What is scalping?

Scalping is a day trading strategy where an investor buys and sells an individual stock multiple times throughout the same day. It’s a popular trading technique that’s been around for a long time and is a common way to take advantage of a daily run-up of a stock or sector. Scalpers can place anywhere from a few to one hundred-plus trades a day, always attempting to turn a small profit with each individual trade.

Scalping decision factors

Scalpers should examine the trends of indices to develop their own reasoning for why they will execute their trades. This guides scalpers on their entry points, be it a breakout or market rally. Furthermore, scalpers should set a goal for trades per day.  

The “little win” objective

Scalping day traders aren’t don’t make large profits with each trade they make. Rather, they make small profits on many little trades. Often, scalpers will buy and sell the same stock within minutes, not holding it for very long. 

Scalping day traders are on the hunt for a trending or highly volatile markets subject to news or swings. Scalpers buy and sell the upswing of the stock to avoid the pitfall of not timing the peak properly.   

Executing an effective scalping strategy

A successful scalp-trading strategy requires a thorough understating of major trends and psychology. Effective scalpers should also be able to interpret short-term charts. Scalpers consider the moving averages and pivot points to determine an appropriate trade execution. 

Of course, scalpers may face losing trades. However, a trading strategy together with discipline can support a better ratio for winning trades. Scalpers should also acquire adequate capital, subscribe to level II platforms that show live bids, and have a strong wired internet connection to avoid latency. 

Your acceptable profit or loss will depend on the timeframe you are using. As mentioned above, most scalpers utilize a 1-minute or 5-minute time frame, where the accepted profit or loss would be 5 pips. This would differ if the scalpers were trading on a 15-minutes time frame where the targets would widen to 10 pips. Moreover, it is highly recommended to select liquid volatile stocks or currency pairs thus avoiding being trapped in the trade for longer than needed waiting for the assigned targets. 

Going against traditional trading instincts

Traditional traders usually hold the stock for short/medium term, but scalping doesn’t follow traditional trading. Scalpers have the discipline to jump in and off the stock even if that stock is in an uptrend. Traditional traders will often hold the stock under the impression that it will continue to climb.

Scalping strategies for beginners

Here’s a rundown of a few tips and strategies for beginners looking to scalp: 

• Trade the hot stocks each day based on your selective watch list. 
• Buy/sell at breakouts or at a support break. 
• Offload your position quickly if there is no move up. 
• Make 3-5 trades as a daily goal. 

One of the simplest and most common forms of scalping involves buying many shares, waiting for a minor tick upwards, and offloading the position as soon as the target profit is achieved. 

Scalpers can often trade the same security throughout the day, especially on volatile days. Beginners seeking to learn the scalping strategy should look for the most liquid securities possible. 

Scalping is counterintuitive to most traders because winners are sold quickly, often just as quickly as the losers. Day traders are used to jumping in and out of positions in short time frames, but scalping takes it to another level. Moreover, while day traders are advised to avoid overtrading, scalpers undergo featured trading volume to make outsized profits. 

It’s recommended to practice scalping via demo accounts prior to live trading accounts to avoid putting capital at risk. As stated above, scalping requires a specific mindset—and there are some drawbacks to scalping. Transaction costs can eat up the scalper’s profits if the broker charges high commission fees or spreads. 

Scalping vs. swing trading

Swing trading is the opposite of scalping, where swing trading is preferable to investors who don’t have time to monitor the market on daily basis. Ideally, swing trading requires the patience of holding positions for several days, if not weeks. 

However, investors should dedicate some time daily for quick market analysis and following up on economic events.  Swing trading takes place when prices form a higher low or lower high for example. Given that swing traders usually trade on medium time frames, larger stop losses are required with an appropriate money management plan. Thus, traders should focus on their analysis and keep calm during short-term noise. Unlike scalping, pairs with lower volatility and high spreads have minimal effect on the trades since traders assign larger “take profit” targets at longer timeframes.