What is Scalp Trading

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  • 10 Sep 2023

In the stock market world, whether a beginner or expert trader is often confused about which style to choose for their trading. Depending upon your financial goal you need to consider a trading strategy that as the saying goes “The trend is your friend” You can carefully analyse the stock market & make the decision whether to enter in the following trade or not.

There are several types of trading in the stock market. One of them is scalp trading. You can learn about scalp trading & understand its advantages & disadvantages along with the steps to do scalp trading from the following article.

Learning different trading strategies often help traders to cover the gap & improve their trading skills as well as the knowledge.

Scalp trading refers to a high frequency trading strategy that involves buying and selling stocks repeatedly in rapid succession to earn small profits per trade. The key characteristics of scalp trading include:

The holding periods are extremely short, often just a few minutes to seconds. Positions are closed out quickly with the goal of pocketing small gains that add up. Scalp traders target very small movements in stock prices and volatility. Gains of just a few rupees or more per share. Large position sizes are taken to amplify small price changes into noticeable amounts of profits. Leverage like margin trading may be used to increase positions.

Overall, scalp traders use short-term volatility to profit off small price movements in highly liquid stocks. It requires precision timing, discipline, risk management and sufficient trading capital to be successful. As you learned about scalp trading, you must also understand about the scalpers.

Scalpers engage in high-frequency trading, executing hundreds or thousands of trades per day to profit from tiny price movements. They implement extremely short holding periods - often just seconds to minutes - to capture small gains per trade that add up. Scalpers take substantial position sizes and leverage to amplify small 1-5 cent price fluctuations into meaningful profits. They rely on technical analysis of real-time quotes, charts and indicators to time their rapid-fire entries and exits. For this trade, traders use strict stop-losses to limit potential losses.

Profits are captured quickly using limit orders once a minimum gain threshold is reached. This active trading style demands sufficient capital to support volume and absorb trading costs. Scalpers exploit short-term liquidity imbalances and inefficiencies using their quick reaction times, disciplined risk management and technological advantages. They close out all positions before the market closes to avoid overnight risk. It is a challenging strategy that requires precision, focus and adaptation to evolving market dynamics in order to consistently profit from many small, fleeting opportunities throughout the trading day.

After knowing the meaning of scalp trading, it's essential to learn how scalp trading works.

In scalp trading , the scalpers exploit minor price fluctuations in stocks, often caused by supply and demand imbalances and market inefficiencies. They aim to get in and out of trades swiftly to capture small gains repeatedly. Using technical analysis, scalpers identify entry and exit points for trades based on movements of charts, indicators like moving averages, and trading volume.

When buying, scalpers place orders at the bid price and aim to sell shortly after at the higher ask price to pocket the spread as profit. Positions are typically held for less than 3 minutes. Some scalpers trade on the 1 minute, 30 second or even 5 second charts. Large position sizes are taken to amplify small price changes into noticeable gains.

Leverage like margin trading may be used to maximise positions. Profits from each winning trade is small, so scalpers aim to conduct many trades per day - often hundreds or thousands. This requires automation and advanced trading platforms. Scalpers close out all trading positions before the market closes to avoid overnight holding periods and risk. No positions are typically held overnight.

Consider a simple example of how scalp trading might work in the stock market:

  1. Let's say a trader is watching XYZ stock, which has been fluctuating between ₹98 and ₹102 per share throughout the day. The trader notices that every time the price drops to ₹98, there seems to be buying support that brings the price back up to ₹102 soon after.

  2. So the trader waits for the price to drop back down to ₹98 and then quickly buys 100 shares of XYZ. Over the next few minutes, as expected, the price moves back up to ₹102 per share. Once it hits ₹102, the trader quickly sells the 100 shares for a profit of ₹4 per share or ₹400 total.

  3. The trader has now made a small but relatively low risk scalp trade profit by taking advantage of the predictable range and support/resistance levels.

The key is getting in and out quickly to capture small profits. This example assumed no trading fees/commissions for simplicity but those would need to be factored in when determining profit targets in real trading. Traders tend to take quick small profits by riding momentum and support/resistance levels. Do your research before making any trading activity in the stock market.

Here is an overview of some popular scalping strategies using specific indicators:

Stochastic Oscillator Strategy

The stochastic oscillator measures momentum by comparing a stock's closing price to its price range. Scalpers look for crossover points where the %K line crosses above the %D line or vice versa. This signals potential turning points.

They buy when the stochastic lines make an upward crossover and sell on downward crossovers. It works well for oscillating, range-bound markets and helps identify overbought/oversold levels.

Moving Average Crossover Strategy

It is one of the widely used strategies that acts on crossover points between two moving averages. When the shorter MA (5 or 10 period) crosses above the longer MA (20 or 50), it is a buy signal. And in case when the shorter MA crosses below, it signals sell. This indicator indicates change in momentum. Scalpers use very short period MAs like 5 and 10 to create more crossover signals.

RSI Strategy

RSI measures the magnitude of recent price changes to identify overbought/oversold conditions. Scalpers look to buy when RSI dips below 30 (oversold) and sell when it rises above 70 (overbought). The divergence between price and RSI hints at potential reversals. It Works well for mean-reversion strategies.

Parabolic SAR Strategy

The SAR helps determine trend direction and potential reversals. Dot flip indicates change in trend. Traders can buy when SAR flips to the downside (below price) and sell when it flips upwards. The exit longs when SAR dots start appearing above price; exit shorts when dots emerge below. If the SAR moves with the trend then it helps scalpers avoid bad trades against the momentum.

Let us learn about the pros & cons of scalp trading.

It can capitalise on small intraday price movements and volatility

It requires constant focus and vigilance during trading sessions

You can get hundreds of trading opportunities per day allows profit potential

You need large positions and high volume trading to amplify small gains.

You need to avoid overnight gap risk

Missing even a few good trades can hurt performance

You can do risk management with tight stop losses.

It's quite difficult to automate every aspect of strategy

Save you from the task to predict longer term price trends

Chances of small inefficiencies that can be exploited are unpredictable

Pros Cons
It can capitalise on small intraday price movements and volatilityIt requires constant focus and vigilance during trading sessions
You can get hundreds of trading opportunities per day allows profit potentialYou need large positions and high volume trading to amplify small gains.
You need to avoid overnight gap riskMissing even a few good trades can hurt performance
You can do risk management with tight stop losses.It's quite difficult to automate every aspect of strategy
Save you from the task to predict longer term price trendsChances of small inefficiencies that can be exploited are unpredictable

Scalping involves a stringent exit strategy for your trade. This is because of the chance of huge loss that can restrict and even remove several small gains for the following. Due to this, investing in the right set of tools like a set of indicators, live feed, and etc, play a vital role to ensure the optimal success of this strategy.

1. Risk Management

Establish clear risk parameters for each trade. Utilise stop-loss orders to limit potential losses and protect your capital, don't overtrade and try to be patient.

2. Practice with Demo Accounts

Before implementing scalp trading strategies with real capital, practice using demo accounts to refine your skills and gain confidence. Take different strategies and test them in your demo account.

3. Focus on Liquid Assets

Trade assets with high liquidity to ensure smooth execution of trades without significant slippage.

4. Stay Informed

Stay updated on economic indicators, news releases, and geopolitical events that could impact market movements and track potential leads in the market.

Conclusion

The success of any type of trade depends on minimising trading costs like commissions, trading strategy and analysis.

Overall, scalpers leverage their short-term trading skills and technology to profit from small, frequent price changes in volatile stocks throughout the trading day. As you know what scalping is in trading, its strategies, you can explore scalping & even apply this type of trading after doing thorough research of the share market.

FAQs on Scalp Trading

Benefits include needing less capital to open positions, not paying overnight financing fees, being able to profit from small intraday price movements, and avoiding overnight gap risk. It also allows compounding profits within the trading day.

Risks include higher commissions from increased number of trades, unpredictable price swings that can stop out positions, increased time demands for actively monitoring the market, and overtrading which can lead to losses.

Scalping can be done across most liquid markets like equities, futures, forex, and options. High liquidity and volatility are preferable for scalping opportunities.

Many scalpers aim for quick profits of just 0.5% to 1% per trade. The small profits add up over multiple trades. More volatile assets allow larger profit targets of 2% or more per trade.

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