Chapter 24

Scalping, Swinging, Trading, and Investing

An investor is someone who buys stocks based on fundamentals and plans to hold the stocks for six months to many years, allowing time for the beneficial fundamentals to be reflected in the price of the stock. Investors will often add to their positions if the stock goes against them, since their belief is that the stock is a value at the current price. A trader is someone who trades off daily charts and short-term fundamental events like earnings reports and product announcements with the intention of capturing a quick move, lasting from one to several days. Traders will take partial profits at the first pause and then move their stops to breakeven on the balance; they are not willing to have a profit turn into a loss. Traders are sometimes referred to as scalpers, but that term more commonly is used to refer to a type of day trader. Incidentally, it is important to keep to your time frame. A common cause of losses is putting on a trade, watching it become a loser, not exiting at your planned stop, and instead convincing yourself that it is fine to convert the trade into an investment. If you put it on for a trade, exit it as a trade and take the loss. Otherwise, you will invariably hold it far too long, and the loss will become many times larger than your original worst-case loss. On top of that, it will be a constant distraction and interfere with your ability to place and manage other trades.

In the eyes of a trader or investor using daily to monthly time frames, all day trading is scalping. However, to day traders, scalping is holding a position for one to 15 minutes or so and usually exiting on a limit order at a profit target in an attempt to capture one small leg on whatever time frame the scalper is using for trades. In general, the potential reward (the number of ticks to the profit target) is about the size of the risk (the number of ticks to the protective stop). The scalper does not want any pullbacks and will quickly exit at breakeven if the trade comes back before the target is reached; the scalper is therefore comparable to a trader on the daily charts. Intraday swing traders will hold a trade through pullbacks. They try to capture the two to four larger swings of the day, holding each position from 15 minutes to an entire day. Their potential reward is usually at least twice as large as their risk. They are comparable to an investor on the daily charts, who is willing to hold a position through pullbacks.

In the 1990s, the media and institutional investors ridiculed day traders, who were mostly scalpers, as gamblers who served no useful purpose. The critics totally ignored one important function that all traders provide, which is increasing liquidity and therefore reducing bid-ask spreads, making trading cheaper for everyone. A good deal of the criticism was probably due to the established institutional investors on Wall Street. They believed that they owned the game and they were kings, and they did not respect anyone who did not play it their way. They worked hard for their MBAs and thought that it was unfair that a high school dropout could theoretically make a fortune after spending just a few months learning simple trading techniques. The institutions enjoyed the awe that their feats garnered from the adoring public and at some level resented the attention that these uneducated upstarts were getting. Once HFT firms became the biggest volume traders on the Street and were producing far better performance records than the traditional institutional investors, the media took notice and began to give them more attention and respectful awe than the dinosaurs who had ruled the Street since its creation. HFT firms are the ultimate day traders and have made day trading respectable. CNBC's Fast Money has traders every day who often scalp, and are presented as admirable, successful traders. Now, the general feeling is that it is very difficult to make money as a trader, and if you are able to do it, you deserve a lot of respect, especially from other traders. It does not matter how you trade. All that matters is performance, and this is how it should be in a capitalistic society. Successful investors, traders, intraday swing traders, and scalpers all deserve the same respect and admiration, because all are doing something special, and doing it very well takes an extraordinary talent and a lot of hard work.

As discussed in Chapter 25 in the section on the trader's equation, swing traders take the opposite side of all scalps, but they also take the other side of trades by traders swinging in the opposite direction. A scalper has a reward about the same size as his risk and a high probability. There cannot be a scalp in the opposite direction with the same risk, reward, and probability. For example, the market cannot have a 60 percent chance of going up two points before going down two points at the same time that it has a 60 percent chance of going down two points before going up two points. Look at a bull trend. If a bullish trader buys at one tick above a strong signal bar in a reliable pullback in the Emini and his entry price is 1254, then his two-point stop is 1252 and his profit target is 1256. The bull would only take the trade if he thought that it probably would probably work, which implies that he had to be at least 60 percent certain, which means that the chance that the market would fall to 1252 and that his stop would be hit is be 40 percent or less. If a bear scalper took the other side of the trade and shorted at 1254.00, his stop is at 1256 and his profit target is 1252. Since the chance of the market falling to 1252 is 40 percent or less, the bear has a 40 percent chance or less of making his profit. In fact, it is almost always going to be less, because for his profit taking limit order to get filled, the market usually has to go one tick beyond it, which is even less likely because it is a bigger move.

Because of the mathematics, the person taking the other side of a scalp has to have a lower probability of success. Since in a very efficient market, institutions control the price action, every trade that takes place has to be one where one or more institutions are willing to take one side and one or more other institutions are willing to take the other (nothing is absolute, but this is pretty close). This means that the person taking the other side of a reasonable scalp has to have a reward greater than his risk if he is to have a profitable trader's equation (you have to assume that he does because he is an institution or someone taking a trade that an institution is also willing to take). This makes him a swing trader. Since the probability of swing trades is often 40 percent or less, a swing trader can take the opposite side of a scalper's trade and still have a positive trader's equation. If the probability of the market falling two points is 40 percent, the swing trading bear who is trying for more than two points has to have less than a 40 percent chance of success. However, if he manages his trade correctly, he can still make a consistent profit using this strategy. For example, from the discussion following on scaling into trades, you will see that he could be using a much wider stop than two points, and he might be willing to scale in several times if the market goes higher. If so, his probability of success can be 60 percent or higher. Once the market finally falls, he could exit his entire position at his original entry price of 1254. If he exited his entire position at his original short entry price, he would be out at breakeven on his first entry and have a profit on all of the later shorts that he placed at higher prices.

To scalp the 5 minute Emini chart effectively, with the current average daily range between eight and 15 points, you have to risk about two points, and your profit target is usually between one and three points. On one-point scalps, you have to win on over 67 percent of your trades just to break even. Although this is achievable for some traders, it is unrealistic for the majority of them. As a general rule, take a trade only where the potential reward is at least as large as the risk and where you are confident about the trade. If you are confident, one guideline is to assume that you believe that the chance of success is at least 60 percent. In the Emini, a two-point stop is currently (with an average daily range of 10 to 15 points) the most reliable stop for most trades based on a 5 minute chart, and that means that your profit target should be at least two points as well. If you do not think that two points is a realistic target, then don't take the trade. Incidentally, I had a friend many years ago who used to trade 100 Emini contracts at a time, scalping two ticks on about 25 trades a day. Since he lived in a 12,000-square-foot house, I assume that he was doing well. However, this is in the realm of high-frequency trading and virtually impossible for most traders to do profitably. A have another friend who once told me about a mutual acquaintance who made millions on Wall Street as an attorney and lost almost all of it as a trader. He probably assumed that he was much smarter than all of his clients who were making millions as traders and that he should have been able to do at least as well. He scalped 100 Emini contracts and lost $2 million over the first couple of years. He might have been smart, but he was not wise. Just because something looks easy does not mean that it actually is easy.

The issue of cherry-picking crosses everyone's mind at some point. Instead of worrying about taking 20 trades a day and trying to make one point on each, what about just scalping the very best three trades of the day and trying to make one point on each? In theory it is workable, but the reality is that if you have waited so long for the perfect trade and you worked so hard for so long to learn what is necessary to spot such a great trade, you have to make sure that you are adequately rewarded. One point is not enough. For example, if you believe that you are about to buy one of the best one or two setups of the day, you should assume that the market will agree that the setup is strong. That means that the always-in position will probably become clearly always-in long, that there will likely be at least two legs up to some kind of measured move or magnet area, and that the move should last at least 10 bars. Instead of scalping out for one point while risking two points, it makes much more sense to exit after a minimum of two points and maybe even four points. If you cannot handle this emotionally and you find yourself exiting at breakeven on the first pullback, you might try putting in a one cancels the other (OCO) bracket order as soon as you get long in which you have a two-point protective stop and a two-point profit-taking limit order. As soon as one gets filled, the other gets canceled automatically. Then go for a walk and come back in about an hour. After you've done this a few times, you might try using a three- or four-point profit target instead of two points and you might soon discover that you are averaging four points’ profit per day on these trades.

Some scalpers scalp all of their trades, but many traders will scalp or swing, depending on circumstances. Implicit in the concept of scalping for this second group of scalpers is that they are not trading in the direction of a clear always-in situation. If they are scalping, they must believe either that there is no clear trend or that their trade is countertrend; otherwise they would be swinging. Even if the market has been trending and traders enter on a pullback, if they scalp, they believe that the trend is about to end, at least for a while. For example, if they buy a bull flag but exit with only a scalp, they suspect that the market is about to enter a trading range. If they believed otherwise, they would hold their position for a larger profit. Whenever a trader sees the market pull back three or four ticks after a signal, it is a sign that big traders believe that the market is not likely to go far. Because of this, the trader will consider only trading range trades or countertrend trades, rather than trend trades. Since this means that the market is probably in a trading range, experienced traders will tend to scalp rather than swing, and look to buy low, sell high.

When traders are trading countertrend, they will sometimes trade a smaller position, like half size, because they are willing to add on if the market goes against them. If they do, they might get out once the market gets back to their first entry price. They would then have a breakeven trade on the first entry and a scalper's profit on the second. Whenever traders scalp, their profit target is often about half of the size of the minimum target for a swing, but the risk is usually the same. This means that their reward is about the same size as their risk, and they therefore need to have at least a 70 percent chance of success or else this approach is a losing strategy. Scaling in can help increase the odds, but the trade-off is more risk because your position size is larger. As easy and tempting as scalping appears to be, it is a very difficult approach to trade profitably.

If you swing part of your trade using a breakeven stop after taking partial profits at a couple of points, this reduces the required winning percentage. If you move your stop from the signal bar extreme to the entry bar extreme (one tick beyond both) after the entry bar closes, and then to breakeven after a five-tick move, this further reduces the required winning percentage to be profitable on the day. Finally, some scalpers use a wider stop of three to five points and add on as the market moves against them, and then use a wider profit target, and this again further reduces the required winning percentage. In general, if you see a setup that you feel is a very high-probability trade, the trade will likely be a scalp instead of a large swing. This is because whenever there is such an obvious imbalance, the market will correct it quickly, so a very high-probability, relatively low-risk situation cannot last more than a bar or two.

Swing traders use the same setups and stops as the scalpers, but focus on the few trades each day that are likely to have at least a two-legged move. They can usually net four or more points on part of their position on each trade and then move their stop to breakeven on the balance. Many will let the trade go against them and add on at a better price. However, they always have at least a mental stop and, if the market gets to that point, they conclude that their idea can no longer be valid and they will exit with a loss. Always look for where scalpers will have their stops, and look to add on to your position at that location, if the pattern is still valid. If you bought what you perceived to be a reversal, consider allowing the market to put in a lower low and then add on at the second entry. For example, with a reliable stock like Apple (AAPL), if you are buying what you perceive to be near the low of the move and the overall market is not in a bear trend day, consider risking two to three dollars on the trade and adding on at a one- to two-dollar open loss. However, only experienced traders who are very comfortable in their ability to read price charts and in their ability to accept a large loss if their read is wrong should attempt this. On most days, the market should go your way immediately, so this is not an issue.

Swing traders can take a position and keep adding the same size position with each subsequent signal, after they have a reasonable profit. The stop on the entire position is the stop of the most recent addition, which usually means that they will have a profit on their earlier entries, even if they lose on their final entry. They would also exit before their trailing stop was hit if the market generated a signal in the opposite direction.

Everyone wants a very high winning percentage, but very few people ever develop the ability to consistently win on 70 percent or more of their trades. This is why so few traders can make a living scalping for one or two points in the Emini, although just about everyone tries it for a while when starting out. For most traders to be successful, they have to learn to accept a lower winning percentage and develop the patience to swing trade, allowing pullbacks along the way. Even if traders are very successful scalpers, unless they are also willing to swing trade occasionally, they will usually not participate in some protracted trends where the probability of a successful trade is often 60 percent or less. Many very good traders sit quietly during these times and simply wait for a high-probability scalp, missing a good part of what is often a protracted move. This is an acceptable way to trade, because the goal of trading is to make money, not to be constantly placing trades.

When the Emini has an average daily range of 10 to 15 points, there will usually be at least one trade a day where a trader can enter on a stop and exit on a limit order with a four-point profit. Since 99 percent of the days have at least a five-point range, theoretically a trader could enter and exit on limit orders and make four points, but that is impossible for anyone to do consistently on small range days. In general, it is easier for traders to spot setups where they can enter on stops and exit on either limit orders or trailing stops. There is at least one four-point swing on 90 percent of the days, and about five four-point swings occur in about 10 percent of the days. Most days have one to three swings where a trader can make four points from a stop entry. If a trader is making 10 to 15 trades a day, then most of the trades are scalps. However, strong scalpers will know when a setup has a reasonable chance of becoming a swing of four to 10 points and will usually swing a quarter to a half of their positions in those situations. Once they exit the scalp portion, if there are additional entries as the market continues in their swing direction, they will usually put scalps back on when additional setups develop.

Swing trading is much more difficult than it appears when a trader looks at a chart at the end of the day. Swing setups tend to be either unclear, or clear but scary. Most swing setups have a 40 to 50 percent chance of leading to a swing that will reach the trader's profit target. In the other 50 to 60 percent of trades, either traders will exit before the target is reached if they believe that the target is no longer reasonable, or their protective stop will be hit. Most swing traders enter on reversals, because they need to get into the trade early if they hope to make four or more points. When a trend is especially strong, they can often make four points by entering on a pullback or even on the close of a bar in a strong spike, but these situations arise only a couple of times a week. Most swing traders try to buy some kind of double bottom, short some kind of double top, or enter on some other reliable opening reversal setup in the first couple of hours of the day. They often have to enter on several reversals before one turns into a big swing, but they still usually make money, on balance, on the trades that do not reach a four-point target. Those trades end up as scalps. For example, if a trader bought a double bottom in the first hour, and then after six bars the market set up a reasonable double top, the trader might reverse to short, maybe making a point or two on the long. Just as a scalper sometimes swings, most swing traders end up with lots of scalps. Once swing traders believe that their premise is no longer valid, they exit, often with a scalp.

After swing traders see a reasonable setup, they have to take the trade. Swing setups almost always appear less certain than scalp setups, and this lower probability tends to make traders wait. When there is a strong signal bar, it usually comes as part of a very emotional reversal, and a beginning trader is still thinking that the old trend remains in effect. Beginning traders are typically unprepared for this. They might be thinking that the old trend is still in effect, and they might have lost on several earlier countertrend trades today and don't want to lose any more money. Their denial causes them to miss the early entry. Entering on the breakout or after the breakout bar closes is hard to do, because the breakout spike is often large, and traders have to quickly decide to risk much more than they usually do. This is why they often end up choosing to wait for a pullback. Even if they reduce their position size so that the dollar risk is the same as with any other trade, the thought of risking two or three times as many ticks frightens them. Entering on a pullback is difficult because every pullback begins with a minor reversal, and they are afraid that the pullback might be the start of a deep correction. They end up waiting until the day is almost over and then finally decide that the trend is clear, but now there is no more time left to place a trade. Trends do everything they can to keep traders out, and that is the only way they can keep traders chasing the market all day. When a setup is easy and clear, the move is usually a small, fast scalp. If the move is going to go a long way, it has to be unclear and difficult to take, to keep traders on the sidelines and force them to chase the trend.

Swing traders should always be wondering if they should exit the trade early, before their profit target is reached. One way to help decide is to imagine that you are flat and think about whether you should enter at the market with a swing-size position and a protective stop exactly where a swing trader who is in the market would have his stop. If you would not take that trade, then you should exit your swing position immediately. This is because holding your current swing trade is identical financially to initiating a new trade of the identical size at that price and with that stop.

Most swing traders will scalp out if the trade is not unfolding as desired, and most scalpers will swing part of their position when they are entering on the best setups, so there is a lot of overlap in what both do. The fundamental difference is that the scalper will take far more trades, and most of those trades are not likely to yield more than a scalper's profit, whereas a swing trader tries to only take the trades that are likely to have at least two legs. Neither way is superior to the other, and traders choose the method that best suits their personalities.

As discussed in the section on the trader's equation in Chapter 25, swing trades are usually less certain than scalp trades. This means that the probability of success is less. However, a trader who is swinging is looking for a large profit, and the profit is usually at least twice as large as the risk. This larger potential profit compensates for the lower probability of success and can lead to a favorable trader's equation. The biggest swings come from breakouts of trading ranges and from reversals, and most reversal patterns are trading ranges. This is where uncertainty is highest, and the probability of success is often 50 percent or less. A swing trader needs to look for a setup where the reward is sufficiently larger than the risk, to compensate for the lower probability of success. Scalps are much more certain, but a high degree of certainty means a conspicuously large imbalance in the market, and a large imbalance is quickly noticed and neutralized by traders. The result is that the market quickly returns to a state of confusion (a trading range). Scalpers have to be fast in deciding to take the trade and in taking profits, because the move will usually come back to the entry price within a few bars.

Swings last a long time because of uncertainty, which is usually a critical component of any trade that lasts for many bars and covers many points. This is the wall of worry that is often mentioned in a strong bull trend, and it works in an opposite form in a strong bear trend. The difficulties of trend trading are discussed in the first book. Trends begin as small or large spikes, and then evolve into small or large channels. When the breakout is small, traders are uncertain if there will be follow-through. When it is big and strong, the uncertainty takes a different form. Traders are unsure of how much they have to risk to stay in the trade, and if the trader's equation is favorable because of the large risk. They see the large spike and realize that they might have to risk to the opposite side of the spike. This increased risk results in a much smaller position size. They then chase the market as it enters a channel, because their initial position was smaller than they wanted it to be. The channel then has the uncertainty of being a two-sided market. At the end of the day, beginners will look at the chart and see a strong trend, and wonder how they missed it. The reason is that all big moves are uncertain as they are unfolding, and this traps traders out of the strongest trends. It also often traps traders into countertrend trades, resulting in repeated losses. Even a beginner has a sense of probabilities and senses that the trend is a low-probability event, which it is. The strongest trends happen only a few times a month, so beginners know that the odds of today growing into one of those strong trend days are small. They end up either denying it and getting trapped out or fighting it and taking repeated losses. Instead, they need to learn to accept it and follow what the market is doing. If it is relentlessly going up, even though it looks weak, they need to buy at least a small position, and swing it.

Trade management for swing trading is identical to that for always-in trading, which is discussed in the third book, except that swing traders tend to scale out as the trade goes their way. A truly always-in trader holds on to the position until there is an opposite signal, and then reverses to a trade in the opposite direction. For most traders, swing trading entries and stops are identical to those in trend trading, which was discussed in book 1. One important difference is that most swing traders treat exits in a trading range differently from those in a trend. In a trend, they are more likely to let part of their positions run until there is an opposite signal, but in a trading range, they are much more likely to exit the remainder of their positions near the extreme of the trading range. At that point, they decide whether the move was weak enough and the reversal pattern strong enough so that they should look for an opposite swing, or instead the swing was strong enough so that they should wait for a pullback and reenter for a second leg in their original direction.

When the average daily range in the Emini is 10 to 15 points and a trader can usually use a two-point protective stop without getting stopped out of most good trades, many swing traders will take partial profits at two to four points, depending on the situation. If traders think that the market is in a trading range and they are buying a reversal up at the bottom, the probability of an equidistant move is usually 60 percent or more. Since they are risking two points, they then have a 60 percent chance of making two points before the stop is hit. This results in a minimally acceptable trader's equation, and therefore a trader can take partial profits at two points. If traders believe that the trading range is tall enough for them to make three or four points, they might take partial or full profits at that level. Other traders will take partial profits on longs at resistance levels, like minor reversals at measured move targets, above prior swing highs, and on bear trend line and bull trend channel line overshoots and reversals (failed breakouts). They will take partial profits on shorts at comparable support levels. All traders exit their final positions whenever there is a strong reversal signal. Remember, they will exit partially or fully on a weak reversal signal, but not usually reverse. This is because traders use different criteria for exiting than for entering a trade. They require a stronger signal before they enter, but will take partial or full profits on a weaker signal in the direction opposite to their position. There are many ways to profitably trade swing trades, and the only major issue is the trader's equation. As long as the math makes sense, then the approach is profitable and therefore reasonable.

It is reasonable for an experienced trader to be primarily a scalper when trading Eminis, looking for two to four points (when the average daily range is about 10 to 15 points), and a swing trader when trading stocks. If you are one of those extremely rare traders who can win on 80 percent or more of your trades, then you can scalp some Emini trades for a one-point profit. Exit part or all of your trade on a limit order after four ticks of profit, which usually requires the move to extend six ticks beyond the signal bar (the entry is on a stop at one tick beyond the signal bar; then you need four more ticks for your profit, and your limit exit order usually is not filled until the price moves one tick beyond your target). Four ticks in the Emini is one point, which is equivalent to a 10 cent (10-tick) move in the SPY (ETF contract).

So what should a beginner do? Most traders will lose money if they scalp for a profit target that is smaller than their risk, even if they win on 60 percent of their trades. Beginners will often be wrong about what they think is a 60 percent setup. Many of their trades will actually be only 50 percent certain at best, although they seemed much more certain at the time that the beginning traders took them. They will probably think that they just need a little more experience to increase their winning percentage up to 70 or 80 percent, where they know that math would then be on their side. The reality is that they will never become that good, because very few of the best traders ever get there. That is the simple truth.

At the other extreme is swing trading for a profit that is at least twice as large as his risk. Most of these setups are only 40 to 50 percent certain, but that is enough to have a favorable trader's equation. On most days, there are a couple of setups a day, and sometimes five or more, and most are usually major trend reversals (discussed in book 3). If a trader is willing to take low probability trades (the reward has to be at least twice as big as the risk, as discussed in Chapter 25), he needs to take every reasonable setup because the math is against him if he cherry picks. The trader's equation for these trades is positive for a basket of them, but the odds are that any one trade will lose since the probability is less than 50 percent. The probability is low because the setup looks bad, and the trade often looks weak even after the entry and usually has several pullbacks before a strong trend finally begins. Many traders instead prefer to wait for the trend to begin so that the probability will be 60 percent or higher, although there is less profit remaining in the trade. Many swing setups are strong, with probabilities of 60 percent or greater. When that is the case, each trade has a positive trader's equation and cherry picking is mathematically acceptable. Also, the math is good for either a swing or a scalp. Most traders starting out will experiment with both swing trading and scalping and just about everything else, like different time frames and indicators, to see if they can be successful and if a particular style better suits their personalities. There is no one best way, and any approach where there is a positive trader's equation is good. Many traders try to catch five to 10 tradable swings a day where the probability of making a profit that is at least as large as the risk is 60 percent or greater. When they do, they usually look for micro double tops to short and micro double bottoms to buy. If a trader thinks that a setup is strong and will likely yield a reward that is at least as large as his risk, then it has a probability of success of at least 60 percent (Chapter 25 discusses the mathematics of the directional probability of an equidistant move). This allows the trader to have a stop that is the same size as his profit target and still have a favorable trader's equation. Although this is the style that most successful traders adopt, most beginners should instead first look for strong swing trade setups, even though the chance of success is often only 50 to 60 percent. This is because when the reward is two or more times the size of the risk, the trader's equation is even stronger, despite the smaller probability of success. In the Emini, when the average daily range is about 10 to 15 points, look for trades with a good chance of a four-point (twice the size of the initial risk) or more swing, and exit some or all at four points. With experience, a trader can scalp out part for two to four points and then swing the balance. If he focuses on these setups, he is giving himself a reasonable chance to become a profitable trader. If a trader finds that he often exits too soon, he should consider placing his OCO orders (one to take profit at two to four points, the other to get stopped out with a loss of two points or less), walk away, and come back in an hour. He might be surprised that he has suddenly become a successful trader. Once the trend is established, look for additional entries in the direction of the trend, scalping most for two points while risking about two points and, if the trend is very strong, swinging some. As simple as this sounds, trading is never easy because you are competing against very smart people in a zero sum game, and what looks so obvious at the end of the day is usually not very obvious at all in real time. It takes a long time to learn to trade profitably and even once you do, you have to stay sharp and maintain your discipline every day. It is challenging, but that is part of the appeal. If you become successful, the financial rewards can be huge.

When it comes to stocks, there is much more variability in the size of the profit targets. For a $500 stock with an average daily range of $10, it would be foolish to scalp for 10 cents, because you would likely have to risk about two dollars, and your winning percentage would have to be over 95 percent. However, scalping for 10 cents might be worthwhile in QQQ especially if you are trading 10,000 shares.

It is relatively easy to look for swings in high-volume stocks (at least three million shares per day, but preferably seven million or more) that have an average range of several dollars. You want minimal slippage, reliable patterns, and at least $1.00 profit per trade. Try to scalp for $1.00 and then use a breakeven stop on the balance; hold until the close or until a clear and strong opposite setup develops. You might be able to watch about five stocks regularly throughout the day and sometimes check on up to another five or so at different times during the day, but you will rarely ever trade them.

An Emini scalper will likely be able to enter only a couple of stock trades a day, since Emini day trading takes so much attention. Also, if you only use bar charts for stocks, this allows you to put six charts on one screen. Just pick the one stock that is trending the best and then look for a pullback near the moving average. You can also trade reversals if you see a trend channel overshoot and reversal after there was a prior strong trend line break. If the Emini market is active, consider trading only 15 minute stock charts, which require less attention.

When you are anticipating a significant move or a new trend, or when you are entering on a pullback in a strong trend, exit 25 to 75 percent of your contracts at a scalper's profit that is equal to at least one to two times your initial risk, and then scale out of the remaining contracts as the market continues to go your way. Move your protective stop to around breakeven after you exit the scalp portion of your trade. Sometimes you will want to risk as many as four to six ticks in the Eminis if you feel strongly that the trade will remain good, and an exit and then a reentry approach would be at a worse price. A good trade should not come back to let latecomers in at the same price as the smart traders who got in at the perfect time. If the trade is great, all of the traders who missed the initial entry are now so eager to get in that they will be willing to enter at a worse price and will place limit entry orders at a tick or two worse than the original entry, keeping the breakeven stop of the original traders from being hit. However, sometimes the best trades come back to beyond the breakeven stop to trap traders out of what will become a huge, fast trend. When that seems like a possibility, risk a few extra ticks. Also, if it comes back and runs those stops and then immediately resumes the new trend, reenter or add to your swing position at one tick beyond the prior bar (in a new bull trend, this is one tick above the prior bar's high).

If the market touches the profit target limit order but does not go through it and the order is still filled, that means that there might be more trend pressure than is evident on the chart, and the chances increase that the market will go beyond the profit target within the next several bars. If you were long and the market was willing to buy your position back from you (you were selling on a limit to take profits) at the very highest tick of the leg, the buyers are aggressive and will likely reemerge on any pullback. Look for opportunities to get long again.

Similarly, if the market touches your profit target (for example, nine ticks beyond the signal bar) but you do not get filled, this can be a failure. If you were long and the market hit nine ticks above the signal bar and you were not filled, consider moving your stop to breakeven. Once this bar closes, if the context makes a reversal trade likely, consider placing an order to go short at one tick below this bar, because that is likely where most of the remaining long scalpers will get out, providing selling pressure. Also, they will not want to buy again until more price action unfolds, thus removing buyers from the market and increasing the odds that the sellers will push the market down enough for you to scalp out of your short. A five- or nine-tick failed breakout is common at the end of a protracted trend and is often the first sign of a reversal.

Although all stocks trade basically the same way, there are subtle personality differences between them. For example, Apple (AAPL) is very respectful when it comes to testing breakouts, whereas Goldman Sachs (GS) tends to run stops, requiring a wider stop.

Although it is theoretically possible to make a living by trading for one-point scalps in the Emini, risking four to eight ticks and using a smaller time frame chart like a one minute or 1,000 tick chart, it is like trying to make a living by panning for gold, trying to collects grains instead of nuggets. It is really hard work, it is only minimally profitable even when you do it well, and it is not fun. You have a much better chance of being successful and being able to trade happily for many years if you go for a larger profit and use a stop that is no larger than your profit target.

Figure 24.1 Swing Long after a Pullback from a Strong Rally

As shown in Figure 24.1, Baidu (BIDU) broke above the 15 minute trend line late yesterday and therefore was likely to have at least two legs up. It was possible that the second up leg ended at bar 5, but today's open was so strong that there likely would be an attempt to exceed it after a pullback. The drop to bar 7 was sharp, but bar 7 was a strong bull reversal bar that reversed the moving average gap, the gap up open, and the test of the bar 3 high (it ran the stops below that high and turned up sharply). For a $300 stock, you need a wider stop; so trade fewer shares to keep the risk the same, but use a larger profit target on the scalp portion of the trade. Two dollars is a reasonable initial target, and then move the stop to breakeven and exit by the close. Since this was a bull reversal from a bear spike and channel, there was a reasonable chance that the market might even test the bar 1 top of the bear channel.

Very successful scalpers might have chosen not to participate in shorting during the four-bar bear spike down to bar 7 if they believed that the probability of any trade was under 70 percent. Traders who scalp exclusively will often sit quietly during weaker spikes if they think that the probability is not high enough for a scalp. The result is that they sometimes miss relatively big swings. However, this is still an acceptable approach to trading for the few traders who are able to win on 70 percent or more of their trades.

Figure 24.2 Swings Up and Down

Today (as shown in Figure 24.2) offered many opportunities for swing traders in both directions. The market fell almost 2 percent yesterday, but had been in a strong bull trend for months. The sell-off was just a poke below the daily moving average and was a pullback test the bottom of a bull channel in a 60 minute spike and channel bull trend. This meant that traders saw this as an area of support and thought that the sharp sell-off yesterday might have been just a sell vacuum and not the start of a bear trend. Both bars 3 and 5 were strong bull trend bars, and both followed attempts to test yesterday's low. The first bar of the day had a big tail on the top, which meant that it sold off into the close of the bar. However, instead of finding enough bears to drive the market below yesterday's strong bear close, the bulls were so strong that they did not allow the low 1 short to trigger. The bar 4 low 2 (some saw it as a low 1) triggered, but was strongly reversed up by bar 5. Traders thought that this was a possible low of the day and bought above bar 5 on a stop for a swing up. The double top at bar 7 never triggered, because it was a two-bar reversal and the trigger was below the lower of the two bars (the bull bar before bar 7), and not just below the bear bar. Some bulls took partial profits here (two to three points, depending on where they bought) as bars 6 and 7 were forming, and that long liquidation created the tails at the tops of the bars. The double top was followed by the bar 8 bull trend bar, setting up a high 2 buy signal above the moving average in a bull swing, which is a reliable buy setup. Some bulls took partial profits at two, three, or four points up from this entry, and others took full profits at three or four points. Many did not exit until the market gave a sell signal at the bar 10 two-bar reversal. As with many swing trades, the sell setup was not ideal because the momentum up from bar 8 was strong. This reduced the probability that a swing short would have been successful. However, if this was a trading range day, a bear had at least a 50 percent chance of the market testing the middle of the day's range, which was about five points below the entry price. With about a two-point risk, this yielded a good trader's equation.

This was the second leg up after a strong bear day and therefore a possible high of the day. Some bears shorted here, but other traders wondered if there might be another attempt up after such a strong rally. Once the market broke strongly to the downside in the bear bar before bar 11, traders gave up on the notion that the market might be forming a bull flag pullback to the moving average. Many traders shorted on this large bear bar, which is why it was a big bear breakout bar. Others shorted on the close of bar 11. Since it did not have a bull close, it confirmed the bear breakout. Still others chased the market down and shorted on the bear bars that followed. Since traders knew that the market might form a double bottom near yesterday's low, this sell-off could have been a sell vacuum instead of a bear trend. This made many traders hesitant to short near the support of the low of today and yesterday.

Bar 12 was a strong bull reversal bar with a low just above the low of yesterday, and therefore a signal bar for a double bottom long. It also followed the largest bear body of the day, which was an exhaustive sell climax and sell vacuum, and not the start of a bear trend. Smart bears took profits here, but many took partial profits at two, three, or four points from their entry prices, anticipating the double bottom and expecting the day to become a trading range day. Their expectation was based on their correct assumption that 80 percent of breakout attempts up and down fail, no matter how strong the spikes appear. Strong bulls also bought the sell vacuum, initiating new longs. Remember how strong the bulls appeared to be in the rally to bar 10, only for the move to be seen later as just a buy vacuum and not a new bull trend.

There was a second entry long after the failed bar 13 low 1 short at the bottom of the developing trading range, and then a bull reversal bar higher low at bar 14. Many bulls went long again here for a swing up. The spike up to bar 15 was strong, so traders expected another rally attempt after a pullback, and most would have considered this premise to remain valid as long as the market held above the bottom of the bull spike. Some traders put their protective stops below bar 14, while others used the bar 12 low. If they bought near the top of the spike, their risk was large and therefore their position size had to be small. Beginning traders would have had a hard time buying above either bar 12 or bar 14 because the sell-off was so steep. However, the day appeared to be a trading range day. Therefore, experienced traders were willing to buy a setup that might have only about a 40 to 50 percent chance of success, like the one at bar 12, which they believed had the potential to make about five points while risking about two. Bar 14 probably had a 60 percent chance of success, but the reward at that point was now a little less. Both setups had favorable trader's equations, even though beginners would have had a difficult time taking them.

Aggressive bears shorted below the bar 18 two-bar reversal, which was a double top and a lower high on the day. Other traders were instead waiting to buy a pullback.

Bar 19 appeared to be a high 2 buy entry, but since the bar before it was not a good buy signal bar, most traders would not have bought as bar 19 went outside up. Most would have waited for a pullback before buying. Some would have bought above bar 19 because it had a strong bull body, and the breakout above its high would have been a sign of confirmation of its bull breakout above the bar before it. Instead of a breakout pullback, the market broke to the downside.

Bar 21 was a strong bull reversal bar and a high 3 buy setup. However, since the market was still in the bear channel from bar 18, many bulls preferred to wait for a second entry, which came with the high 4 two-bar reversal at bar 23. Some bought the high 4 and others bought above the bull bar that followed bar 23. They saw this as a bull flag following the spike from bar 12 to bar 16, and they expected a second leg up, maybe to a leg 1 = leg 2 measured move up. Some traders who bought above bar 21 were aware that the market might form a lower low pullback from the breakout above the top of the bar, and this is what happened. Because of this possibility, many traded a smaller position size and used a wide protective stop, like maybe below bar 14 or bar 12, or maybe three to five points. Those traders then put on the remainder of their longs on the second entry above the bar 23 two-bar reversal. Some longs took partial profits at fixed intervals, like two, three, or four points, while others waited for price action profit targets, like below the bar 26 second leg up or below the bar 28 wedge rally (bars 24, 26, and 28 were the three pushes up).

Aggressive bears shorted below bar 28 or below the bear bar that followed it, looking for a test of the bar 25 bull channel that followed the spike up from bar 23. They took profits at two, three, and four points, or just above, at, or below the bar 25 bull channel low, or just before the close of the day.