Fill Issues with Scalping

[Tradewinds 12]

In scalping, reliable fills are crucial. I don't think it's possible to scalp and make money without getting reliable fills. So you either need to use a market order, and have a system that is good enough to deal with slippage, or place limit orders such that fills are very likely. Limit orders placed in such a way to insure a fill, may decrease your profit per trade, but increase your profit overall. For example, if you are long, and place a limit sell order below, the current price, it will fill immediately.

 

I'd like this thread to focus on getting reliable fills for a scalping strategy.

[Tradewinds 12]

Price behavior is designed to prohibit you from entering an order at the optimal price. In order to get a fill, the following must happen:

 

• Price needs to go in the opposite direction of your entry order. E.g. price drop for long
  
• For a long order, a limit order must be entered above the current price.
  
• Use a market order, which will fill at the price above the current price. (long)
  

 

For a long entry, you must be willing to pay a price that is higher than the current price in order to get into the market. If you enter an order exactly at the bottom of a trend, the order will not fill. For example, if you enter a long order at 50, and the bottom of the trend is exactly 50, the order is not going to fill. If the price is at the bottom, and the price is 50, you would need to enter the order at the next price higher than 50. So if you think that price has bottomed, you could enter a market order, and hope the price doesn't surge up the second you enter the order, or enter a limit order above the current price in order to get an instant fill.

 

If the price hasn't bottomed, but is near the bottom, then you could get a fill when the price drops one last time.

 

It makes sense that price behaves this way. If the price is going to go up, why would the other traders/investors give you a better price? So if the trend really is going to turn, then you must pay the asking price, or no one is going to sell to you. Either you will pay what they are asking, or no one will be willing to sell to you. That is when the price is at the absolute bottom.

 

Now, . . . things can change very quickly, the market could be behaving as if price is at the absolute bottom, and then the market could change it's mind.

 

But here is the problem. Let's say you enter a long order. It doesn't fill, and doesn't fill, and time goes by, and the price is right exactly at your order, but it just won't fill. Now you need to make a decision. If you leave the order there, and price drops, and you get a fill on your long order, it could mean that price is going to continue down. If you are willing to buy, when everyone else thinks the market is going down, then of course you will get a fill.

 

So don't get to excited if you get what you might think is the optimum fill price for a long order. You may have just entered a long order at exactly the wrong time.

 

But it gets more complicated than that, because if you pay a premium for the assurance to get a fill on the long order, thinking that price is at the absolute bottom, and then the price goes down more, now you are in the worst possible situation. You just paid a premium to enter a long order, and price is going down, increasing your losses even more.

 

This is the way the market works.

[jdevron 10]

Ideally a market order should work.

However, the rules allow a market order to take upto 3 minutes to fill

which can seem like a lifetime in a fast moving market, and kill your profitability.

The market order 'Immediate or Cancel' (IOC) can be a work around to this.

However, not all brokers support this.

 

An aggresively priced limit order with either an IOC attribute or a

Time in Force (TIF) of one or two seconds can work well.

However, if your broker doesn't fill your orders immediately (for his own reasons),

then you will have to re-enter another order at a possibly less favorable price.

 

The key is to use a broker that offers Direct Market Acces (DMA) and does

not try to fill the orders out of their own supply. The brokers who fill you out

of their own supply always claim you could be getting a 'price improvement'

but really you are often getting screwed as they fondle and hold your order

until the price is favorable to them while the market moves away from your price.

They could open a new of their own imediately after you send an order to them,

make a few pennies off it, then fill your order by closing theirs while you are still

waiting for your initial order to fill. It's something like front running a trade.

 

A serious red flag to watch out for is if your broker has rules about how often

you can cancel and resend orders. If they have rules in place that prevent you

from buying and selling precisely when YOU want to then it might be best to

consider finding another broker.

[willrane 10]

Bad fills are quite common while scalping since you have to use market orders often. I have a simple solution when I have a bad fill - I get out very quickly since your risk reward is now skewed. If the market does not zoom in my direction immediately I get out with a profit/loss of couple of ticks. Works most of the time and sometimes you have to take a bigger loss but that is a cost of doing business.

[Tradewinds 12]

Bad fills are quite common while scalping since you have to use market orders often. I have a simple solution when I have a bad fill - I get out very quickly since your risk reward is now skewed. If the market does not zoom in my direction immediately I get out with a profit/loss of couple of ticks. Works most of the time and sometimes you have to take a bigger loss but that is a cost of doing business.

 

Thanks for that advice. This is the same perspective that I have. Action needs to happen very quickly, and decisively. It's a precision maneuver. But I think that most trading needs to be a precision execution, unless we are talking about long term value investing.

 

When I state, precision execution, I'm not saying that the perfect entry and exit needs to happen, but the decision making needs to be definitive and based upon pre-determined rules that are known to be good.

[TheNegotiator 13]

Let's just say you are right next to the exchange you are trading. If you also then have the absolute best pc equipment, set up in exactly the right way, then you still have to deal with your own reaction time. But what about the algos? Some exchanges give algos different(faster) connectivity and extremely preferable fees. So an algo can cheaply scalp before you even react in all likelihood. Maybe you can account for this and try to take more than a couple of ticks each time and for sure it varies with different markets and different exchanges. However, one thing is absolutely certain in my mind. Scalping is not like it used to be and should be considered very carefully if you are going to try it.

[Tradewinds 12]

Price moves very fast at the outer limits. There are times when price moves slowly, and in a range, but when price moves to a new level, or returns to a previous level, or is peaking or bottoming, it can move very fast. And the places where the price moves very fast, are the best opportunities for profit and entry. So the speed of the price move during the best opportunities for entry and exit, limit the ability of the trader to take advantage of those "sweet spots". Price can move so fast, that the window of opportunity that a trader has to react is very limited. This is one way that the market maintains an advantage over the trader. If the window of opportunity is extremely short, then the trader has no time to react. It puts the trader at a disadvantage. When studying historical price data, the outer price levels that you see on the chart are very deceiving. Just because that bar on the chart shows that the price went to a certain level, doesn't mean that you would have enough time to react and enter an order at that price. This is something that I did not understand for a long time. Either you need to "take the bet", and anticipate a certain price level being hit, or settle for a less than optimum fill price. If you settle for a less than optimum fill price, then the trend must continue, otherwise you are in a bad situation right from the start.

[SIUYA 11]

And the places where the price moves very fast, are the best opportunities for profit and entry. So the speed of the price move during the best opportunities for entry and exit, limit the ability of the trader to take advantage of those "sweet spots". .

 

 

no....this just means that the volatility is high, and that you are likely to make or loose money in a quicker period of time. Too many people confuse volatility with risk and reward. A lot of trades you want to get set when there is low volatility in anticipation of an expanse in volatility.

(sorry I know this thread is in regards scalping, but it is still a relevant point.)

[Tradewinds 12]

Too many people confuse volatility with risk and reward. A lot of trades you want to get set when there is low volatility in anticipation of an expanse in volatility.

 

I don't understand what you are saying. I agree that entering during low volatility in anticipation of an expanse can be an excellent opportunity. That is, if there is something to base the future direction on. The issue I have with low volatility, is that I personally have a more difficult time judging what direction the price is going to expand to. During low volatility the trend signals are very, very faint. They are there, but small. It's probably just a matter of zooming in, or looking at the longer time frame trends. It does seem like periods of low volatility are more likely to be a major reversal point.

[SIUYA 11]

poorly worded on my behalf....

Basically, just because a market is being volatile does not mean it does not offer opportunities. Many trending markets are actually low volatility, but high risk reward

The speed of the market, as you rightly point out can cause problems and a lot of people look at how fast they can make money forgetting that they can loose it just as quick....they get tricked into thinking high volatility is a good thing. While it can be good it also has to be recognized for what it is....a greater chance of losing money if you are wrong.

The key is realizing that you still need to measure the risk reward of the trade and not try and pick the markets just because they are volatile.

[Tradewinds 12]

Basically, just because a market is being volatile does not mean it does not offer opportunities.

 

Definitely. Either high or low volatility both offer opportunities. Something that I believe, is that a volatile market still trends. Before I had a basis for recognizing a trend, I would look at a volatile market and think that there was no trend. A trend is much, much easier to recognize in a nice, smooth, low volatility market. But now I can recognize what the trend is in a high volatility market. In a high volatility market, the trader must deal with the possibility of much, much larger draw downs and retracements. In a highly volatile market, those larger draw downs and retracements could be misunderstood as a trend reversal, when they are really just a blip. Let's say the price moved by 10x in a low volatility market. That would probably be a reversal. But if price moved by 10x in a high volatility market, it could just be a little blip (in relative terms) on the way to wherever the trend is going to continue to. It's all relative.

[Tradewinds 12]

The speed of the market, as you rightly point out can cause problems and a lot of people look at how fast they can make money forgetting that they can loose it just as quick....they get tricked into thinking high volatility is a good thing.

 

When I talk about "speed" of the price move in this context, I'm not really talking about volatility. Even in a low volatility market, I believe that, relatively speaking, when price decides to go to the next level that it is going to, that it moves relatively faster than when it's paused at the established level. I'll use an uptrend as an example. The price behavior that I see, is that when price decides to go higher, the price surges up, defines the new high, then almost immediately retraces a little. The market tells you where it is going before it goes there. The market shows you how high or low it's willing to go before it breaks that level. So the price will surge up, just for a very short while, show you where the next high target is, then go back.

[TheNegotiator 13]

I don't understand what you are saying. I agree that entering during low volatility in anticipation of an expanse can be an excellent opportunity. That is, if there is something to base the future direction on. The issue I have with low volatility, is that I personally have a more difficult time judging what direction the price is going to expand to. During low volatility the trend signals are very, very faint. They are there, but small. It's probably just a matter of zooming in, or looking at the longer time frame trends. It does seem like periods of low volatility are more likely to be a major reversal point.

 

Are you confusing low volatility with low movement? I have to say, I do think in markets where for whatever reason, the volatility is elevated, there tends to be more opportunity for scalping. I'd say this is generally because traders are quicker to enter and exit trades believing they'll miss the price otherwise. Plus there is more disagreement and uncertainty of fair price. Also, when volatility is high, the natural back and forth trade in a market is also higher - which is where a good number of scalping trades will come from.

 

Given the nature of this type of trade, where you have to enter and exit pretty quickly in a good number of trades, it is essential to have very little lag between what you see on the screen and where the market is currently trading. If not, the market can easily go offside by your normal stop before you even see it. This is whether you are talking in terms of price extremes or any scalp in between.

[Tradewinds 12]

Are you confusing low volatility with low movement?

 

Yah, probably. I guess there is a distinction to be made between the two. There could be low volatility, and sideways or very little range, or there could be low volatility, and the price goes way up all day long. Those would be two totally different situations.

[TheNegotiator 13]

Yah, probably. I guess there is a distinction to be made between the two. There could be low volatility, and sideways or very little range, or there could be low volatility, and the price goes way up all day long. Those would be two totally different situations.

 

Indeed. Either way I would say low volatility is not great for scalping. Unless of course you are talking about markets like say crude or the dax.

[emg 12]

In scalping, reliable fills are crucial. I don't think it's possible to scalp and make money without getting reliable fills. So you either need to use a market order, and have a system that is good enough to deal with slippage, or place limit orders such that fills are very likely. Limit orders placed in such a way to insure a fill, may decrease your profit per trade, but increase your profit overall. For example, if you are long, and place a limit sell order below, the current price, it will fill immediately.

 

I'd like this thread to focus on getting reliable fills for a scalping strategy.

 

To get your order filled fast mean is to find a market that is extreme liquid whether the volatility high or low. It is all about the liquidity in the market. iUnder less liquid market, expect slower order filled and slippage because the bid and ask spread are wide. For example, crude oil futures bid/ask spread averages 3-5 cents per second. Expect slippage in crude oil. Under extreme liquid market, the bid/ask spread are narrow or extreme narrow. For example, Emini SP 500 futures bid/ask spread is 1 tick. expect to get filled at the tick depending how many time it hits the price.

 

Hope this help

[Tradewinds 12]

Indeed. Either way I would say low volatility is not great for scalping.

 

I tend to think of scalping as taking profit on every new price level move, whatever the price move may be. Either that, or waiting to take profit until I expect some retracement. Basically, I think of scalping as taking profit before the price has a chance to retrace or reverse. In other words, locking in profit. I don't think of scalping as any particular price move. I think of it as simply price cycling back and forth. And the price cycle is shown by my indicators.

[TheNegotiator 13]

Tradewinds, I do agree with what you're saying. I just think there are way more of these little tests of levels throughout the day when conditions are more volatile. I know from my experience, when the markets are really slow and I am trying to scalp, I normally end up taking suboptimal trades with tighter targets and have the possibility of getting done on a single move with high volume. I just prefer not to scalp in low volatility. I know I'm not alone in this feeling.