What Is Scalping in the Stock Market?

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Scalp trading, also known as scalping, is a popular stock day trading strategy characterized by super short periods between the opening and closing of a trade. Or in other words, stock scalpers trade with the intention to make small profits from short-term share volatility and small price movements.

It is like thrillers that are full of action and keep you on the edge of your seat the whole time. It’s an exciting, fast-paced trading strategy and mind-rattling all at once. So, in this lesson, we will explain how scalping trading strategies work and help you decide if this is the best trading strategy for you.

How Does Scalping Work?

The main objective of the scalping strategy is to benefit from the small changes in stock price movements throughout the same day. In fact, just like the day trading strategy, they close all their scalp trades at the end of the trading session and never leave positions open overnight. Scalpers only hold onto their trades for a few seconds, or at most a few minutes, and usually follow short period charts, such as 1-minute charts, 5-minute charts, or 15 minutes top. 

Additionally, many scalpers use a level 2 order book as one of their scalping strategies to get executions and wait in the queue to sell their assets and make quick profits. Further, as scalp trading is generally known as a momentum trading strategy, they often use technical analysis momentum indicators and chart patterns to predict small future price movements. Such momentum technical indicators include moving averages, moving average convergence divergence (MACD) RSI, Fibonacci support and resistance levels, and repetitive chart price patterns.

The name ’Scalping’ is derived from how its goals are achieved. Whether it is forex scalping or stock scalping, traders can literally place up to a few hundred trades in a single day trying to “scalp” lots of small profits from a vast number of trades. For example, a trader can open a scalp trade and close it with a gain of a few cents. That’s the goal – making minimal profits in a very short period. Eventually, when you can make more successful trades than losing trades over the long term, you can develop it as your primary trading style.

Note that because scalpers have to be glued to the charts, this trading strategy is best suited for people who can dedicate hours of undivided attention to trading stock markets. It is not like position trading or swing trading – It requires focus and quick thinking to succeed. Not everyone can handle such a fast and demanding stock trading environment.

Scalping Trading Strategy – Smaller Trades Add Up to Big Gains

Unlike other trading strategies, the scalping trading strategy is not for those looking to make big wins all the time but rather for investors who prefer a number of small profits over one long-term profitable trade. The objective behind this trading style is that the risk per trade is limited, given that the time of open positions in the market is reduced.

This means that investors set tight trading windows in terms of price movement and timeframe. Nonetheless, even though the risk exposure is lower, the most important rule in succeeding as a scalp trader is using proper risk management tools and, most importantly, a risk-reward ratio per trade.

Scalp Trading Strategy – Pros and Cons

You might be a stock scalper if

  • You like a fast-paced environment and excitement.
  • You like to monitor your stocks constantly.
  • You are a fast thinker with fast fingers.
  • You are impatient and don’t want to wait for long trades.

You might not be a stock scalper if

  • You get easily stressed in a fast-paced environment.
  • You like to take your time to analyze the overall stock market before placing a trade.
  • You’d rather place fewer trades with higher profit gains.

The Bottom Line

Scalp trading is certainly one of the most popular day trading strategies to trade financial markets. It’s an exciting way to trade stocks, and many traders prefer this day trading system over others as it minimizes their trading risk and removes, to some degree, the element of luck. 

However, scalping is also among the most challenging trading strategies to master. It takes time and dedication to learn how to identify these minor price movements and make a small profit in every trade you make. Furthermore, it is a system that requires the right equipment, including a fast internet connection, a reliable trading computer, and good trading monitors

But once you have overcome the earlier challenges, you can look forward to the most rewarding and safe stock trading strategy, especially over the long term.

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