The stock market offers various trading platforms for investors to trade in the stocks without any hassle. This is the place where individuals invest their funds for the long term. However, there are other traders too, who enter these markets with the purpose of making small quick profits by trading for minutes or hours.
These traders are known as scalpers, who believe in making immediate profits rather than waiting for the long term.
Before getting a dig deep into this, let’s understand how scalping can be used to collect huge profits through small trading techniques.
What is Scalping?
If you have heard the name scalping, you would be wondering what these scalpers are and how they achieve profits from the deal.
Scalping is a short term trading strategy used to achieve profit from the volumes of trade placed, rather than focus on maximizing capital gains on each trade.
These are short trading styles predominantly used in intraday trading. Scalpers trade frequently and in small trading sessions.
The name scalping got famous due to the traders who adopt such styles – they quickly enter and exit from the market by making small profits from a large number of trades, throughout the day trading.
A scalp trader usually follows a strict exit policy as one huge loss could eliminate all the profits made throughout the day. Therefore this trading style requires discipline, stamina and decisiveness.
If one possesses these qualities with the right strategy, he/she can become a successful scalp trader.
Scalp traders often enjoy the trading style that it requires. However, to achieve successful deals, you are required to execute numerous technical trading techniques to identify profit opportunities in the market.
How Does Scalping Work?
Before answering the question, how does scalping work, lets understand the trading mechanism of scalping.
Scalp trading is a short term trading style that includes buying and selling of assets multiple times to book profit. Trading multiple times allows a trader to earn from the price difference.
It involves buying an asset at a lower price and selling at a high or vice versa.
Scalpers mostly try to find out the highly liquid assets that are volatile in nature i.e. these assets do frequent price changes during the day trading. Do remember, for scalping, it is highly important for an asset to be liquid, only then will you book profits throughout the day or otherwise you may face huge losses.
Scalpers believe it is easier to make money through small deals because it is less risky from the market volatility perspective.
There are other traders too, who hold onto their position for some weeks or months for making a huge profit. However, scalpers believe in making multiple profit opportunities within a small span than the bigger one.
Here some principles of scalping that every trader needs to follow:
Make Small Moves:
Small moves are easier to obtain than large moves. For making a huge profit, the stock market has to be insatiable i.e. it requires a high imbalance between supply and demand. In such situations, small prices are comfortable to deal with.
Small Moves happen Frequently:
Small moves in the stock market always work the best. Even many experienced traders use small moves when they see the market is quiet for some time.
Lower exposure Limit Risks
A brief exposure in the market reduces the chances of running into an adverse condition.
Trading methods used by Scalpers
While other trading styles like position trading use fundamental analysis, scalp trading however depends on technical analysis. This is because technical analysis includes identifying the historical price movements of assets and comparing them with the current asset’s price. For this, scalpers use different charts and patterns.
The comparison of historical data with the current data helps scalpers observe patterns and predict future price movements with ease.
Scalpers use charts and patterns and observe them with a specific timeframe. In other words, they do analysis in small time frames which are the shortest of all trading styles.
An intraday trader uses five minutes or 10 minutes trading charts to make five deals a day. Scalpers, on the other hand, uses a time frame of 5 to 10 seconds to make 50 to 100 trades during the day.
Scalpers play smartly with the trading, also they use several market’s tactics to achieve a high speed of trading. Such tactics are the market’s time and sales – a record of buying, selling and cancelled transactions.
5 Scalping rules that are must be followed by Traders
Avoid Excessive Usage of Trading Indicators
Firstly, scalpers need to minimize the usage of multiple technical indicators. Trading indicators are basically the plotted lines on the price charts that help traders to identify whether to buy or sell assets.
Invest in Profitable Stocks
For a scalp trade, it would be beneficial if you invest in profitable stocks as it will help you achieve more profits throughout the day. Also, the quality number of trades in a single day makes your margin requirement and risks reduced.
Margin is the borrowed funds that brokers lend to the traders so that they can buy securities more than they afford.
Master Certain Strategies
As a scalp trader, it is important to master certain strategies that will give you bountiful benefits of profit booking. Traders apply multiple strategies which confuse them with which strategy should be used or which one is not?
For example; you made 10 trades and used various methods to execute them. Now you would get confused as to which strategy worked well for you? Therefore it would be ideal if you use 2 or 3 strategies and execute your trade order.
Selection of Preferred Market
Scalping is a short term strategy that is not limited to futures alone. In fact, you can use scalping trading in forex and stocks as well.
The preferred market for scalping are:
- Scalping for forex market
- Scalping for the futures market
- Scalping stocks
Reducing losses is one of the most significant concerns a trader must pay attention to. A scalper trade in many traders in a single day. Some scalpers book huge profits from it where others suffer a loss. Therefore, a scalper needs to learn to cut down the losses in every losing trade to mark a good profit in scalping.
Scalping is a process where a trader uses short time frames, chart plans to book a profit throughout a day. Scalping is a difficult trading process that demands dedication, speed and discipline to execute scalp deals.
If you are an experienced trader who knows how to trade intraday and aims for short term trading, you can go for scalping trading. However, if you are not aware of intraday trading strategies and wants to invest in the long run, scalping is not your cup of tea. Choose wisely and execute your trades according to your trading styles.