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. However, remember, day trading is risky. While this strategy is a popular one, it’s by no means easy. Success in trading takes a tremendous amount of hard work.
What is Scalping in Day Trading?
Day traders leveraging scalping strategies are trying to do the same thing as the ticket scalpers. Big wins aren’t the goal. Instead, stock scalpers want to build up dozens (or sometimes hundreds) of little wins to make profits. Positions are opened and closed on a timeframe of minutes to seconds and profits are taken quickly.
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.
Scalping Strategy Overview
Scalp trades come in a variety of shapes and sizes. You’ll need access to 1-min charts, Level II quotes, and exchange order books in order to pull off the most advanced types of scalping.
Many scalpers aim not to profit off small price moves, but on the actual bid/ask spread itself. Profiting off bid/ask spreads requires tremendous skill and experience – fortunately there are easier forms to scalping to learn.
One of the simplest and most common forms of scalping involves buying a substantial amount of shares, waiting for a small tick upwards, and unloading the position as soon as profitability is reached.
For example, a trader enters a limit order to buy 5000 shares of YYZ at a price of $0.98, which happens to be the closest support level. Once YYZ falls to 0.98, the trade is executed and the scalper monitors the price movement on a 1-min chart.
A minute later, the stock has bounced to 1.02 off the support level and the scalper’s equity has increased from $4,900 to $5,100. The trade is quickly closed for a $200 gain, regardless if the price movement continues to look favorable. The scalper makes $200 in a minute and moves on to the next trade.
Scalpers can often trade the same security over and over again throughout the session, especially on volatile days. Beginners seeking to learn the scalping strategy should look for the most liquid securities possible.
If shares are hard to move, your trade could blow up as you’re forced to hold on longer than anticipated. Use technical trading signals like moving averages and stochastic oscillators to identify the best entry points and leverage your DMA broker to get the fastest possible trade execution.
Remember, every fraction of a penny matters when utilizing scalping strategies.
How is Scalping Different From Other Strategies?
“Let your winners run” is one of the oldest suppositions in trading. Stocks in uptrends tend to stay in uptrends and selling should be reserved only for when you reach your predetermined profit goals. 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.
Another unique feature of scalping is the sheer volume of trades required to make outsized profits. Day traders are often warned against overtrading. If you don’t stick to a plan and trade on tilt, transaction costs build up while profits dwindle. Since scalpers make such tiny profits on each trade, huge volume is necessary for the strategy to pay off. Fears of overtrading need to be tempered if you’re going to have success with scalping.
What You’ll Need to Execute Scalp Trades
Since scalping requires lightning-fast trade execution, you’ll need to find software and a broker capable of handling the load. Slow, traditional brokers won’t do the trick here. To maximize the already thin profits produced by scalping, you need the right technology.
- No commissions or heavy volume discounts – Scalpers often make hundreds of trade per day. Imagine getting charged a flat commission on each and every one of those trades? Your profits would quickly be eaten by up transaction costs. To scalp successfully, a zero commission broker is ideal. Or at least one offering steep discounts for high volume traders.
- Direct market access – Since scalpers profit off the bid/ask spread and/or tiny price movements, timing is crucial. Direct market access is a must since scalpers need a hit on a high percentage of trades to make money. When you’re trading hundreds upon hundreds of shares each day, you need to know exactly where and when your trade will be executed.
- Advanced Charting Tools – Scalping requires something a little more sophisticated than Robinhood’s candlestick chart. As we’ve been mentioning, speed is critical for scalpers. When positions are opened and closed in less than two minutes, using 5-min candles isn’t very helpful. Scalpers need real-time price updates and 1-min charts to pull off successful trades.
- Endurance and Quick-Thinking – If you’re looking to celebrate 10 baggers, scalping isn’t the strategy for you. Scalpers can’t just hit on a few winners and take the day at 11am. Be prepared to log a full day behind your screens looking for opportunities. You’ll also need the nimbleness to move out of non-working trades since big losses are Kryptonite to stock scalpers.
Speed and precision are key in scalp trading. If you don’t have a broker offering direct market access or low / zero commissions, you’ll likely be hit with too many transaction costs to make the strategy worthwhile.
Downsides to Scalping
Scalping isn’t for everyone. Be sure to practice scalping techniques in a demo account or simulator before putting real capital at risk. This is not a path to immediate riches – scalping requires a particular mindset and lots of perseverance. Here are a few drawbacks that all prospective traders should be aware of.
- Transaction costs can burn scalpers quickly. You’re going to be making at least a dozen trades every day. If you’re still using a broker that charges $5 (or more!) in trading commissions, it’ll be hard to make money scalping.
- Scalping is tedious. Jumping in and out of stocks might seem like an exciting way to trade, but scalpers need to constantly focus on the data. You’ll be making the same kinds of trades over and over and over again, trying to build up wins and minimize losses. Not everyone will have the mentality to use scalping effectively.
- Lack of big winners can cause distress. AI systems make the best scalpers since they don’t have the ability to feel regret. Buying a stock at $0.98 and selling at $1.02 is a nice trade for a scalper, but what if that stock shoots to $1.40 an hour later? Can you handle compiling small wins and missing out on these monster gains? Most day traders need some sort of detached indifference to be successful. Scalpers practically need to be robots.
Scalping stocks isn’t a bold or innovative trading strategy, but it’s one many day traders have implemented successfully. Scalping minimizes your exposure to losses and enables profitable trading even in the flattest markets.
However, if you’re looking to get rich overnight, you probably won’t be amongst those success stories. Scalpers need to be okay with taking small wins and think only about the next trade.
This may sound easy on paper, but scalping strategies will chew up traders who aren’t experienced enough to handle their emotions.
The first step to successful stock scalping is finding the right broker. One quality option is TD Ameritrade – no trade commissions and a high-tech platform in thinkorswim.
Practicing with paper trading is a must before putting cold, hard cash at risk and begin with smaller position sizes once you graduate to the real thing. Set profit goals before executing each trade and sell quickly if your anticipated move doesn’t occur.
Scalping will take a while to master, but it’s a great skill to add to your arsenal, especially if markets trade sideways for an extended period.