Scalping is a style of trading that aims to profit from small price changes in financial markets. Instead of buying and holding positions over a long period of time, scalpers make fast profits off a high volume of shorter trades, often lasting just seconds or minutes.
The theory behind the style is that smaller price moves are more frequent, and therefore easier to capture, than larger ones. By quickly entering and exiting larger positions, the smaller gains add up to the same level of profit from a normal day trade. By entering trades at a larger volume, even a profit of pennies would add up – but so does the risk associated with the position.
Scalping requires a strict trading strategy, which sets out exactly when to enter and exit positions and how much capital will be put up on each position.
An exit strategy is particularly important in scalping because allowing just one trade to run losses could eliminate a large portion of any capital gained. Scalp traders will make use of take-profit and stop-loss orders to automate these entry and exit targets.
What is a scalper trader?
A scalper trader is the name for an individual who uses the scalping trading style. Technically, scalpers are also day traders because they never hold positions open overnight, but there are a few traits that set them apart.
Scalper traders are often extremely disciplined individuals, due to the need to be strict about how long they keep positions open. They have the complete opposite opinion of ‘let your profits run’ and will instead cut trades at very specific profit targets, and even more strict levels of loss. Scalpers would never wait to see whether a losing trade will turn into a winning one.
A scalper trader will also need to be able to dedicate a lot of time to monitoring financial markets, given that a pure scalper would be entering dozens, if not hundreds, of trades each day. For this reason, it’s very rarely a style of trading adopted by beginners or part-time traders.
Scalper traders can manually make decisions about when and what to trade, but they do usually overlap with the class of trader that prefers to automate their trading strategy. Due to the amount of work a successful scalping strategy takes, it can be more cost and time effective to use a computer program. This guarantees speed when it comes to entering and exiting positions and reduces the risk of trading based on emotions and biases.
How does scalp trading work?
Scalp trading works by buying and selling large quantities of an asset, but only holding the position for a short period of time.
Scalp traders would either go long by buying low and selling high, or go short by selling high and buying low. Having both avenues of profit enables scalp traders to find a much wider range of opportunities across rising and falling markets.
To make enough profit from such small movements, pure scalpers would be entering dozens, if not hundreds, of trades each day. This means they’ll need to dedicate a lot of time to monitoring financial markets, so it’s very rarely a style of trading adopted by beginners or part-time traders.
Due to the amount of work a successful scalping strategy takes, it can be more cost and time effective to use a computer program. This guarantees speed when it comes to entering and exiting positions and reduces the risk of trading based on emotions and biases. Scalp trading can work manually, with traders making their own decisions about when and what to trade, but usually scalp traders choose to automate their trading strategy.
Ultimately though, scalp trading looks different depending on the market you’re interested in. Let’s take a look at two of the most common asset classes: stocks and forex.
Types of scalping strategies
Broadly speaking, there are three main strategies that scalpers employ:
High-volume trading - Scalpers will often buy in large quantities to make the most of a small move, sometimes just a couple of points. As mentioned previously, this approach requires enough liquidity for the full position to be opened and closed effectively and with a tight spread
Breakout trading - Most scalping trading strategies will involve looking for breakouts, positioning your entry to a trade at the start of a breakout and riding the market move until the first exit signal is given off. This strategy is probably the most approachable, given it’s used across trading styles
Trading the spread - Also known as market making, this is a strategy where scalpers attempt to profit on the spread itself by simultaneously buying and selling an asset. It relies on a market being relatively stable but still popular enough to experience deep liquidity. This is the most difficult strategy as the trader will be going up against much larger institutions and market makers
While most traditional scalping techniques are based on going long, a realm of opportunities can be opened up by going short too – especially when it comes to market-making strategies that involve buying and selling.
You can go long and short using derivative products, such as CFDs, options and futures.
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