Everybody wants to turn a quick profit, which may draw some traders to a scalping trading strategy.
While scalping, sometimes referred to as day trading, promises quick returns, it rarely delivers.
David Jaffee of BestStockStrategy.com warns against day trading because there is little probability for profit.
Instead, David Jaffee recommends selling option premium to earn a consistent profit.
Keep reading to learn more about scalping trading and why selling option premium is the best options trading strategy.
Scalping Trading Strategy
Scalping, sometimes referred to as day trading of stocks or futures, focuses on fast profits.
Instead of attempting to optimize the results of a positive trade, scalping tries to realize quick and small wins while only being in a trade for a short amount of time (typically just a few minutes).
In order to become a profitable trader, scalpers have to have a very high ratio of winning trades, and overall profits must exceed losses.
Scalping as a trading style can limit a trader’s risk exposure because they are only briefly exposed to the market.
In some cases, it can also be easier to realize a smaller move, and smaller moves occur more frequently.
However, a single large loss can undo a large number of wins for a scalper.
Scalpers have to have a strict exit strategy in place, and they sometimes make tens, or even hundreds, of trades each day.
Scalping Trading Example
Scalping trading focuses on large volumes of small wins to make a profit.
For example, a stock may rise in price from $39.50 to $39.55.
While this change seems minimal, scalpers can make a profit by purchasing large quantities of shares at $39.50 and selling them at $39.55.
If a trader purchased 100,000 shares at $39.50 and sold them for $39.55, they could earn $5,000.
However, price changes for scalpers are often less than $0.05 per share, and one large move can overwhelm hundreds of wins.
Scalping Trading vs. Swing Trading
Swing trading is another short-term strategy for traders, but it differs from scalping in a few ways.
Scalping involves making a large quantity of trades each day and holding positions for brief periods of time.
Swing trading can involve holding a position for days, weeks, or months, if necessary.
Scalpers rely on charts of 1-5 minute while swing trading incorporates daily or weekly charts.
Scalping also requires a great deal of focus, rapid decision making, and high levels of stress.
Swing trading is usually less stressful and typically incorporates less strategy and slower decision making.
Should You Use a Scalping Trading Strategy?
Traders may be drawn to the quick turnaround time of scalping, but it takes a considerable amount of work and precision to be successful.
Without the right exit strategy and tools, a trader can sustain major losses that are impossible to overcome.
A single loss can also wipe out a considerable amount of hard work and winning trades.
When compared to selling options, scalping takes a lot of time and requires a great deal of concentration.
Traders can make a profit by selling option premium and only make a few trades per week, while scalpers may have to make hundreds of trades each week.
Scalping as a trading strategy also carries high transaction costs and requires more leverage.
Traders must have a lot of very small wins to successfully scalp, and they often miss out on opportunities for larger wins.
The primary problem with scalping, or day trading, is that each trade has a probability of profit below 50%. There is no statistical edge when scalping or day trading.
Every movement in the stock corresponds to a direct positive or negative move in your P&L. When you add in trading costs, slippage, the emotional toll of trading, and people’s propensity to cut winners short and let losers ride, then most scalpers engage in a trading activity where the probability of profit for each trade is below 40%.
Even the best scalpers are engaging in a n activity that has a probability of profit equal to a coin flip, assuming zero transaction costs and no slippage. And when you factor in the opportunity cost of your time and education, it’s no wonder that virtually all retail scalpers are unable to earn consistent profits and end up losing money.
What is the Best Options Trading Strategy?
David Jaffee recommends selling option premium as the best options trading strategy.
Unlike scalping, selling option premium does not require a great deal of time, and it also has a very high probability of profit.
Selling option premium can be profitable with just a few trades each week.
David Jaffee teaches his students how to create a watchlist of stocks and be disciplined when placing trades.
You can also win up to 98% of your trades and earn a consistent profit by selling option premium.
The right risk management strategy for selling options can ensure your few losing trades do not offset your wins, which is very difficult to do when scalping.
Overall, selling options provides a much better strategy if your goal is to be consistently profitable.
Learn the Best Options Trading Strategy
Are you looking for a great options trading strategy?
If scalping trading is too time-consuming or risky, learn how to sell options for a profit.
David Jaffee provides a comprehensive online options trading course that teaches beginners and advanced traders how to earn money by selling options.
Visit BestStockStrategy.com to learn more about selling options and receive $400 worth of free options trading materials.