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In this article we highlight Scalp Trader - SCALP, authored by Chief Market Strategist Damon Southward, who provides special situations and industry relative value commentary and includes intra-day setups and specific trading recommendations. SCALP coverage can be found on our Briefing Trader service.

Almost every experienced trader I speak to talks about the impact high frequency trading and Black Box trading has had on the market. Some have been unable to adjust and have been pushed out of the business. From my perspective, opportunity continues to exist in spades, but individuals must adapt their style to reflect the new conditions.

Here are some of the adjustments I've made:

Alternative Strategies: I have been talking about Yield-focused trading Strategies for a couple of years now and have developed a good following in this area. This space has been an extremely consistent money maker for me. I trade a Relative Value strategy in Yield plays such as Preferreds, Royalty Trusts, Agency REITs and even leveraged yield-focused ETFs. What I like about the yield equity space is that real buyers create a floor on price because most of the market is made up of investors running a buy-and-hold-for-income strategy. This gives me the comfort to take far more size than I would with my regular, more speculative trading positions. I trade this space for both capital gains and income. Given the intraday leverage made available to daytraders, I simply don't need that much cash to execute my intraday strategy. The yield plays provide an attractive "cash management" tool for me that kicks off attractive, steady income. It also is the lowest stress strategy I've ever executed in my 15 years of trading.

Research: These days I spend hours doing research on stocks, industries and themes, then patiently waiting for a price/valuation that I like. As I detailed in my Strategy Meeting Key Points update on Feb 3, I'd been researching my theory of buying the Preferred stock of small Natural Gas drillers that had fallen into distress (due to low Nat Gas prices) and that were weighed down by heavy debt loads. I was looking for names that had enough cash to last at least a year and a history of being shareholder focused (i.e., would only consider default as a last option). In doing this research, I came across the Preferred of GMX Resources (GMXR is the common; GMXR-prD is the Preferred), which was down to $6 from its $25 par value (representing a dividend yield of 40% vs the original 9.25% coupon). Coincidentally, that very evening, GMXR issued a press release stating that they would cut expenses enough to fully fund CapEx for the year, including debt expense. Because of my research, I was ready to pull the trigger at the open, picking up stock at a $7.10 average price (33% yield) and watching it run to a high of $16 over the next two days (I sold my position just under $11.00 based on my valuation of the security). This trade played out quickly, but I was prepared to wait for days or weeks on this opportunity, which would have meant watching for press releases and listening to conference call presentations from the company that indicated GMXR would continue to pay distributions on the Preferred. Yes, it sounds like a lot of work, but this one idea was good for what I consider to be a couple good months of trading.

On an intraday basis, my trading focuses on information flow and volatility events. The first thing I do when considering an idea is to look at the 1-minute chart. This tells me if I'm early or late. If I feel that I'm early to the story and that the stock has legs, I play the Long side. If the 1-minute suggests that I'm late, I may simply let it run a bit more then get Short to ride the first round of profit-taking. I focus on names that I know reasonably well. If there is a significant move in a stock that I don't follow (at least 5% move in a large-cap and 10% in a smaller-cap), I'll spend a few minutes getting up to speed in order to capture some of the volatility opportunity (for me, that means reaching out to our specialists in the area, reading Briefing's archives and talking to contacts who may have more familiarity with the name). I also like to trade based on information coming out of conference calls, as I have a good understanding of how institutional investors will react to certain kinds of comments. From both an intraday and swing perspective, patience and market awareness have become increasingly important. The markets provide windows of "clean" volatility followed by periods of less predictable chop. It is important to know which one you're in and to adjust your size/frequency accordingly.

The business of trading has certainly undergone some dramatic changes over the past year. That said, think I might actually prefer these new conditions. Because I'm looking for smaller moves, I spend less time watching/babysitting a position. The change in conditions also led me to pursue these Alternative Strategies, which have provided me some of the lowest stress money I've made in my 15 year career.

If I were to send you away with one word of advice it would be to understand what you are trading. Many individuals have abandoned trading individual stocks because the technicals no longer work nearly as consistently. These days, I spend a great deal of time studying individual stories, locating and understanding industry rotations and tracking down the names that institutions are buying/selling. Understanding the trading games that go on these days is what allows me to consistently clip 0.25-0.40. Understanding the story is what allows me to stick around for the +1.00 pt move.

--Damon Southward, Chief Market Strategist