What is scalping and how do you do it?

Some people find scalping exciting while for others it may be stressful. Is it the right strategy for you?

A trader in the office viewing several screens                                 
Scalping focuses on making short-term gains – Photo: Alamy
                                

Scalping trading strategy is focused on near-constant short-term gains. By definition, scalping uses the shortest allowable time frame to conduct as many profitable trades as possible. Basically, a trader buys or sells shares and then sells them a few cents higher or lower in several seconds or minutes, rarely by hours. By taking advantage of dozens or hundreds of small fluctuations in the price of an investment, a scalping trader can return profits, even if the asset declines overall.

How does scalping work?

Scalping trading is the strategy of adding many small trades together, from 10 to hundreds, to achieve a profit. Basically, you have set gain/loss percentages which automatically trigger a trade. In the simplest form, scalping traders are trying to achieve more positive than negative trades in as short a time period as possible.

Scalping tips typically emphasise using an extremely low loss margin to reduce any fluctuation risk. This means as soon as a loss is incurred, even at a very small amount, the investment instrument is divested. The gain margin may be slightly higher but is still quite small and the investment is sold as soon as the gain is realised.

By capitalising on incremental movements in price and reducing risk by containing losses, scalping traders look to profit on the cumulative total of all daily trades and do not spend large amounts of time researching long-term market trends.

Scalping pros

  • Scalping is a risky strategy. However, scalping trading rarely leaves capital in the market overnight, and by executing a large number of trades exposure to large downturns in the market is reduced;
  • Scalping trading offers constant opportunity to the right trader. Even in times of economic downturn as capital flees, there are opportunities as investments, such as casinos, alcohol or gold, can increase;
  • Another benefit to scalping trading is it does not require long-term growth. The investor does not have to predict the future and research all possible outcomes, merely take advantage of small swings in the initial price.

Scalping strategy usually dictates a complete exit from the market at the end of each day because there is no effective way to monitor movement during market close hours. This strategy provides the investor with daily access to profits rather than the days or weeks for other investment strategies. They can re-invest these profits or cash out on a daily basis.

Scalping cons

  • The main downside to scalping strategy is the discipline required. Even one significant loss can wipe out hours of profitable trades if a proper exit strategy is not followed;
  • Scalping traders frequently compare the hours of staring at screens watching for the slightest movements in their investments to playing a video game, and burnout is not uncommon. It can be exhausting, but does offer the ability to liquidate investments at any time without any risk carryover;
  • Transaction fees. Scalping requires conducting as many trades as possible. If the starting capital is not large enough, trading fees can significantly reduce these already thin profits. Scalping traders should actively search for the lowest commission fees available and use these platforms.

Does scalping suit you?

Similar to many other things in life, scalping strategy can be well-suited for some people, but not for others. It requires a great deal of self-discipline and an ability to focus on the overall goal rather than individual outcomes. It requires the investor to be constantly vigilant while they have assets in the market. Some people may find this fast pace exciting, while others may find it stressful.

Another aspect, which varies greatly from individual to individual, is the reaction to “lost” profits. It is very possible for a stock or currency to continue to rise long after a scalper has sold their investment due to adhering to upper and lower margin limits. While some will find satisfaction in the fact that they made their small profit and got out as the strategy dictates, others may be distressed by the missed opportunity.

Whether scalping trading strategy is right for you really comes down to you personally. Do you have the time to commit daily to watching the market for slight variations? Do you have the risk profile and discipline to walk away at the first sight of loss and to not dwell on chasing continued gains? There are other short-term strategies, such as day trading, which may be better suited to some.

Scalping trading can be difficult for novice investors as it requires quick and decisive action without much consideration. There are definite rewards for those who move fast and are decisive. For the right investor, scalping trading can be an effective strategy.

Further reading

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com Bel LLC or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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