & Explain"; Part 2 of 6 - "Searching for Opportunities"

Though execution is an important topic, a lot of what is shared in the video is not relevant from from an Indian perspective. I would still urge you to watch the video. Below are the key ideas shared in the video from an Indian perspective.

Scalping Efficiency - Here Tom talks about understand the products that you would like to scalp and then goes on to explain which are the better suited products in the US market. Let's look at products in India , given the way taxes are structured, Options are any day more cost efficient products in India.

Let's compare the costs - 1 lot of NIFTY Futures vs. 1 lot of slightly ITM Call Premium (Delta 0.7 approx) 

Compare the STT which is almost 12 times more for Futures. The net loss of trading for a 1 lot is 6 times higher in Futures. Also note the break even points. almost 2 times more. I would suggest you do the math yourself using the Zerodha Brokerage Calculator. 

Orders - Though Tom talks about "Marketable Limit Orders" more about it here, we in India don't have that choice. Its either a Market Order or a Limit Order. Yes, there are other orders like Cover Order and Bracket order that is available, but they don't work for my trading style. Since every penny matters in Scalping, it only makes sense to do limit orders and if required manage the position by scaling-in.  But both entries and exits have to be on Limit orders unless in an exceptional situation you just want to square off and scoot.

Default Size - Tom says 1 lot has been a default size for him, but then he is talking about futures in the US. I would answer this in a more nuanced way. (Disclaimer - This is the method that I use, there is no best way to do it, there are several ways, just that the below described method works better for me, happy to hear your comments) 

I trade in a way, where I identify a trade location. Once price gets to my trade location, I define boundaries of that location, and scale-in to my position in tranches of increasing sizes, for example if 10 is the total number of lots allocated for the trade in a specific price zone of 10 points, I would scale in with a the fall of every 3 or 4 points with 2,3, and 5 lots. This approach works (only) if used in a context of a larger probabilistic framework. Similarly, I also scale out of the trade and trail around 30% of the position to catch larger moves.  

So the bottom line in terms of size is, define the size that you would like to trade, and don't change it arbitrarily, also define a stop loss level based on the average cost of the position. More on this when we talk about Risk Reward ratios.

Market Depth  - Most of us i.e retail traders have access to Level 1 Market Depth, which shows us 5 best ask and bid prices, I personally do not see an edge in that, however, glancing at it would give us a sense of the bid-ask spread, volatility/rate of change, and the volumes being traded. 

Order flow - To view this, you would need a tick data feed, preferably e-signal and some charting tool like Market Delta for foot print charts. This data again has limited predictive capabilities, but definitely better than the minimalist market depth. Here we can, to some extent, identify large lot buyers, spot cumulative volume delta divergences etc. I subscribe to these through Vtrender.

All these tools help us make a probabilistic guess about the very near term market direction (30 minutes to 2 hours), and add to that a cost efficient product helps us make the best of the market moves.  

Hope you found this useful.

Feel free to post your questions or write to me on srao@niftyscalper.com

Getting Started - Scalping Basics - 02

So here is the review of Part 2 of the Six part series. This one is titled "Searching for Opportunities" - It's a rather short one.

Part 2 of 6 - Searching for Opportunities 

"Liquidity is the most important prerequisite" - This is something that we discussed in the previous post as well, and to tell you something interesting, NIFTY Options is the most liquid product in the world. Take a look at this NSE press release. Yes there are some nuances to it. Like, when it comes to scalping NIFTY, you would find that ATM and slightly OTM strikes have better volumes compared to ITM strikes. Also strikes ending in 100's have higher liquidity than those in 50's. But at the end, when it comes to liquidity nothing comes close to NIFTY options.

"The very act of scalping is initiated by the market itself" - "Price extremes are a good place for market forces to push price in the opposite direction." This is what Tom Sosnoff says. In other words I guess he is trying to say that markets are mean reverting, and that is where the opportunity lies. It's very true for NIFTY as well. At NIftyScalper we use probabilities of mean reversion to trade, and you would be surprised to know that there are specific time slots with certain mean reversion probabilities. I practically make a living of it. 

"Ranges are the key to scalping" - You need some range, some movement to scalp. If you look at NIFTY Index data you would get a sense of the average range of NIFTY. It comes to around 80 points i.e the High-Low range, which is what we are interested in, not the Open-Close range.

If you are scalping options, the delta of the strikes would play a role here. I usually scalp ATM strikes, so you would have a a delta of (0.5) which means a range that is half that of the Index. There are a few days in a year where the index itself is in a narrow range of sub 50 at times, that is when it becomes difficult to scalp, but then ranges are also mean reverting, there are periods of expansions and contractions.

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Role of VIX or the Volatility Index - This is something they allude to indirectly by referring to expected move in the index. More on what it is here.

It's important to understand the implications of VIX and its correlation with NIFTY. It helps us build on our market awareness and also aids in having a directional bias while scalping.

That's pretty much for this episode. The next one is about "Trade Execution", I would say its a key building block of scalping. Eager to write about it as there are a lot of contextual differences which need explaining.

Getting Started - Scalping Basics - 01

This is the first in the "Getting Started" series which I would be doing on the blog. The purpose of this series is to curate learning resources which give a general sense of what "Scalping" is, and it also helps in creating a mental framework based on which one can further pursue specific sub-areas of interest.

Since most of the content which would be introduced in this post is more US focused,  I would attempt to contextualize it based on its applicability and relevance to Indian markets, while adding my prespective as well.

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Sometime in 2015, TastyTrade did an awesome six part series on Scalping. I would say it was a first of its kind. Though I would recommend that you watch each of the episodes in series, however due to paucity of time if you would not want to do that here is a re-contextualized summary of it. 

Part 1 of 6 - Define, Expect & Explain

"This is the story of Tom and Tony's life, 35 years of scalping for Tom..., we think there is a skill set to it.." - TS (Tom Sosnoff)

Tom and Tony were Market Makers at CBOE, and as market makers all that they did was Buy at Bid and Sell at Ask. Though today they are more like any other retail traders, they still scalp futures and they think there is a skill to it.

"Direction is luck, however there is a method .." "80 % of the time Tom is right.. how can it be pure luck" - TS and TB (Tony Battista) 

This is very important to understand. Direction is luck, but there is a method. Which means we at any given point of time, cannot predict the direction, however the skill lies in managing the trade.

"Mechanics.. understanding the probabilities - understanding what is supposed to happen"; 

"Intraday Range...Opportunity can be found by examining the intraday range and the risk could also be assessed using the same" - TS

Here Tom is trying to say that once you know the probable range in which a specific market operates, you would know the boundaries withing which the price would move, for instance  if you are at the mean at a given point of time,  you know the probable move in either side that can happen. Which also means you know when the move exceeds the norm.

"Bet the same side.. Short side" - TS

Though Tom says he always has a short bias, personally I have benefited by being direction agnostic, I personally do not see an edge in trading only one side, the reason he may be suggesting that is, because he trades futures and mentally its easy to stay on one side, however when it comes to options all that you have to do is to look at which side is going up (It has to be either the CE or PE), so mentally you are always chasing the price/premium moving upwards, and hence being direction agnostic works well in Options.  

"Its not about where it ends up.. its about what it does in between." - TS

Full time traders look at what happens between the open and close of the markets, and that is where opportunities lie. At NiftyScalper we have analyzed data to understand the probable opportunities a market like NIFTY can offer, and there are several such sweet spots that are there for the taking.

"Directional call is not what makes money for most people" - TS

Read this sentence again! There is nothing more that I would like to add here.

"More than an engagement tool" - TS

Meaning, they used this approach for more than just being busy with markets, they make money through this. And yes anyone can, so long as they develop the skills.

"Scalping Products - Tiers, Liquidity separates the tiers".  -TS

In India, if we go by liquidity the only products which stand out are NIFTY Options and Futures. Stocks options just don't fit the bill. Especially if you are looking at scalability.

"Some point where you have a very high statistical chance to take your 4 or 5 point profit" - "That's all scalping is - recognizing those odds" - TS

All that you need to do is to analyze NIFTY intraday data on a shorter time frame and see where such statistically high probability trade locations exist. And they do!

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Finally rounding it off Tom and Tony share the key aspects to successful scalping 

1. Markets are cyclical

Meaning markets are mean reverting most of the days. More on this later, this deserves a blog post of it own.

2. Probabilistic outcomes... if you wait long enough

You need to play the game long enough for the probabilities to come true, meaning if the probabilities are based on a years' data, then you would need at least a year long participation to gain by those probabilities.

3. Managing winners vs. Managing price - you cannot expect the market to go the level that you think its gonna go to... you can expect though the levels its supposed to be, based on where its currently trading

Trade management is what they are alluding to over here. You cannot predict where the price will go in the next few minutes or hours, but you can have a plan in place as to what you would do if the price moves in either direction.

4. Multitasking

Yes, you may have to work with multiple systems, charting tools and order execution tools. But there is a catch here, multitasking does not mean trading multiple instruments. I have seldom seen a successful scalper who focuses on more than 2 products. I personally cannot do even 2, I trade only 1 instrument i.e NIFTY

5. You have to stay small

Yes at least till the time you master the game, you need to stay small. And to make money scalping while staying small is possible but you need the right brokerage plan for that. Something like a fixed brokerage plan is ideal.

6. You have to recognize when the move has exceeded your expectation

This is something which I highlighted previously, once you know the probable ranges you know what to expect. 

7. You have to have the capital

Yes you need to have sufficient capital to start with, what constitutes sufficient capital needs a post of it own. 

8. You have to recognize when you are in the wrong product...

Here again, its more to do with liquidity, especially with Options, some ITM and OTM strikes may have insufficient liquidity, from a scalping standpoint. Also knowledge of Option greeks is desirable to understand how those variables can affect us.

9. Usually a Intraday play - why "usually"

Tom says sometimes they tend to hold positions for longer duration. I want to clarify a few things in the context of scalping. One, the risks associated with scalping are very different from the risks associated with Positional trades. Hence if you plan to hold positions overnight you need to manage your size accordingly, else you could be risking all the advantages of scalping intraday and perhaps risking your capital much more than what you would want to. 

10. Before entering the trade we need to have an exit strategy - Profit target.

Yes, essentially you need to have both a SL and a Target in mind. Yes I said it right "in mind". The reason I am underlining that aspect is, scalping is more like surfing, you need to go with the flow, which can mean both "Scaling-in" and "Scaling-out" of trades. But this scaling in and out needs to be done in the context of the probabilities. Which is where understanding probabilities becomes so important. 

11. Scalping is luck.. but success is understanding the simple math...  

Lastly, we need to appreciate that "Picking the direction" or "Directional movement" is luck. But what we do with that movement and how we manage that is math.