Scalping is a way to make big profits from small margins by nipping in quickly to sell as soon as the market rises.
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The key is volume – each trade might make a slight gain, but when you multiply that thousands of times over, your earnings skyrocket.
Successful day traders need to have defined exit plans since one wrong move, and the wrestling loss could wipe out all the accumulated small gains.
Scalping needs nerves of steel as well as diligence, constant monitoring, and the ability to move fast.
Understanding Stock Scalping
The underlying assumption is that most stocks will gain value at some point. That might be the start of an upward trajectory or a momentary blip, but a scalper doesn’t mind.
Rather than focusing on investment potential and betting on the stock continuing to appreciate, the trader works on optimising profits by working on as many small wins as possible.
Yes, that could mean they lose out on a much bigger earner, but the tactic often reduces the potential for heavy losses by holding stocks for too long, with only a brief exposure to market risks.
It’s more likely that a stock will move by a narrow margin – even by £0.01 – than make substantial price gains, so even in a quiet market, a scalper can find successful slight price movements reasonably easily.
Choosing a Scalping Strategy
There are three main scalping approaches:
- Market-making
- Volume scalping
- Traditional trading
Market-making involves posting a bid for stock while posting an offer at the same time.
This technique is complex because the trader will be competing against other bids and offers and generates only a fractional profit.
Volume scalping means that the trader buys a large volume of shares, sold at a profit on a slight movement in price.
The trader might buy 5,000 or 10,000 shares and maintain their position until a small move – even if just a few pence per share.
Traders can also follow a conventional trading pattern, entering a position on a specific number of shares prompted by pre-defined triggers. They then close the position when the ratio of risk versus reward gets close to 1:1.
Scalping Analysis Techniques
A competent scalp trader needs to be equipped with enough technical data to come out on top, similarly to high-frequency traders that move quickly.
Scalpers can’t often depend on real-time reporting, given that many trades occur away from the big exchanges.
Hence, it’s important to have a market analysis process to pick up on signals that trigger a buy or sell instruction.
Traders use three technical tools to gauge opportunities:
- Moving averages
- Exit strategies based on relative strength and weakness.
- Scalping by poring over multiple charts.
That latter indicator, multiple chart scalping, means that the trader develops a chart covering 15-minute intervals, with relevant indicators linked to factors that affect the stock value.
They input the opening value and the price highs and lows within the first hour or two of their trading session.
When the stock moves close to either of those values, it initiates a response.
Generally, scalpers close all their positions during the day.
They won’t tend to carry them over, adhering to the concept of leveraging small market opportunities rather than holding a position across multiple days.
Advantages of Stock Scalping
Traders with a consistently strict exit trigger are usually the most profitable and make gains on stocks during micro-movements, which aren’t necessarily indicative of the overall commodity price trend.
One of the advantages is that a scalper doesn’t need to adhere to the normal fundamental trading principles because they’re only worried about a short turnaround time and don’t require an in-depth knowledge of every stock they trade.
Exposure to market risk is minimal, and traders limit their losses by using tightly controlled leverage, winning on a trade even if the markets aren’t moving upward.
You can also automate a scalping trade, using technical parameters to inform your position and initiate a buy or sell order as soon as a trigger point is reached.
Scalp Trading Risks
There are no sure-fire trading approaches that protect from inherent risk even if a scalper takes every possible step to avoid losses.
Potential pitfalls include:
- Higher transaction charges with multiple commissions paid every day.
- The need to make high volume trades involving hundreds of transactions per session.
- Profits are tiny, so scalpers need to make the maximum trades available, which requires a great deal of time and focus.
However, some traders use scalping as a supplementary trading style, whereas others will use this approach as their primary activity.
Full-Time vs Supplementary Stock Scalping
Pure scalpers don’t adopt any other trading styles.
They use tick or one-minute charts to prompt fast transactions, with brokerage systems like Direct Market Access or the Level II order book (related to Nasdaq stocks) to monitor movements.
Scalpers have to execute orders instantaneously and often automatically, so they typically use a direct-access broker.
Not all brokers permit stock scalping (including Plus 500, Trading 212 and eToro) and not all will have Level II quote data, so the choice of broker is essential.
Part-time scalpers may have a range of other trades with longer time frames and use scalping now and then when the market isn’t making any meaningful movements.
Suppose there are no opportunities to move on longer-term trades. A scalper can take advantage of a relatively stagnant market and pursue smaller profits at volume until things get moving again.
Another option is to use a concept called umbrella trading.
The trader enters a longer position and identifies additional setups alongside, within a shorter time frame, adjacent to the main trade but moving in the same direction.
This method means that the trader maximises their profits without incurring considerable additional costs.
Scalping: Small Margins But Big Profits FAQ
Does scalping work for cryptocurrency traders?
Yes, scalping applies to cryptocurrency as well as shares and forex.
Is it legal to trade via a stock scalping strategy?
Scalping is legal and regularly used by institutional and private investors.
Although stock scalping is a popular style of trading, it can be used for fraudulent purposes, hence the reluctance of some brokers to get involved.
For example, a trader could recommend a stock to get the price to climb and use this to influence their scalping profits.
Brokers routinely use counter-trading, so it can mean that if the client makes a profit, they make a loss, so you need to pick a direct access broker that permits scalp trades.
Can I make a profit through stock scalping?
The premise of scalping is that you make tiny profits, but it’s possible to make a lot of money.
Even though the size of each winning trade is small, a scalper will look to boost their ratio of wins against losses, with numerous transactions made in every session to accumulate more impressive gains.
One of the downsides is that a scalper will exit as soon as a stock reaches a specific threshold and could forgo a much larger profit – but the idea is based on quick sales and small profits but with overall gains when all the pennies add up.
What is the best way to choose a stock as a new scalper?
Scalp traders won’t usually spend much time researching each stock and aren’t restricted to particular sectors or asset classes.
Instead, they use strategic analysis and technical markers to make decisions:
- Each trade has a target profit related to the stock price, often from £0.10 to £0.25.
- They follow Level II quotes to identify stocks that have started the day with fluctuating highs and lows to spot opportunities with the likelihood of a profit.
- The trader needs to keep a watchful eye on the stock price, often for extended periods, executing an order as soon as the stock moves in their favour.
Brokers often publish hot stocks lists, with stocks expected to see volatile price movements – a dream for an accomplished scalper.
Can I scalp trade in Forex?
Forex scalping is the same as any other scalp trade and means buying or selling currency pairs over short intervals to make a profit.
Like any other market, the trader will aim for multiple trades per session, selling at small profits and closing their position before the end of the day.
Is scalping suitable for novice traders?
Stock scalping is accessible since traders can buy small volumes with low entry barriers, so it’s becoming popular with new traders testing out different trading strategies.
It’s also a viable option if you want to set up automated execution orders or have the time to remain vigilant, spotting the exact moment to sell.
However, there is a risk because scalp traders need to make lightning-fast decisions, continually monitor their positions (there could be dozens at a time) and use significant discipline to focus on their targets.
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