Scalp trading, or scalping is a popular trading strategy that has been around for a very long time. In this trading method, traders buy and sell stocks multiple times within a day for a small profit. This is normally done as soon as the trader gets in a trade and makes some profit. Traders who use this style of trading are known as scalpers, and they can place 10 to 100+ trades in one day in order to make even tiniest profit.
Scalping attracts traders because it exposes them to less risk and offers greater number of trading opportunities. In addition, traders are able to fight greed since they target very small returns. This type of trade offers participants very little time to hold a stock, meaning they have to enter and exit the trade in a matter of minutes if not seconds. Nonetheless, there are exceptions to holding stocks for a few hours.
Traders locate trading opportunities by looking for small price changes in the market. Precise timing and prompt execution are essential when scalping. This type of trade is profitable for some traders, but also has its own share of risks. A scalp trader is like a marathon runner because he/she needs to capitalize quickly on available opportunities
A profitable trade could turn into a loss if one of those opportunities dwindles, because most scalpers won’t wait long enough for other opportunities to crop up for the same trade. This is why some people tend to shy away from scalping because it exploits leveraging to quite an extent. Scalpers are often advised not to trade too big or get greedy as those are easy ways of losing money fast.
Scalpers mainly make decisions based on the following factors:
- Trade the hot stocks each day based on the watch list you create
- Buy at breakouts and see an instant move up after entry
- Sell quickly if there is no move up
- As soon as you have a small profit, sell half and adjust exit to your entry point on remaining position, ensuring high % of accuracy
- Take 3-5 trades until daily goal has been achieved
Liquidity is also an important aspect of scalping given that traders get in and out of their trades multiple times in the same day. In addition, it ensures that traders get the best price they can when getting in out and out of the trades.
Scalpers look to make profit by keeping up to date with the current news and trade latest or future events that are likely to trigger price movements. They also watch the high and low prices of a stock during a given trading session and gauge its direction over the short-term. However, this calls for prompt execution and high concentration.
Another method of making money is by setting profit target amount per trade, and this ought to be relative to the price of the stock. Scalpers should have a win/loss ratio of more than 50% in order to make a profit, as opposed to other intraday trading methods that can still make you money even with a lower win/loss ratio.
Above are some scalping statistics from Ross over the past couple years. As you can see, in order to be successful you have to be quick to pull the plug on trades that aren’t working. His largest loss was just over $12k but his largest winner was over $31k, almost a 3 to 1 reward ratio, with a 69.6% win rate. That is solid trading and a great reference for developing traders to try and copy.