The scalping trading strategy is a high-energy, high-frequency style of trading that leverages the opportunities to make small profits rapidly, and accumulate a decent amount of money in the shortest period possible. This trading style brings in profit or loss from small price changes.
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Scalping in day trading requires a trader to have a clear exit strategy that is strictly adhered to, as well as the stamina to make many trades in a day. As much as scalping has the potential to net a trader a lot of profits in a day, there is also the potential to lose a lot of money, if an exit strategy is not strictly followed.
To scalp, you must have the right tools, direct access to the market, the resilience to handle the pressure, and the ability to analyze data accurately and consistently. So, let us dive in and answer the question ‘what does scalping mean in trading?’
Advantages of the scalping trading strategy
These are the advantages you get when trading using a scalping strategy.
Small but consistent profits
Other styles of trading may rely on making large profits on long-term trades, which can go awry. However, with the scalping trading strategy, a trader has the opportunity to make small but consistent profits, which add up and reach a substantial level.
With a good exit strategy, you can make profits. This method is good for traders who are just getting started in the market because they can make money off it every day, due to its consistency.The scalper waits for small stock price movements to make profits, whereas the long-term traders have to analyze intensely, and wait longer for profits.
Low risk per trade
Most scalpers usually open small position sizes. For that reason, they are exposed to lower risks, such that even if they do misjudge a trade, they can still bounce back.
The low risk is only applicable when traders use reasonable leverage levels. If the leverage is too high, you could wipe out all the profits you have made with one bad trade. The implementation of stop-loss orders helps too.
In answering ‘what is scalping trading strategy?’ We always include risk management in implementing that strategy and the fact that there is low risk per trade when scalping, plays well into this precautionary measure.
Small movements could mean profits
Where other traders have to rely on large price changes to make enough money so the trades are worth it, scalpers only have to rely on small movements, which happen daily. These tiny intraday movements increase the probability for them to make money every day and reach their goals.
With the short-term scalping trades, the yield may be small per opened and closed position but they add up. That is why the high-frequency nature of scalping could be profitable. With other long-term strategies, not only do you have to rely on deeper levels of analysis, you have to wait for a while for the price to move significantly enough to make a profit.
Disadvantages of the scalping trading strategy
Along with the many advantages, come disadvantages you have to watch out for.
Scalping may be the most intense type of trading. It feels and looks like a lot of work and that is because it is. You may be able to analyze the markets and figure out that they will shift a certain way over weeks, months, or even a year or more.
However, doing the same for the next one minute or five minutes is a different story altogether. For that reason, day trading scalping or swing trading are usually not recommended for beginners since all these requirements can lead to intense emotional pressure.
The emotional issues faced could lead to agitation and overtrading, due to the high-octane, high-frequency methods that are required to make a profit while scalping.
Broker fees are brutal
There is nothing wrong with the concept of paying the broker. However, the scalper is running against time when trading. The results are mixed and will include losses, profits, and breaking even in some situations.
However, through all this, you have to pay the broker’s fee. It may be very negligible when you are trading long-term.
The scalpers have smaller profits since they depend on small stock price movements. Due to this, the scalping trading strategies usually suffer a bit more from broker commission fees.
There is always a danger from interpreting data wrongly. Many beginner scalpers still gauge their results based on luck, instead of facts. When a trader has a string of wins, they think luck had something to do with it. They think the same on days that do not go so well.
As such, they trick themselves into thinking that after a string of losses, their luck will turn and things will look up. So, they end up making random trades with no real reasons for doing so and expect to gain after a string of losses.
That is no way to trade since traders can increase trade sizes, under this luck illusion and lose disastrously. The point here is that with scalping and so many trades to make, it may be easier to not think about things than it is to think and analyze them. Always have a reason and understand why things play out the way they do.
5 Scalping Day Trading Tips
The trading world has low barriers to entry, which makes it easy for anyone to get started. However, each beginner trader is usually asking one thing ‘Is scalping trading profitable?’ It can be and is when you keep the following tips in mind.
When it comes to executing an order, timing is everything. A small delay or a bad order can wipe out all the profits collected over time, resulting in unwanted losses. Since the profit margin for every trade is limited, the execution has to be very precise.
It is therefore imperative that when you get a broker, they give you Direct Access Trading and Level 2 quotations, to make sure that you get the information at the right time. You then have to educate yourself on the best practices of executing orders to increase your success rate.
Number and cost of trades
When you are new in the market, you have to make sure that costs are kept in mind when trading. Since there are numerous trades (up to hundreds per session), frequent buying and selling eat into the overall profits because of fees/commissions.
The broker you choose has to give you competitive commissions, direct access to the markets, and all the information needed to make an accurate decision. It is also worth noting that not all brokers allow day trading scalping or swing trading.
Remember; you can make as many trades as you want. Just keep them profitable.
Perform proper analysis before trading
Spotting a trend and noticing momentum is key to making better trades as a scalper, since you have to rely on the predictions that a trend will rally, to enter and exit quickly to make profits. Spotting the trends and momentum requires education in how the markets work.
That is why it is always good to start with learning how to analyse the markets before participating in them. Trading the momentum is a great way to make profits and any novice would do well to learn how to do this.
Trade the sides
Do not start with executing long and short orders from the very beginning, since it is not easy to trade on the short side. Most traders stick to executing long trades, before gaining the experience and skills needed for short trades.
We mention this because if you master finding long and short trading opportunities, you will find more chances to make money. Most traders choose to enter only long positions and they limit their profit opportunities quite considerably, so if your broker provides the ability to open short positions, make sure to benefit from them as much as you can.
The most reliable way to make trades is through careful assessment and analysis. Technology has made it easy to access the information you require to make informed trades, as well as make it easy for you to enter and exit positions quickly and with ease.
Technology allows you to trade on the go, stay informed, manage risk, watch trends and create clear strategies that can be analysed to gain insights into your performance as a trader. This will not only improve your trading style, but also help you pad your bottom line through more consistent profits.
There is no chance of making it if you do not learn how the markets work first. In becoming a scalper, you have to train over time and then scale up when you get comfortable with the initial stages of the scalping trading strategy.
For instance, it is always recommended that you learn how to trade long positions before learning how to trade short positions. This will give you the chance to understand how it works and be able to make decisions based on facts instead of luck.
We have answered the question ‘what does scalping mean in trading,’ which means you are just left with the education part before trading. Start with easy trades and scale up as you learn, for the best results in scalping.
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