Scalping is a trading strategy geared towards profiting from minor price changes in a stock’s price. Traders who implement this strategy place anywhere from 10 to a few hundred trades in a single day with the belief that small moves in stock price are easier to catch than large ones; traders who implement this strategy are known as scalpers. Many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses. Scalpers need to be disciplined and need to stick to their trading regimen very closely. Any decision that needs to be made should be done so with certainty. But scalpers should also be very flexible because market conditions are very fluid and if a trade isn’t going as expected, they’ll need to fix the situation as quickly as possible without incurring too much of a loss.
Scalping utilizes larger position sizes for smaller price gains in the smallest period of holding time. It is performed intraday The main goal is to buy or sell a number of shares at the bid — or ask — price and then quickly sell them a few cents higher or lower for a profit. The holding times can vary from seconds to minutes, and in some cases up to several hours. The position is closed before the end of the total market trading session.
Popular Scalping Strategies
There are countless different trading strategies that can be used for scalping profits.
It’s important to note that these strategies cannot be blindly implemented to scalp profits in any asset; rather, they serve as a starting point to developing a more fine-tuned strategy for a particular asset.
There are several steps to implementing scalping strategies:
- Define: Determine what technical indicators you plan on using and the settings for them.
- Backtest: See how the strategy would have performed in the past using historical data.
- Paper Trade: Paper trade the strategies using your broker.
- Optimize: Make any necessary improvements to the strategy to improve the risk-adjusted returns.
- Trade: Trade using the strategy and carefully track the results while being cognizant of any market-moving news.
Pros and Cons of Scalping
Traders should carefully consider the pros and cons of scalping before using the strategy.
The benefits of scalping include:
- Limited Risk: Scalping strategies are designed to limit the risk of loss from any single trade by creating tight take-profit and stop-loss points. There’s a very little market risk.
- Non-Directional: Scalping is a non-directional strategy that doesn’t require the market to move in a specific direction. You can profit in both up and down markets.
- Easy to Automate: Scalping strategies are often easy to automate with trading systems since they are usually based on a series of technical criteria that can be computed.
The drawbacks of scalping include:
- Higher Minimums: Scalping requires higher minimum account values to either comply with pattern day trading rules ($25,000) or generate enough profits to reach your goals.
- Higher Transaction Costs: Scalping involves placing a greater number of trades than other strategies, which means that transaction costs tend to be much higher.
- Greater Leverage: Scalping often requires a high amount of leverage to generate enough profit, which makes it very important to control for risk to avoid large losses.
Scalping is best for short-term traders with access to sufficient starting capital. A high level of discipline is also required for scalpers that aren’t using automated trading systems to buy and sell equities, currencies, or futures. And finally, it’s important to backtest and paper trade any untested scalping strategy to ensure it’s the right fit for your goals.