Arbitrage Scalping (trading)

1 arbitrage

1.1 how scalping works
1.2 principles
1.3 different parties , spreads

1.3.1 pays spreads (costs)
1.3.2 receives spreads (bonuses)


1.4 factors affecting scalping

arbitrage
how scalping works

scalping shortest time frame in trading , exploits small changes in currency prices. scalpers attempt act traditional market makers or specialists. make spread means buy @ bid price , sell @ ask price, in order gain bid/ask difference. procedure allows profit when bid , ask don t move @ all, long there traders willing take market prices. involves establishing , liquidating position quickly, within minutes or seconds.

the role of scalper role of market makers or specialists maintain liquidity , order flow of product of market.

the profit each transaction based on few pips (basis points), scalping typically conducted when there large amounts of capital , high leverage or there currency pairs bid-offer spread narrow.

principles

spreads bonuses costs - worldwide markets operate on bid , ask based system. numerical difference between bid , ask prices referred spread between them. ask prices immediate execution (market) prices quick buyers (ask takers); bid prices quick sellers (bid takers). if trade executed @ market prices, closing trade without queuing not amount paid because of bid/ask difference. spread can viewed trading bonuses or costs according different parties , different strategies. on 1 hand, traders not wish queue order, instead paying market price, pay spreads (costs). on other hand, traders wish queue , wait execution receive spreads (bonuses). day trading strategies attempt capture spread additional, or only, profits successful trades.
lower exposure, lower risks - scalpers exposed in relatively short period, not hold positions overnight. period 1 holds decreases, chances of running extreme adverse movements, causing huge losses, decreases.
smaller moves, easier obtain - change in price results imbalance of buying , selling powers. of time within day, prices stay stable, moving within small range. means neither buying nor selling power control situation. there few times price moves towards 1 direction, i.e. either buying or selling power controls situation. requires bigger imbalances bigger price changes. scalpers - capturing smaller moves happen of time, opposed larger ones.
large volume, adding profits - since profit obtained per share or contract small due target of spread, need trade large in order add profits. scalping not suitable large-capital traders seeking move large volumes @ once, small-capital traders seeking move smaller volumes more often.

different parties , spreads

whenever spread made 1 (or more) party must pay (paying cost receive value on completing transaction quickly) , party (or parties) receive money profit.

who pays spreads (costs)

the following traders pay spreads:

momentum traders on technicals - these traders fast movements hinted quotes, prices , volumes, charts. when real breakout occurs, price becomes volatile. sudden rise or fall may occur within second. need in quick before price moves out of base.
momentum traders on news - when news breaks out, price becomes volatile many people watching news react @ more or less same time. trader needs take market prices opportunity may vanish after second or so.
cut losses on market prices - spread becomes cost if price moves against expected direction , trader wishes cut losses on market price.

who receives spreads (bonuses)

the following traders receive spreads:

individual scalpers - trade spreads , can benefit larger spreads.
market makers , specialists - people provide liquidity place orders on market books. on course of single day, market maker may fill orders hundreds of thousands or millions of shares.
spot foreign exchange (exchanges of foreign currencies) brokers - not charge commissions because make profits bid/ask spread quotes. on july 10, 2006, exchange rate between euro , united states dollar 1.2733 @ 15:45. internal (inter-bank dealers) bid/ask price 1.2732-5/1.2733-5. foreign exchange brokers or middlemen not offer same competitive prices clients. instead provide own version of bid , ask quotes, 1.2731/1.2734, of commissions hidden in it. more competitive brokers not charge more 2 pips spread on currency interbank market has 1 pip spread, , offer better quoting prices in fractional pips.

factors affecting scalping

liquidity - liquidity of market affects performance of scalping. each product within market receives different spread, due popularity differentials. more liquid markets , products are, tighter spreads are. scalpers trade in more liquid market since can move in , out of large positions without adverse market impact. other scalpers trade in less liquid markets, typically have larger bid-ask spreads. whereas scalper in highly liquid market (for example, market maintaining one-penny spread) may take 10,000 shares make 3 cent gain ($300), scalper in illiquid market (for example, market 25 cent spread) may take 500 shares 60 cent gain ($300). while there theoretically more profit potential in liquid market, poker game many more professional players can make more difficult anticipate future price action.
volatility - unlike momentum traders, scalpers stable or silent products. imagine if price not move day, scalpers can profit day placing orders on same bid , ask, making hundreds or thousands of trades. not need worry sudden price changes.
time frame - scalpers operate on short time frame, looking profit market waves small seen on one-minute chart. maximizes number of moves during day scalper can use make profit.
risk management - rather looking 1 big trade, way trend trader might, scalper looks hundreds of small profits throughout day. in process scalper might take hundreds of small losses during same time period. reason scalper must have strict risk management never allowing loss accumulate.




^ cheng, grace (2016-12-08). 7 winning strategies trading forex: real , actionable techniques profiting currency markets. harriman house limited. isbn 9781905641192. 
^ niimi, tomohiro (2016-01-01). recent trends in foreign exchange (fx) margin trading in japan . bank of japan.