Scalping Trading: What is Scalp Trading & How Does It Work?

Scalp Trading: How To Earn Profit From Small Deals

New traders are often confused which trading style to pursue. If you too have the same dilemma, you have come to the right place. It is imperative to pick a trading style that best suits your personality before you start navigating the stock market. Without a technique, you will get confused and may end up with huge losses. Your adopted style must depend on your financial goal, risk tolerance, time that you can invest daily to follow the market, and several other similar factors. So, you must learn about the different trading techniques to make an informed choice. In this article, we will discuss the scalping trading style, which is about making numerous small deals during the day to earn a profit. So, keep reading.

Who Are Scalpers?

If you have heard about scalp trading, you are probably wondering who scalpers are and how they must be earning from their deals. Well, scalping is a trading style that is employed to earn from small price changes to make profits that add up.  Scalpers trade frequently and in small successions. A scalp trader needs to have a strict exit policy because one large loss could eliminate all the small profits he has made in the other deals. Scalp trading, therefore, needs discipline, decisiveness, and stamina. With these qualities and the right tools, you can become a successful scalp trader.

Scalp traders often enjoy the thrill that this trading style offers. But to strike successful deals, you will need the experience to execute the various technical trading techniques to identify profit opportunities in the market.

How Does Scalping Work?

Having answered the question of who scalpers are, we have arrived at the next question: what is scalp trading?

Scalping trading is a short-term trading technique that involves buying and selling underlying multiple times during the day to earn profit from the price difference. It involves buying an asset at a lower price and selling high. The key is to find highly liquid assets that promise frequent price changes during the day. You can’t scalp if the asset isn’t liquid. Liquidity also ensures that you get the best price when entering or exiting the market.

Scalpers believe it is easier to make small deals and less risky from the market volatility perspective. They make small profits before the opportunity evaporates. Scalp trading lies on the other side of the spectrum, where traders hold onto their position overnight, sometimes even for weeks and months waiting for a bigger profit size to emerge. Scalpers believe in creating multiple profit opportunities within a small span than waiting for a bigger one.

Scalpers work on the market on three principles

Lower exposure limits risks: A brief exposure in the market also minimises the chances of running into an adverse condition.

Small moves are easier to obtain: For a bigger profit, the stock price has to move significantly, which also require higher imbalance in supply and demand. Compared to that, smaller price moves are more comfortable to catch.

Small moves happen frequently: Even when a market is apparently quiet, there are smaller moves in an asset price that scalpers target to exploit.

While other trading styles like position trading, depends on fundamental and technical analysis to identify trades, scalp traders primarily focus on technical trading techniques.

Technical analysis involves studying historical price movements of the asset along with following the current trends; achieving it, scalp traders use various tools and charts. Equipped with historical price, scalpers observe patterns and predict future price movements as they plan a deal.

Scalp traders use trading charts and timeframes that are the shortest of all the trading styles. A day trader might use a five-minutes trading chart to make five deals a day. But a scalp trader will use timeframes as short as five-seconds to make 10 to 100 trades during the day. To achieve this high speed of trading, scalp traders use several trading techniques including market’s ‘time and sales’ – a record of buying, selling, and cancelled transactions.

Day Trading vs Scalping

In nature, day trading is the closest to scalp trading. Like scalpers, day traders also make several trades during the day. But still, there are several differences between the two.

Day Trading Scalp Trading
A day trader may use a timeframe that lasts of 1 to 2 hours A scalp trader uses the shortest timeframe to trade between 5 seconds and 1 minute
A day trader has an average account size A scalp trader since takes a higher risk in the market has a larger account size
Day traders also trade in quick successions, but they trade at an average speed Scalpers aim for immediate results. They trade in the market in ultra-speed. Before other traders see an opportunity, a scalper will open and close his deal
A day trader will follow the trend. They base their trading decisions on technical analysis The strength of a scalp trader is experience. They understand where the market trend is heading and wait for closing trades to get profit into their account

Should You Scalp?

One can adopt scalping as a primary trading style or a supplementary style. A scalper will use short timeframe, tick or one-minute charts to plan trades. It demands dedication, discipline, and speed to execute scalp deals. If you would rather take your time to find the right asset and make your decision with time, then you wouldn’t enjoy scalping. However, if you like speed and want immediate profit, scalping might suit your personality.