As a day trader, scalping simply means you are looking for a quick, small profit in a stock. Usually, you are attempting to make 1/8 point profit (and sometimes more) within a few seconds or a minute or two. Therefore, you want a momentum surge in a stock's price that you can hop on board for a quick and profitable ride. During the day most price movement in a stock is random noise. The majority of moves do not provide enough follow-through in one direction to be profitably traded. So, how do you isolate and predict the strong „price spikes“ from the regular ebb and flow of price? The answer lies in intraday price „compression“. This can easily be seen on a 5 minute bar chart graph as it unfolds during the trading session. When'a stock begins to trade in a very tight range (called consolidation) at the day's current high or low, a potential trade „setup“ may be unfolding. To further screen these price pattern setups, two other criteria are applied to filter out only the highest probability trades.

First: The consolidation on the 5 minute chart must be hugging up against the current high of the day for a long trade, or hugging down against the current low of the day for a short trade.

Second: The consolidation should last for at least 20 – 30 minutes and preferably longer (the longer, the better). This compression builds up like a pressure cooker, and when the stock breaks to a new high or low, you usually get a strong, quick follow-through move in price, i.e. a „price spike“. By watching these trades set up during the day you are ready to be one of the first traders to enter the stock at the best price and at the very beginning of a highly reliable momentum surge.

Once you are filled, you immediately bid or offer out for a profit while the momentum is still continuing. Often these trades wiii move far enough where you can get 1 /4 or 3/8 point…and even more. The key to exiting is not to be too greedy or wait too long, because once the momentum begins to slow or stops, your bid or offer is less likely to be filled. Also, if the trade does not follow through like you expected, be ready to buy or sell at break-even if that price is available to you. If momentum has stopped and you haven't been filled on your bid or offer, exit the trade. It is better to take a „flat“ than wait for the stock to reverse and hand you a 1/8 point loss or worse. When commissions are factored in, you realize that to be profitable you must risk no more than a 1 /8 point loss on any given trade and be ready to exit flat if you are wrong. Also, you must have a high percentage of winning to losing trades to be net profitable. That is why you must rely upon the trade setups in this module.

You must time your entries at the price just prior to the breakout if a breakout move seems imminent as you monitor the activity on the „market maker“ and „time and sales“ screens. You may also wish to enter one price level later, the actual breakout price. If you do not get your price then pass up the trade. There will be other good setups later.

A good characteristic of the „compression / price spike“ is that opportunities of profits beyond 1 /8 point present themselves more frequently than with other scalping methods. Sometimes the stock will move so quickly after you enter, that by the time it takes you to put out your bid or offer you are already looking at a 3/8 point move and probable 3/8 point profit. These „windfall“ scalps, although infrequent, can sometimes yield even a I* point profit with just one trade.

Since you need to keep your maximum loss per trade to 1/8 point you must trade only stocks that typically have a 1/8 point bid / ask spread. This way if you are wrong and the trade immediately goes against you, only 1/8 point is lost. Usually 1000 shares are traded. If you want to trade some 1/4 point spread stocks that tend to have very strong moves out of the setups presented in this manual, then you can drop the number of shares you trade to 500 and look for at least a 1/4 point profit. Either way you risk no more than S125 per trade with the expectation of at least a SI 25 profit before commissions.

Don't necessarily limit yourself to 1/8 point increments. 1/16 point increments can be used to increase the profit of a trade or decrease the loss if you are wrong. Every 1/16 point makes a S62.50 difference. Over time these can add up to more profits.

Remember, never risk any more than S125 per trade with any setup when scalping. This includes trades based on the 5 minute bar chart setups and on the daily bar chart setups.

The daily bar chart is often referenced even when using the 5 minute bar chart for your primary setups and trade entries. This is because it is important to be aware of the daily bar chan's price support and resistance areas even when scalping. If you have a buy setup on the 5 minute chart but also see nearby price resistance just above on the daily chart, then the strength of ihe price spike may be lessened (vice versa with daily bar chart support on the sell setups). On the other hand if a buy setup on the 5 minute chart is hugging the same price as the resistance level on a daily chart (or is above daily resistance) then there is more room for the stock to move up on a breakout with a strong price spike. The converse is true with support levels when shorting a stock.

With scalping, mental discipline wilt be ihe biggest factor in your success or failure. This is important how you subsequently manage your exit from the trade. Exiting quickly with smaller, high-probability profits derived from the price spikes should be your goal.