Educational Guide: Intraday Scalping Guide for Members (Part 1)
Educational Guide on Foundational Concepts for Scalping for Intraday Profits
Note: This educational note will serve as today’s premium daily market note. Our Pre-Market intraday plan covered our action plan for the day. Please share this to spread education for folks.
Hi Everyone -
Now that FOMC has passed and the Fed has essentially given a green light to Short-Term Risk On (and simultaneously significantly added to Macro Risks), I think this is a good period of time for me to write an educational post on Intraday Scalping.
The reason I want to provide more education is that I really, really do want all our members to take full advantage of what I have to offer in our Community. Advanced folks in my Community can tell I am very focused on accuracy and would like to uphold a strong win rate based on the context of my intraday commentary. However, I have a feeling that Beginners and even Intermediate-level folks may not fully understand what scalping/intraday entails, and this post (along with future ones) with hopefully begin to bridge that educational gap.
This post will answer many foundational questions such as the following:
What is scalping (and even more broadly, what is Intraday trading)? How does this complement investing?
Secondary Topic: Why is scalping even a good skillset/tool to begin with? Is it worth learning this skill?
Why does Larry always talk about ES and NQ? What are these things? How is this different from options?
How can I even participate in these instruments, and what do I need to know about them?
Can anyone learn this skill? Or do you need some type of specialized training?
How to understand my Pre-Market Plan which I send Monday-Thursday
Perhaps most interestingly, how much can I expect to earn from this?
What is scalping (and even more broadly, what is Intraday trading)? How does this complement investing?
To answer this question, I want to first bring up what drew me into this area to begin with. This background information will explain I use it extensively in addition to intermediate-term/long-term investing.
Most long time readers know that I spend considerable time covering stocks from the China Internet Sector (notably the top stocks from KWEB ETF). What is also widely known is that China ADRs/Hang Seng has been an extraordinarily tough sector to navigate. Compared to the investing landscape in the U.S. and other developed/emerging markets, China has fared much less favorably on a relative basis.
We also know retail favorites such as Alibaba, Tencent, Baidu, and JD have all been structurally de-rated in the past few years, and this has caused long-term returns on these names to be negative for most investors. Using the Hang Seng as a proxy, China ADRs are down about -30% over the last several years. It is no joke when I say that China is the hardest market I have ever traded, but it has served to be a powerful training ground for me.
For me personally, I have only been able to find very small modest profits in China. Although I am net profitable on this sector, I attribute nearly all of my profits drawn from China based on the concepts from scalping (and some luck of course). Buy & Hold as a concept for China has not worked (yet, perhaps).
In other words, out of a natural need to survive China’s investing landscape, I had to evolve and learn scalping because it was the only way to ever find Green in this sector. Of course, I hope this changes for investors, but as of this post, I do think scalping has been the only reliable way to make profits from most stocks in the China KWEB ETF.
So, what is Scalping in markets? And how does this complement long-term investing? I’ll offer my perspective on it.
What is it? Scalping is a trading concept that shortens the timeframe of the typical holding time preference to adjust for market structure. It is also about profiting from smaller movements in the stock/ETF. For instance, if I buy NVDA and my holding period intention is 1 year, then if I trade BABA for 1-3 days, then BABA is a scalp and NVDA is an investment. If I usually trade SPY on multi-week timeframes, then trading the intraday range is then also a scalp.
How does this complement long-term investing? If developed as a skill, then scalping is a way to extract cash flow (liquidity) from the market. If we put on our investors’ hat and we really get into the fundamental definition of investing positions, long-term positions technically may not be considered to be liquid for a variety of reasons (taxes, held for long-term, pass down to future generations, etc)
In other words, you can’t use investing profits to buy more stocks without selling one position to buy another. Investing positions is a position that compounds in the background.
Your shares grow in value. But you don’t own more shares (unless your stocks are going through a stock split)
On the other hand, scalping/intraday trading is a way to extract cash flow from the market via intraday gains and these profits can be RE-invested back into longer-term ideas like SPY, QQQ, Semiconductors, your fav. ideas, etc.
Cash flow drawn from scalping/trading is essentially a secondary source of income that can then be used to buy more shares of long-term ideas that compound in the background
Additional bonus: Learning Scalping has helped me to potentially identify better entry points for longer-term ideas because I execute on lower timeframes to find optimal areas. Scalping China has helped me to better find trading opportunities in the U.S.
So the formula that I have designed and practice is the following:
Intraday Profits = Active Cash Flow
Long-Term Investing Positions = Compounds Passively in the Background
Any Intraday Profits —> Long-Term Investing Positions
or
Any Intraday Profits —> Pay for Lifestyle, or anything you want to get
When in Drawdown from Intraday Trading —> Go into Conservative Mode until drawdown is recovered.
So far so good? Okay, onto the next question.
Why does Larry always talk about ES and NQ? What are these things?
In order to scalp, we need to have a vehicle to do so. I focus on 2 areas for intraday scalping, almost exclusively, and that is the S&P 500 and the Nasdaq-100.
ES is the futures product to trade the S&P 500 (think SPX/SPY)
MES is the micro edition of ES at 1/10 the size. I use MES a lot because it’s very margin friendly and allows me to scale up and down more easily.
NQ is the futures product to trade the Nasdaq-100 (think QQQ ETF)
MNQ is the micro edition of NQ at 1/10 the size. I use MNQ a lot because it’s very margin friendly and allows me to scale up and down more easily.
In terms of how this market works, here’s the math behind it:
ES is $50 per point
Example: If ES moves from 5200 to 5201, that is a $50 profit before commissions and fees. If it goes down to 5199, that is a $50 loss before commissions and fees.
MES is $5 per point
Example: If MES moves from 5200 to 5201, that is a $5 profit before commissions and fees. If it goes down to 5199, that is a $5 loss before commissions and fees.
NQ is $20 per point
Example: If NQ moves from 18350 to 18351, that is a $20 profit before commissions and fees. If it goes down to 18349, that is a $20 loss before commissions and fees.
MNQ is $2 per point
Example: If MNQ moves from 18350 to 18351, that is a $2 profit before commissions and fees. If it goes down to 18349, that is a $2 loss before commissions and fees.
You can see that catching even a couple points with several Micro Contracts (MES/MNQ) can result in several hundred dollars of profit per day. About 90% of my intraday trading profits come from scalping MES and MNQ. Unless there is anything very compelling, I exclusively focus on these two areas on intraday timeframes.
Now, why these products rather than SPY and QQQ?
It is because it is Much more margin friendly (a double-edged sword, of course).
For instance, here’s the math behind the margin requirement (No margin interest is ever paid if positions are closed by 4pm). Here are some screenshots from Interactive Brokers below.
ES (S&P 500 Proxy)
Per 1 Contract, ES Intraday Margin Requirement: About 9000. Overnight is about 13000.
Per 1 Contract, MES Intraday Margin Requirement is about 900. Overnight is about 1300.
In other words, for 900 dollars, you can trade 1 MES Contract (which has a notional value of about $25,000) and if you can scalp 3 points, you just made $15! (Enough for a small breakfast in most U.S. cities!)
If you’re a bigger player and you scalp 3 points successfully on ES, you just made $150 (before commissions and fees)! This is enough for a nice dinner for 2 almost anywhere in the U.S.
NQ (Nasdaq 100 Proxy)
Per 1 Contract, NQ Intraday Margin Requirement: About 17650. Overnight is about 25000.
Per 1 Contract, MNQ Intraday Margin Requirement is about 1760. Overnight is about 2500.
In other words, for 1760 dollars, you can trade 1 MNQ Contract (which has a notional value of about $35,000) and if you can scalp 10 points, you just made $20! (Enough for a small breakfast in most U.S. cities!). 10 points on MNQ is about a .08% move.
To make $20 from QQQ (which is $445 now), you would need the ETF to go up $2 (which is .5%) and you would need to have 10 shares ($4450)
To be sure, the leverage embedded in these products means that much care and thought needs to be put into examining what entry may be de-risked enough and what exit may be appropriate.
This is why I give Intraday Levels in my Pre-Markets. They serve this exact reason.
Now, I also want to share my journaling of statistics so that folks know what I look for:
On intraday timeframes, I tend to look for 5-7 points on MES/ES and 10+ if I’m able to trail a runner.
On intraday timeframe, I tend to look for 10-50 points on MNQ/NQ and 75-100 if I’m able to trail a runner.
In general, while I can’t speak for everyone, for me, the larger the size I put on, the smaller the target I go for. And vice versa.
As a general example, if I have 10 MES on (1 full ES), I look for about 3-4 points. If I have 5 MES on, I look for 4-5 points. If I have 2-4 MES on, I look for 6-7 points.
My reasoning for this is that taking on a levered position means that you want to greatly increase the probability that you can get to your Limit Order Sell. Having a levered position on while the NQ market swings -50 points against you will not be pleasant. The way to mitigate this is by entering at LOW levels and then having a conservative exit target. Because NQ is a levered instrument, for example, even a 10 point move in NQ will result in $200 profit (before commissions and fees).
Here’s a real example:
On Thursday March 21st - post Fed FOMC - I was able to scale into an MNQ position that eventually was 9 MNQ contracts (so 90% of a full NQ contract).
My cost average was about 18655.
Because 9 contracts is a large sized position for me, I decided to target +15 points for a Limit Order Sell of 18670. So, just 15 points.
We can see below that as I got filled at 18670, my MNQ position netted me about $270. Holding time was about 45 minutes.
Everyone will have their own style, but my own routine is that I typically look for $200-$500 per day and then once I achieve that target (the sooner the better), I set Stops and then I am done for the day as I work on my other DCF models for long-term investments.
I am not interested in trading every setup, and I have a strong preference towards sitting on my hands if I don’t see anything worthwhile.
Leverage will go both ways, and for instance, I had to sit through drawdown this morning for a bit before my Limit Order Sell was achieved.
In my view, the Entry and the Exit are incredibly key ingredients to success in scalping. As one gets more advanced, you can develop mechanisms for trailing orders so that if the market runs in your direction you still have partial exposure.
Before I get to the next chapter, I want to emphasize that this type of activity is suitable for more risk-tolerant investors who investors who have more capital to deploy. Futures trading is a levered form of trading, and it can be very rewarding but it can also produce losses very, very quickly.
It has taken me a minimum of several months to develop expertise in this area but my learning curve was accelerated because I had a background in options.
So, I highly, highly encourage all new folks to ES/MES and NQ/MNQ to please use a simulated account for several months to get used to the pacing and velocity of it. And if using live capital, please use the Micros (MES/MNQ) in small quantities first. You will notice that P&L moves a lot faster than traditional stock positions because of leverage.
The goal of scalping is NOT to beat the S&P 500 or Nasdaq-100’s yearly returns. The goal is to generate cash flow for yourself so that you have a powerful source of income to do what you wish.
Like most things worthwhile in life, developing this skill will take time, patience, and grind.
It is one thing to make $50000-$100,000 a year working every day 9-5. It is another to make $200/day-$500/day ($50000-$100,000) a year trading 1-2 hours a day (which essentially is a lucrative side hustle), using those profits to reinvest in passive long-term ideas which compound, and then spending the rest of your time doing anything you want and being location independent.
Beginners should have the smallest positioning possible when starting out. Advanced folks can decide to scale up or down based on personal preference and risk tolerance. Always start with a simulator account to get the feel of things for a few months first.
Just know that with every contract you add, you concretely take on more risk in order to achieve that incremental reward. The psychological weight of trading larger contracts is not to be underestimated.
How can I even participate in these instruments, and what do I need to know about them?
In any futures enabled brokerage account (I use TD Ameritrade for charting and IBKR for execution), here are the steps to put ES/MES and NQ/MNQ on your watchlist.
Step 1: In your brokerage (here is IBKR as an example), type in ES, MES, NQ, or MNQ depending on the one you are looking to add. Here is ES. On IBKR, you would click Futures.
Step 2: You will want to choose the month that is closest to the current time. In this case, it’s June 2024.
Step 3: This page below is the details of ES. On Interactive Brokers, if you don’t have an existing position, Sell means to Short-Sell (look for the price to go down)
Step 4: Order page where you enter parameters. Everyone will have a different style. I personally like to use Limit orders if possible for entry. For Exit, I lean heavily on Sell Limit Orders. If I have to get out of a position quickly, I will do Market Sell.
Can anyone learn this skill? Or do you need some type of specialized training?
Scalping on intraday timeframes is a niche part of the market where technical analysis takes on a more imminent weight than fundamental analysis.
Even though I am a CFA Charterholder with a finance background, I nearly had to rewire my brain to learn participating in intraday timeframes because much of my experience prior had been with company selection and equity research (which I obviously still do with my DCF Conclusion Studies).
Will what I know about fundamental analysis, macro thinking, DCF modeling apply to scalping?
These valuable concepts have importance in intraday trading from the perspective that you are more prepared to surmise where NQ/ES may go because you have a Fair Value understanding of the Mag7 stocks and you know their trading ranges.
However, the actual execution of Entry & Exit and making profit from the market with scalping comes down to the following areas:
Lots of screen time understanding price structure/behavior
Identifying when an intraday pivot may occur
Watching what levels of Support are Strong and which are Weak
Watching whether the upcoming Resistance level is going to fold or flush the market
Human intuition and sense of market direction (this can’t be explained as easily)
Of course there’s more to it, but this is just a short list.
So can anyone learn scalping? I would say the best way to know is by practicing realistic transactions in a simulated account and taking it seriously. That’s probably the best way to know.
If you can’t be profitable in simulated trading, trading with live capital will be significantly more challenging.
How to understand my pre-market notes in our Community?
Every Monday-Thursday, I write concise pre-market plans for our Member Community. I take Fridays off to do DCF Modeling in the background, read different perspectives, and plan for the next week. By spending more time outside of the market, I am able to be more refreshed when I participate in it.
Members will notice that I write 1 Pre-Market per day and I put my best effort towards making that plan a time-efficient way to interpret what may happen throughout the session.
Unless it is a special circumstance, I keep my update to 1 Pre-Market and 1 Daily Note because additional follow-ups dilute the meaning of the original plan.
Believe me - more updates do not mean more profitable ideas.
When possible and appropriate, I do my best to offer areas on ES and NQ where I think reactions may occur. These plans which I share with folks before the opening bell also serve as a framework from which I look at participating in that day’s session.
Here is an example from Thursday March 21st, one of many pre-markets that I have written.
In this pre-market, I comment on NQ. Specifically, if I see NQ stay above 18600, I lean towards a long scalping mindset (look for dips, look for recoveries, look to buy support, etc).
I discussed breaking above 17660 to offer an extension of the rally (NQ was up 1% at the 17660) level.
Remember, trading isn’t linear or picture perfect. My comment means that I expect further upside beyond 17660 if it breaks above, but it doesn’t mean we can’t come back below it. It just means that upon breaking above it, there is more potential to go higher.
As seen in the chart below, upon a break above 17660 (Black Line below), NQ eventually auctions into the 17700 area, offering up to +40 points of long scalping opportunity for MNQ/NQ traders. There was an opportunity at roughly 10am and also at 1130 am for this to happen.
Because I was “looking for longs” above 17600, this means that I was looking for price structure to make dips which I could scale-into a position.
Had NQ fallen below 17600, I would be much less confident in buying dips that could bounce and instead would start looking for bounces to short-sell against. But that didn’t happen (yet) in this context.
As shown in my transaction above which I’ll re-copy/paste here, I accumulated Long MNQ on what I believed to be constructive price structure, and on an eventual reclaim of 17660 (My key level), I targeted a conservative +15 points from my entry of 17655 to Limit Order Sell at 17670 (which serves as “upside” beyond 17660).
You can see that there are other instances where the market made more local lows and then subsequently bounced. There are also instances where the market rolled over and made new lows.
Do I play all these setups?
No.
I participate in 1 setup. I attempt to make my day with my plan. And if I can, I’m done.
If it appears that the market is very unfavorable to my plan, I either don’t trade or take loss and plan for next session.
Profit protection is very important. The more I trade, the more that I’ve found I open up the doors to give back hard-earned profits.
My golden rule: Protecting what you have made » Attempting to make more.
Perhaps most interestingly, how much can someone expect to earn from scalping?
Trading is a highly scalable activity. Unlike a career where you have to hop through office politics and promotions, in trading, the only thing a person needs to do to open up the potential to earn more is Size Up.
However, therein lies the most dangerous aspect about it. Sizing Up is not appropriate unless there is a very good reason to do so. Sizing Up increases the financial stakes and means that a person must have the mental/psychological capital to withstand significant portfolio variance before they see Limit Order Sell has been filled.
I hope this answer conveys my thinking to this question.
You can make as little or as much as you want as long as you can Stay-in-the-Game long enough to keep doing it on a repeated basis. So, from my experience, if you want to make more in trading, you may want to Size Down, get consistent, build an edge, and then work up from there.
Because I am very much interested in doing this over the long haul, I am more conservative in my daily targets.
Some days are good and I can find $800-1000. Some days are really tough to trade. If market conditions are really bearish and I’m long, I’ll even settle for $20 bucks and call it a day if I can avoid a loss (sometimes not possible).
By structuring positioning such that multiple drawdown days won’t impair your ability to continue, you put yourself in a position to keep learning and growing.
For folks with large accounts, making 4-5 figure days is very common. For newcomers, probably best to start with trying to make $10-30 a day consistently.
Don’t underestimate small gains because $10 a day is $50 a week and ~$200 a month. That’s $2400 a year.
Averaging $30 a day would be $7500 a year (which is bigger than the typical bonus in Corporate America). There are 250 trading sessions in a year.
It doesn’t matter how big/small your account size is. What matters is the quality of the process.
With a process and with a good plan, you will eventually grow it. Even when markets are Red, or Flat.
My role is I hope to improve your process. I hope to provide plans that will be enduring, actionable, and helpful under different market environments.
I hope this Educational Guide helps and that you enjoyed this post.
I will be writing more of these Guides to help Members grow as Traders and Investors over time.
Feel free to share with your network. This post is designed to help all my readers.
Sincerely,
Larry
How I help our Members:
1 Pre-Market Plan sent out Monday-Thursday on intraday context on ES and NQ as well as key macro points and other items I deem important. This is hosted on Whatsapp.
1 Daily Market Note sent out Monday-Thursday where I highlight a rotation of topics such as DCF Conclusion Studies of Key Stocks in the market, Macro commentary, Intermediate-Term Opportunities in Stocks that may have 10-15% upside, and more
Helpful Websites and Resources: