We all know the term scalping, but what is it?
Scalping is an investing technique that involves short-term investing in stocks and futures.
It’s a highly risky method that can result in quick profits, but it can also result in losses.
In this post, we’ll answer the most common questions we hear from beginners and provide a few tips on how to get started.
Scalping Stocks
Online trading has come a very long way, and today, there are so many different types of trading techniques that traders use. The beauty of having so many strategies is that you have options. You can utilize one or more strategies as you deem fit and still come up with the same results; to make a profit. One of the most popular strategies used by short-term traders is called scalping or stock scalping.
Scalping stock is a trading style that involves making a profit off small changes in the asset price you are trading. The asset may be stocks, foreign exchange, cryptocurrencies, Futures, and any other asset you can think of. The idea behind scalping is to accumulate significant profit off multiple trades. Scalpers do not anticipate large profits in a single trade but off multiple trades. That is why the profit margin per trade is very tiny, but several winning trades amount to a large profit.
To be successful at this trading strategy, you have to be very disciplined and have an exit strategy. A wrong move can result in significant losses that will wipe off the smaller profits made off other trades. So the utilization of stop loss and other valuable tools are important tools in executing the strategy. Furthermore, maximum concentration is important too when scalping.
The nitty-gritty of Scalping
Scalping may look like a complex form of trading, but this is not the case. In fact, it is one of the simplest trading strategies since it involves a much shorter timeframe and analyzing few data to gain clarity. For scalping to work, you have to execute several trades per day. You will need to place as many trades as you can and close your position as quickly as possible, even if the trade is still in a profit position.
Features of scalping stock
Small price movement
A scalper believes that the slightest changes in price can result in profit, so that is what they will target. Even when there is a possibility of a large profit, they hedge their trades against losses by exiting the trade once their mission is accomplished.
Short term trading
Scalping is a short-term strategy and does not last for more than a few minutes. So while other traders like swing traders can remain in the market for a long time, running into weeks or even months, scalpers work around a very short window. The reason for this is because they are largely risk-averse, so they always anticipate price reversal at any moment, so the shorter the window, the better for them.
Liquid market
Scalping is highly dependent on a liquid market. If the market is liquid, volatility is lower compared to when the market is illiquid. And as you know, a highly volatile market experiences massive price swings, and trading in such a market using a short timeframe is a recipe for disaster for some traders.
High trading cost
Another feature of scalping is that it attracts a higher transactional cost. The number of trades is much higher, and there are fees for each trade, so the more trades you place, the higher the fee you will pay to the broker.
Efficient trading platform
It is almost impossible to trade with this strategy in a slow trading platform. Since you are focusing on the tiniest of price changes, the last thing you want is to have the platform lag behind by a few seconds. Time lags may prevent you from entering or exiting the market at the right time. Also, it may cause you to lose whatever profit your active trade may have accumulated.
Who is a scalper?
A scalper is a trader who enters and exits the market very quickly. Depending on the market conditions, they may enter and exit the market within seconds. Scalpers are also known as high leverage traders because they place higher leverages on every trade they make so that the potential profit they may make per trade may increase further.
When it comes to online Financial Markets, Scalpers operate differently in different Markets. For example, in a commodity market, a scalper may buy more of a commodity when the price is down in anticipation of a rise in price so he can sell and make a profit. However, in certain contexts, this is illegal.
One common example of illegal scalping is when a scalper buys several sporting tickets at a regular price and plans to sell at a much higher price. According to Federal Law and the Law in most states, this is illegal as it is equivalent to ticket hoarding. However, when it comes to online trading, scalping is not illegal. Unlike a commodity trader, a forex or stock trader may or may not buy several stocks or currencies to increase future profit margins but instead increase the leverage per trade. So, in a nutshell, a scalper leverages the small changes in price to make tiny profits across multiple trades.
What is the difference between scalping and swing trading
Scalping is the exact opposite of swing trading. While a scalper is looking to remain in the market for a very short time, the swing trader does not mind remaining in the market for a very long time as long as his or her profit position is still in place. To better explain their differences, let us analyze their features.
Number of trades: A scalper can place tens and hundreds of trades per day if the opportunity presents itself, but swingers only place a few trades per day or a single trade that will run for days
Trade window: Scalpers keep their trading windows open for a few seconds or minutes, and they never leave it overnight. Swingers, on the other hand, keep their trades open for several days, weeks, or months if the market reflects their analysis.
Time Charts: Scalpers mostly do not trade beyond a 5-minute timeframe, but swingers trade 1 hour, 4 hours, 24 hours, or over several days or weeks
Trading behavior: A scalper is risk-averse and will exit the market once they make the profit they anticipated even if the trade still looks favorable. A swinger, on the other hand, is a risk lover who is more patient.
Trading decision: To scalp successfully, your decision-making must be fast and evolving in line with the market changes. On the other hand, swingers are very fluid with their decision-making. They analyze the market long-term and rarely change their decision unless they are forced to do so by market forces.
Source tracking: Scalpers track the market by mostly focusing on the charts in front of them since they operate within shorter window timeframes. Swingers rely mostly on financial news, editorials by reputable financial analysts like Standard & Poor’s, Moody, and the like. They also follow press releases of government bankers and private corporations.
Experience Level: Scalping is ideal for experienced traders who understand price changes better and can do accurate fundamental and technical analysis. Swinging is a long-term strategy that beginners, intermediate and experienced traders can engage in.
Types of scalping strategies
Now that you know what scalping stock is all about let us now review some of the popular scalping strategies used by experienced scalpers. Please note that this list is by no means comprehensive as there are hundreds of strategies. Even you can come up with your own scalping strategy that works for you. However, the list below reviews the popular ones used by experienced scalpers.
Price Action & Volume: This scalping strategy is the art of studying the price patterns of an asset or a currency pair alongside their volumes. Scalpers who use this strategy look to see whether the price is rising alongside the volume. If this is the case, it is an indication of a very strong upward trend. If the volume and the price is falling, they consider this to be a downward trend.
Bollinger Band: Scalpers who use this strategy use Bollinger Bands more than any other analytical tool. They use the band to analyze the volatility of the asset. This strategy requires a deep knowledge of technical analysis when drawing the band. For example, if the price of the currency pairs stock falls below the band they draw, they consider this to be a good sign to buy, but if the price is above the band, they consider this an indication to sell.
Exponential Moving Average:
Another scalping strategy that experienced scalpers use is an Exponential Moving Average. This technique relies on a signal with which is the scalper makes trading decisions. If the EMA is below, the scalper will buy at a shorter window. Scalpers also use several EMAs to make trading decisions.
Traits/Skills that a good scalper should have
There are certain traits or skills that distinguish a good scalper from an average scalper. Learning more about these skills is one way to set yourself up for success in the future as a very good scalper. We discuss some of them below.
Aggressive: Scalpers are notoriously aggressive with their trading approach. They are highly competitive and hate losing even a cent in any trade. To them, trading is a competition, and they never take a long-term view of the market. Furthermore, other traders, alongside market forces, are their enemy. So when they see a price pattern that works for them, they work it hard.
Disciplined: You can’t be a successful scalper if you are not disciplined. Scalpers don’t chip and change their patterns as the market changes. Rather, they look for price patterns that suit their strategy, and once they find it, they hardly ever change it. As a result, they are very repetitive traders and use stop loss and limit trading to hedge their trades against risk.
Pressure trading: Another trait scalpers have is that they are used to trading under pressure. Oftentimes, they make split entry and exit decisions within seconds and their mind works very fast. Therefore, if you want to be good at scalping, you need to know how to analyze data quickly and trade under pressure.
Know when to walk away
Another trait many people hardly talk about enough is the way scalpers exit trades even when the market seems to be doing well. Once a scalper has made his profits for the day, he walks away even if the market tells him to stay put. This is why they never keep trades open overnight. While a swinger has no qualms keeping trades open, a scalper will exit the market and call it a day. This trait ties to trading discipline. Scalpers have a profit target for the day, and when they hit it, They end their trade for that day.
Common Assets for Scalping
Online trading is very fluid, so you can scalp any asset; however, here are the three common assets many scalpers trade on.
Futures
Using this trading strategy on Futures is very risky, but scalpers who get it right often close the day’s trading with high returns. To scalp futures, you need to be very experienced in forex, stock, and commodities trading. Future scalpers place a much smaller margin then increase it based on the feedback from their analysis. They also exit their positions quickly once they get the profit they want before the market reverses.
Stocks
Scalpers operating in the online stock market use technical indicators when scalping. Unlike futures, scalping in the stock market is less risky because stocks are not as volatile as futures. The only downside with stock scalping is that many brokers do not offer leverage to help you multiply your profit. So to close the day with a substantial profit, you need to trade several windows per day. Therefore, using stop loss is very important to protect your trades from risks.
Forex
Forex is another fertile ground for scalping. In fact, many will argue that scalping as a trading strategy was popularized by forex traders. They trade currency pairs that are highly liquid and can quickly be bought or sold. However, some traders prefer illiquid currency pairs with larger spreads.
What is the best timeframe for stock scalping?
The best time for scalping will depend on the judgment of the trader as well as the asset in question. But, on average, scalpers prefer 1-15 minutes timeframes. In addition, when analyzing the trading patterns of most scalpers, the 1-5 minutes timeframes is their ideal timeframe. Remember, they prefer to keep trades open for a very short time. The longer the trade lasts, the more likely the trend could reverse, in their opinion. Some currency pairs that work very well for scalping are
- GBP/USD
- EUR/USD
Pros and Cons of Scalping
To conclude this article, here are some of the pros and cons of scalping.
Scalping pros
- Spend less time analyzing data compared to swing traders who take a long term view
- Scalping is easy to replicate using the automated tools on trading platforms
- Stop losses are much easier when scalping, so a good scalper can limit his losses much better
- Scalping can be performed in bullish or bearish markets
Cons
- Scalping attracts higher transactional costs because multiple trades are placed. This can eat into your profit margin or equity
- Scalping requires a much higher minimum balance before most brokers will allow it.
- Higher leverage is required to generate substantial profit, but in the same vein, this can lead to higher losses if the trade goes wrong
Conclusion
Stock scalping is a trading strategy that has become very popular over the last decade. This strategy involves exploiting slight changes in prices to make a profit, and most scalpers trade shorter window timeframes. Before you engage in scalping, make sure you are very experienced and properly understand the asset or set of assets you intend to trade.