21-Jan-2023
2 mins read
Scalping is a day trading strategy where an investor buys and sells a single stock multiple times during the course of the day. A scalper’s objective is to make a tiny profit across a large number of small deals, not a huge profit on each trade they make individually.
Scalping strategy
Trading has always been recognized as a lucrative space for traders who understand the stock market properly. However, everybody should begin with the basics. There are various trading strategies that have been suggested by many. But it all comes down to implementing the best trading strategy for you. Generally, there is no single strategy that works for everyone. Every individual has a distinct trading approach and has to select their best strategy. However, the scalping strategy has been a very famous one and has been universally used by various traders to make massive profits. Let’s have a glimpse at what this strategy brings out.
What is scalping trading?
As the name implies, scalping is when you stay in the market for a very short period of time to make a trade. You can make profits in the stock market from very small price fluctuations. However, to make a large profit over a very small change in the price of a stock, the quantum, i.e., the number of shares to be purchased, must hike drastically. So, in order to scalp by generating large profits, you would have to buy a larger number of shares.
Benefits of scalping
- It can be extremely profitable if you learn to execute your trades precisely. It is also essential to have a clear exit strategy. Your trade will result in a cash-out and a massive loss if not.
- Even if the market is not very active, resulting in very small price changes in stocks, scalping can help you make money. Even a little change in the stock price can help you make money if you use scalping as your trading strategy.
- You may not have to follow price action with extreme precision. You only need to understand the basic trend of the overall index, the index in which the stock is present, and the stock itself.
- You will be exposed to only a very nominal amount of market risk.
- It would not be affected based on the market trend. When you use scalping as your trading strategy, the market going up or down is not a matter of concern.
- Within the trading system that you presently use, scalp trading can be easily automated through computerization.
How Does Scalping Work?
After we’ve answered the questions of who scalpers are and what scalp trading is, we can move on to the next one: what is scalping trading?
It is a short-term trading strategy that involves buying and selling underlying assets multiple times during the day to generate profit from price fluctuations. It suggests buying an asset at a lower price and selling it at a higher one. The key is to identify highly liquid assets that promise continual price changes during the day. You can’t scalp if the asset isn’t liquid, as liquidity ensures that you get the best price when entering or exiting the market.
Scalpers consider it smooth to make small deals and less risky from the market’s volatility perspective. They make small profits before the opportunity disappears. Scalping trading lies on the other side of the spectrum, where traders hold onto their positions overnight, sometimes even for weeks or months, waiting for a larger profit to emerge. Scalpers believe in generating multiple profit opportunities within a small span rather than waiting for a larger one.
Scalpers operate in the market based on three assumptions.
Lower exposure limits risks: A small exposure in the market also diminishes the chances of working in an adverse condition.
Small moves are easier to make. For a greater profit, the stock price has to move substantially, which also requires a bigger imbalance in supply and demand. Compared to that, lower-priced moves are more convenient to catch.
Small moves occur frequently. Even when a market is intuitively quiet, there are smaller fluctuations in an asset’s price that scalpers aim to exploit.
While other trading techniques, like position trading, depend on fundamental and technical analysis to find trades, scalp traders basically emphasize technical trading techniques.
Technical analysis entails studying the asset’s historical price fluctuations as well as following current trends. To achieve this, scalpers use numerous tools and charts. Equipped with historical prices, scalpers examine patterns and predict future price fluctuations as they plan a deal or project.
Scalpers use trading charts and timeframes that are the shortest of all the trading approaches. A day trader might apply a five-minute trading chart to generate five deals daily. But a scalp trader will need timeframes as short as five seconds to generate 10 to 100 trades during the day. To attain this high speed of trading, scalpers use various trading techniques, including the market’s “time and sales”—a document of buying, selling, and cancelling transactions.
Day Trading v/s Scalping
Day trading and scalping are two popular strategies traders use to profit from short-term price movements. While both strategies are similar in their short-term approach, there are some key differences between them.
- Day Trading
Day trading is a trading strategy that includes involves buying and selling securities within the same trading day. Day traders hold their positions for a longer period than scalpers, usually from a few minutes to a few hours. They aim to profit from the price movements during the trading day, taking advantage of short-term trends and market volatility.
Day traders rely on technical analysis to identify trading opportunities, using indicators and chart patterns to make trading decisions. They may also use fundamental analysis to identify stocks with strong potential for growth or news events that could impact market sentiment.
Day traders typically use lower leverage than scalpers, as they hold their positions for longer periods and are therefore exposed to more risk. They also tend to have a higher risk tolerance than scalpers, as they may hold positions through market fluctuations.
- Scalping
Scalping is a trading strategy that involves buying and selling securities within a very short time frame, usually from a few seconds to a few minutes. Scalpers aim to make small profits from each trade, relying on the high frequency of trades to generate profits over time.
Scalping traders use technical analysis to identify short-term trends and market movements, such as momentum indicators, trend lines, and moving averages. They also rely on their experience and intuition to make quick trading decisions, taking advantage of price movements over a few seconds or minutes.
Scalpers typically use higher leverage than day traders, as they hold their positions for shorter periods and are exposed to less risk. However, they also need to have a well-defined risk management strategy in place to limit their losses.
There are also various differences between scalping and day trading.
- Scalping refers to a position where a trader holds a financial asset for less than five minutes. A scalper can usually hold a trade for two minutes or less. On the other hand, day traders can hold trades for several hours during the day.
- Scalping needs to open tens or even hundreds of trades per day. This is simply because the total profits per trade will be relatively low. On the other hand, day traders can open just a few minutes worth of trades per day.
- At times, day traders can depend on concepts like fundamental analysis. In scalping, this type of analysis is generally not necessary.
How to plan your scalp?
While scalping may seem exciting and generate huge profits, it is necessary to keep a few things in mind to perfect your scaling strategy and reduce losses. When it comes to scalping, certain decision elements are taken into account.
1. Research indices and news
To preserve a hot list of stocks you can trade the next day, you must research the indices carefully. It is also essential to understand the sectoral index, as it doesn’t necessarily have to overlap with the overall index. In addition, ensure that you follow the news and delve deeper into the market trends.
2. Keep an eye on your capital
One key element that every trader who plans to use a scalping strategy should have is adequate capital. As the stock’s price fluctuation will be minimal, the capital to be used for the trade should be higher to make profits.
3. Technical analysis
The requirement of conducting a technical analysis before scalping is paramount. You cannot fully depend on real-time constraints if you are a scalper. So, you will have to find out the market depth to make an entry at the right point. For short-term opportunities, the 3 most commonly used signals are multiple chart scalping, the moving average, and the relative strength/weakness strategy.
You can start by creating a 15-minute chart with no signals and plotting the key support and resistance levels. Now, change to the 60-minute chart and apply the same. Your scalps will generate the most profit at these support and resistance levels in two ways. One method is to wait for the trend to break out of the key level. The other method is when the trend bounces back from the key level.
4. Discipline
Finally, the most important part of your plan should be to pursue a disciplined approach. Maintain an exit strategy and stick to it no matter the fluctuation of the stock. Disciplining, especially while scalping, is essential, as it could lead to serious capital losses otherwise.
Conclusion
It is one of the very popularly used trading strategies. If you want to scalp your trades, ensure that you have adequate capital and a trading strategy beforehand. It is also essential that you plan your exit strategy to minimize losses.
One can select scalping as a primary or supplementary trading style. A scalper will use short time frames, tick charts, or one-minute charts to plan trades. Executing perfect scalp deals demands scalper dedication, discipline, and speed. If you prefer to take your time identifying the right asset and making your decision, you will not enjoy scalping. However, scalping might suit your personality best if you love speed and want prompt profit.
But first, you will need a Demat account to begin your trading journey. You can open a Demat account with us with a few simple steps.
