Scalping Trading

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Have you just started trading or are interested in learning more about the types of trading? Scalping is one trading style that you might know a little about. Scalping can bring in quick profit by taking advantage of market fluctuations.

Let's understand what Scalping is

In simple words, scalping means entering and exiting your orders within a few seconds to a few minutes. A scalper does this with the sole aim of earning profit during a short-term price fluctuation.

Scalping is a trade done within a time frame between 5 seconds to 2-3 minutes. A scalper needs good risk management and an entry-exit strategy to be profitable while trading with this style.

Who exactly are scalpers?

Scalpers are traders who enter and exit from trades many times a day to earn small amounts of profit. As the trade duration is small, a scalper trader must be quick when scalping in the stock market.

A scalper must be very professional and have expertise in quick execution, as scalping can be a tough nut to crack. Scalpers also have to overcome problems like:

  1. As scalpers take trades frequently, they follow strict risk management rules to remain profitable even after paying high transaction costs.
  2. Scalpers have to be aware of High Frequency Trading. It employs computer programs and logics that can punch thousands of orders in microseconds. HFTs execute orders in a way that is impossible for humans to do.

As mentioned earlier, only experienced scalpers can make money, as scalping is challenging. Here are a few qualities one must develop to become a successful scalper

A scalper must be ready and take quick decisions in situations like these and should not panic when deciding.

How does the scalping trading strategy work?

A trader scalping in the stock market looks for quick sharp price moves to make small profits. They trade multiple times a day to earn small portions of profits. In scalping, the trader benefits by taking leveraged positions, which helps to maximize their potential profit. Many traders prefer scalping in options as they can provide quick profits in less duration.

For scalping, a stock must be very liquid. Liquidity ensures that a trader will get the desired price when taking an entry and exit in a stock. Liquid and volatile markets are the ideal markets for scalpers. These types of markets suit the requirements of a scalper very well.

The following are the most common indicators used by scalpers –

  • SMA (Simple moving average)
  • RSI (Relative strength index)
  • VWAP (Volume-weighted average price)
  • Bollinger bands

Day trading Vs Scalp trading

Scalping might sound like intraday trading. While they share some similarities, they also differ in various ways. The following table highlights the differences between scalping and intraday trading

ParameterScalpingIntraday trading
Duration of the tradeIn scalping, the trade duration can last from seconds to several minutes at a maximum.In intraday trading, a trade can last from several minutes to a few hours.
TimeframeA scalper uses a trading timeframe of 10 seconds to 2-3 minutesAn intraday trader can use a trading timeframe of comparatively longer duration.
Type of marketA scalper’s criteria before taking trade is a volatile marketAn intraday trader seeks a trending market
Number of tradesA scalper can take hundreds of trades within minutesAn intraday trader comparatively takes lower number of trades in such short durations.
Transaction costsScalping attracts huge transaction costs as scalpers take a lot of trades.Compared to scalping, the since the number of trades are comparatively lower, transaction costs of intraday trading are less.

Should you practice scalp?

It is not recommended for a complete novice to follow scalping as their primary trading strategy. Scalpers need to be very focused and disciplined and they must make quick decisions. Therefore, only experienced scalpers make money.

Professional scalpers must consider many things that may affect their overall profitability, such as transaction costs, unusual market volatility, illiquidity, etc.

This might sound too overwhelming for you, but don’t worry. Even if you’re a beginner and do not know how to scalp trade, you can start scalping by paper trading at first. Eventually, by adopting the traits of a successful scalper, as mentioned in this blog, you will become a successful scalper in no time!

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