Scalping is one of many trading styles that investors use to profit off small price changes. Traders need a very strict exit point to realize profits. A large loss can eliminate gains rather quick.
Whether you’re a novice trader or an expert, it can be a great strategy for generating significant profits via multiple small-profit trades. For more great guides visit our homepage or read our full guide on the Brokers for Day Trading.
Definition of Scalping
As mentioned, scalping is one of many day trading strategies. Scalping involves making numerous small-profit trades instead of a few larger profit trades. This style focuses on generating profits from the small price changes. Scalping is known for having one of the shortest time frames, with positions lasting for only a few seconds or minutes.
Traders who use this strategy are known as ‘scalpers’ who quickly enter and exit the market to skim small profits off high-volume trades.
A word of warning though, if you decide to give it a try, you’ll need to have a solid exit strategy in place. This is because incurring a large loss would negate any profits that you’ve worked hard to obtain.
If you want to pursue scalping, we would advise that you make sure you have access to the proper tools. This includes live feeds, and perhaps a direct-access broker.
How does it work?
Traders who primarily use the scalping strategy do so under the assumption that entering positions on small profit trades to profit off small price point movements is less risky than entering positions for larger moves.
To avoid the risks associated with market volatility, scalpers keep their trading time frames short and small.
Scalping offers traders the opportunity to earn major profits, however, it requires traders to have discipline and a fair amount of experience in reading market trends.
A trader who only uses scalping can make over a hundred trades in a day. Scalpers rely on tick or one-minute price point tracking charts. They might also make use of Direct Access Trading (DAT) and level 2 quotations. These supporting systems are essential if you decide to scal.
The Difference Between Scalping and Day Trading
Scalping is a method that is commonly used in day trading. While they share numerous similarities such as focusing on making multiple trades throughout the day and keeping the trade windows small, there are a few key differences.
Scalping is a form of day trading but not all strategies involve scalping. In simple terms, scalping is always considered day trading but day trading is not always considered scalping.
The key difference is the duration of the trades. While day trading is characterized by buying and selling a financial asset within the same day, there aren’t any rules on how long you have to wait between trades.
Scalping, on the other hand, is characterized by rapid-fire trades that occur within minutes or seconds of each other.
While day trading can be both systematic and make use of various strategies, scalping is often an automated process.
There are three main strategies you can consider when trying scalping. The first strategy is known as ‘market-making.
Market-making occurs when the scalper attempts to capitalize on a spread by posting a bid and an offer on the same stock simultaneously. However, this strategy only works on immobile stocks that don’t have price fluctuations and are traded at high volumes.
A word of warning though, this strategy is incredibly difficult. This is because traders will have to compete with market makers for bids and offers on shares. In addition to this, the profit generated is small and any price movement against the trader’s position can lead to a loss that is far greater than the profit goal.
The second scalpings strategy involves buying a large number of shares and selling them based on small price point movements to generate a profit. The price point movements are usually measured in cents.
Stocks with high liquidity rates are essential for this strategy. This is because it requires trades to exit and enter trades with thousands of shares.
The last method involves traders entering a specific amount of shares on a setup on the trader’s system. The trader will then close their position once an exit signal occurs close to the 1:1 ratio of choice.
Much like the previous strategies mentioned, this method requires a working knowledge of financial markets and how they operate, as well as being able to read market trends.
Here are a few common questions you might have:
The short answer here is yes. Scalping isn’t simply automated trading. As we’ve said, it isn’t without its risks and it requires extensive know-how about the ins and outs of financial markets. Traders also need to be adept at reading and acting on market trends. Once you’ve got this down, it can be extremely profitable.
The general rule of thumb here is to choose stocks that are traded at high volumes and that have high liquidity rates. This will allow you to make those rapid trades and generate profits from the small price point changes of the stock.
You should also use market trends to help you make your decision.
Forex scalping is another method that focuses primarily on forex. This involves trading currency pairs and holding on to these pairs in an attempt to generate a profit. As I am sure you can surmise, it is used by forex traders. Much like general scalping, forex scalping aims to take advantage of small price point movements within currency pairs to generate income.
Scalping is one of many day trading strategies and it involves trading stocks at high volumes to generate a profit from the small price point changes.
Traders who use this strategy require a great amount of know-how and experience in day trading. They also need to develop solid exit strategies for their ventures to be profitable.
We would recommend this strategy to experienced traders who can read market trends and have access to additional tools such as charting and Direct Access Trading.