Getting Started - Scalping Basics - 02

So here is the review of Part 2 of the Six part series. This one is titled "Searching for Opportunities" - It's a rather short one.

Part 2 of 6 - Searching for Opportunities 

"Liquidity is the most important prerequisite" - This is something that we discussed in the previous post as well, and to tell you something interesting, NIFTY Options is the most liquid product in the world. Take a look at this NSE press release. Yes there are some nuances to it. Like, when it comes to scalping NIFTY, you would find that ATM and slightly OTM strikes have better volumes compared to ITM strikes. Also strikes ending in 100's have higher liquidity than those in 50's. But at the end, when it comes to liquidity nothing comes close to NIFTY options.

"The very act of scalping is initiated by the market itself" - "Price extremes are a good place for market forces to push price in the opposite direction." This is what Tom Sosnoff says. In other words I guess he is trying to say that markets are mean reverting, and that is where the opportunity lies. It's very true for NIFTY as well. At NIftyScalper we use probabilities of mean reversion to trade, and you would be surprised to know that there are specific time slots with certain mean reversion probabilities. I practically make a living of it. 

"Ranges are the key to scalping" - You need some range, some movement to scalp. If you look at NIFTY Index data you would get a sense of the average range of NIFTY. It comes to around 80 points i.e the High-Low range, which is what we are interested in, not the Open-Close range.

If you are scalping options, the delta of the strikes would play a role here. I usually scalp ATM strikes, so you would have a a delta of (0.5) which means a range that is half that of the Index. There are a few days in a year where the index itself is in a narrow range of sub 50 at times, that is when it becomes difficult to scalp, but then ranges are also mean reverting, there are periods of expansions and contractions.

Role of VIX or the Volatility Index - This is something they allude to indirectly by referring to expected move in the index. More on what it is here.

It's important to understand the implications of VIX and its correlation with NIFTY. It helps us build on our market awareness and also aids in having a directional bias while scalping.

That's pretty much for this episode. The next one is about "Trade Execution", I would say its a key building block of scalping. Eager to write about it as there are a lot of contextual differences which need explaining.