What is Scalp trading? How does it work?

Scalp trading, also known as Scalping is a process that helps traders make profits from minor movements in prices often including small and frequent trades. The profits are made in small numbers per trade from the pip movements. 

 

It’s a trading style that traders use to buy assets at a lower price and sell them as soon as there is a movement returning a profit. To make sure that the price change is frequent they often target trades that have high liquidity. If the stock does not have high liquidity, then there will be no frequent changes in the stock prices leading, Hence the scalping strategy won’t work there.

Since it does not go according to the beliefs of long term investors, a lot of people believe it to be an illegal activity

 

A long-term investor keeps his investment for a long period to earn huge profits by waiting over a period that does involve the market going through volatility but recovers from the losses and making huge profits over time. 

 

Unlike long-term investors, Traders who do trading using a scalping strategy also known as scalpers believe in making profits from opportunities that are created within the day using their experience and some other technical tools for the same. 

Who Are Scalpers?

Traders who work on the market using scalping strategies are called scalpers. They work on the market on three principles for scalping strategies that are lower exposure limits risks, small moves that are easier to obtain, and small moves which happen frequently.

 

A scalper is therefore a trader who uses the scalping trade technique in his/her trades and earns profits in small sizes by making numerous deals in a day. A scalper needs to have discipline, courage, and decisiveness to make quick and informed decisions if he wants to make profits out of the movements. 

 

They need to be experienced as well to have a developed intuition and also identify the profitable movements using technical trading techniques. One wrong move can eliminate all the small profits that are made in the trades. Therefore most of them do have a very strict exit policy that they follow in their trades. 

How does scalping work?

So far we have understood that scalping takes place in a period of very short time. Scalping aims to aim for profits over the movements in prices that are so small that they can’t even be noticed on a one-minute chart.

 

Scalping works in seconds or minutes at maximum for scalping trade. Scalpers are making moves every minute while the charts are moving and making profits.

 

Traders make numerous trades in a day, even hundreds of them. The scalpers need to have the live feed, a direct access broker, and the precision to place these many trades in a day without missing the exact moment in movements.

 

Scalping works on an assumption that stocks complete the first stage of movement and after that initial stage, some stocks cease to advance while others continue to advance. As soon as a stock goes on discount, it intends to take as many small profits as possible. 

Scalpers keep the number of winning trades much higher than the losing trades, while the size of the profit might not be very high or even equal in terms of the losses.

Stock scalping strategies

There are majorly three types of stock scalping strategies. Let’s discuss all three of them:

 

The first type of scalping is a market-making strategy where the trader capitalizes by simultaneously posting a bid and an offer for a specific stock. This strategy only works with stocks where there are no real price changes but mostly immobile stocks that trade big volumes.

 

This scalping is very hard to do because a trader needs to compete with market makers on both bids and offers. In this strategy, the profits are so minor that the stock movement against the trader’s position will lead to a loss exceeding their original profit target.

 

The second strategy involves purchasing a large number of shares to sell them for a profit on a very minor price movement. Here the trader enters multiple positions for several thousand shares and waits for a movement. 

 

The third type of scalping is considered more of a traditional trading approach. It involves entering ar a specific amount of shares on a signal from the system and closing the position as soon as the first exit signal is generated. 

 

The last two strategies are based on a more traditional way of trading and require moving stocks so that the prices move rapidly and they can make profits out of the opportunity. They involve a very precise strategy and a very detailed method of reading the movement.

Benefits of scalping

In scalping, technical indicators are used as complementary tools due to the price noise that occurs in shorter time frames. Scalping is largely based on fundamental analysis which makes it more interesting than technical analysis.

 

The advantages of scalping are numerous if you are a professional trader and know how to deal with trades in a very short period. For a professional trader, high-frequency trading can generate higher returns than daily trading strategies.

 

In scalping, profits are in small size, but the opportunities you get in a day to make numerous profits are huge. Therefore a keen eye on the chart will help the trader to make the right trades. 

 

The high frequency of trades will help the scalper understand the market and increase his learning of how the market input and output work. This will help the scalper understand the nature of the market and will also provide a self-development of intuition. Once the scalper masters the scalping, other trading strategies such as intraday and long-term strategies will seem much easier to him. 

 

Conclusion 

If you are a trader in the market who wants to try out a new strategy, you can try scalping as a primary or a supplementary style. It’s a beneficial way of trading if you have the right tools and knowledge. 

 

This strategy works opposite to the normal mindset that long-term investors follow of “let your profits run”. This strategy focuses on making more number of winners rather than the size of the wins.

 

A concrete conclusion is that scalping requires a scalper who has dedication, discipline, and decisiveness. A scalper with these qualities can make a living out of scalping stock with huge profits.

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