How To: High Frequency Discretionary Scalping

Graybox Trading

Apr 09

If you want to learn some high frequency style discretionary scalping and want action, the best market today may just be the SPY. Below I will share the significant advantages for scalping the SPY compared to even the e-mini and e-micro futures. The same principles may be used to trade other equities like the QQQ’s or even individual stocks like BA.

First, I started with the ES S&P 500 e-mini back in 2009. As I predicted the entire market, it did not really matter. The main reason I chose the ES was because the PDT rule excluded me from trading stocks, and that it was easy to understand. I did not give it much more thought then that. One could also get good leverage with low trading costs for the time compared to retail stock brokers. Everything has changed today. Back then, in order to pursue my trading craft and passion, I had to risk real money. Of course, I prefer the way futures move but that is likely just because of my familiarity. Today, everything have changed.

Of course, those who champion the ES or the MES will point too the tax advantages, leverage, overnight markets, and the liquidity. While relevant advantage to trader who are trading size and making big money: are those really the most important factors when learning to trade?

The first important reason that one should start with the SPY compared to the MES e-micro is that one can trade and scale with less risk the e-micro. And, while not investment advice, for the trader with say a 7k model or notional account, keeping risk per day to $30 to $50 is probably about the right level for learning for many people. One might argue that is an almost inconsequential amount– that’s the point. You need to be able to trade consistently for at least 90 days. Well if you want to start with the big boys then you need to be willing to take around $750 risk per day– that gives the ES trader six “10 tick stop” trades per day or three “20 tick stop” trades. While that is only a $75 risk trading 1 e-micro at a 1/10th size– if you want the ability to trade 3 lots for multiple targets then you would need to triple that to $225 per day. The minimum SPY size is 1/50th the e-micro. A trader can trade 15 shares of SPY per “unit” for a 3 unit equivalent to a 1 e-micro.

The second reason is just as important: commissions and trading costs. I can trade the SPY with commission free trading at Tradestation (there might be like a 1 cent SEC fee). Even with the cheapest e-micro broker like AMP Trading, one is paying around 74 cents per round. It does not sound like much. But, two points– first that’s $7.40 cent per round at ES pricing level which is quite high even for years ago and markets are more efficient. And, second once you start to do a lot of rounds then it adds up, if you do 30 rounds then comes out to $22. Again it doesn’t sound like much but if you capture say 1 tick those 30 rounds then that’s only $38 minus your $22 fees yields $15. As such, I have found one probably needs to keep the volume to approximately no more then around 12 rounds per day for the e-micro unless the volatility is extreme and then it tops at about 25 rounds or else commissions become too large a factor. With the SPY, one can trade many more rounds and more rounds equal more opportunity for learning.

The third reason is the spread. For a discretionary or manual scalper, the larger spread in futures is just a negative because one cannot be competitive in trying to capture the spread in futures today with the HFT. What they do is they put their orders out and then pull them based on sophisticated algos that track their queue position in the book. So, whether you use a limit order or a market order then one is likely giving up advantage to HFT. On the other hand, the SPY only has a 1 cent spread– which means it is going to be easier to be profitable. If I did the math right, with the SPY trading at MES equivalent the minimum movement is equivalent to 50 cent compared to $1.25 with the MES or $5 compared to $12.50 for the ES. Why is this important? Let us imagine you really are just taking random trades and you lose just the spread on one side plus costs. If you were taking say just 10 trades per day on the ES then you are giving up 1/2 the spread plus costs which is $12.50/2+$5= $11.25*10=$112.50 per day. Trading consistently for 90 days then you stand to lose $10,000 (it would be $20,000 if you lost spread on both sides). Now, trading SPY with no slippage which likely again is not true at that kind of size but can be at small learning size, you are looking at losing only $5 (.01*500) / 2 (fair value is the mid point) which equates to $2.5 *10= $25 * 90= $2250 (or $5,000 if losing on both sides). Obviously, if you are taking random trades then you won’t profitable but if you are taking trades with a tiny edge– it can make a big difference. More importantly, trading at very small size you can stay in the game while refining your method.

Yes, there are many downsides for trading SPY compared to futures if one wants to trade size. The worst part I have noticed is the fill confirmation takes forever in Tradestation compared to CQG futures trading. But, the best aspect about trading the SPY is that the trader can switch to the futures if once one gains consistency with a method, sure, it will likely be at a lower volume too. SPY can be a good place to warm-up and refine methods without going back and forth from the simulator– and again you can take a lot more trades which I personally like. With futures scalping, the risk and focus required make it such that it is almost always best to stop trading once your profit objective is reached.

Let me know if you agree or disagree that SPY is a going to better for the trader who wants action and to learn scalping and why. Also, let me know if you want another post on some mechanics and ideas for scalping SPY or futures with a higher frequency style.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at