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 is 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 on 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 indices trends to develop their own instruments on which they will execute their trades. This would guide scalpers to decide their entry points be it a breakout or market rallies. Furthermore, scalpers would set a goal for trades per day accordingly they either sell quickly and take profits or exit position if a loss is endured.
The “Little Win” Objective
Scalping day traders aren’t willing to make enormous profits with each trade they make rather, make small profits over many little trades. Often, scalpers will buy and sell the same stock within minutes, not holding it for a long time throughout the day. Scalping day traders are on the hunt for a trending or highly volatile market those subject to news or to a swing. Scalpers start to buy and sell the upswing of the stock in order 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 market major trends and psychology. Effective scalpers should also be able to interpret short-term charts as the option to take trading decisions on charting that is 1 to 5 minutes interval. Scalpers would consider the moving averages and pivot points trading techniques to determine the trade execution. Of course, scalpers may face losing trades however, a successful trading strategy together with discipline can support a better ratio for winning trades against losing ones. Scalpers should also acquire adequate capital, subscribe to level II platforms that show live bids, and asks aside for an exceptionally wired internet connection to void latency which may lead to working on outdated data.
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 accordingly, the accepted profit or loss would be 5 pips. This would differ if the scalpers are trading on a 15 minutes timeframe 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 terms however, 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 on the bigger time frame, traditional traders will often hold the stock under the impression that it will continue to climb.
Scalping: Day Trading Strategies for Beginners
- Trade the hot stocks each day based on your selective watch list
- Buy/sell at breakouts or at a support break and see an instant move after entry
- Offload your position quickly if there is no move up
- Take 3-5 trades until the daily goal has been achieved
One of the simplest and most common forms of scalping involves buying a considerable number of 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 session, 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.
Is Scalping for everyone?
It is highly recommended to practice scalping via demo trading accounts prior to application on real trading accounts to avoid putting capital at risk. As stated above, Scalping requires a specific headset and persistence. On the other hand, there are some drawbacks to scalping. Transaction costs can eat up the scalper’s profits if the broker charges high commission costs or untightened spreads. Lacking big winning trades can cause anxiety since a 4% profit on a single trade might be satisfying for a scalper however, what if the stock runs to 40% throughout the day? can scalper handle making small winds and miss out on monster gains?
The difference between scalping and swing trading
Swing trading strategy is the total opposite of Scalping since swing trading is highly 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 on a daily basis 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, in an uptrend a trader buys swings lows, the same applies in downtrends where traders sell swing highs. Given that swing traders usually trade on medium time frames, larger stop losses are required with an appropriate money management plan and not to panic over short-term volatility 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 bigger timeframes.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients