A day trading technique where an investor buys and sells an individual stock multiple times throughout the same day
What is Scalping?
Scalping is a day trading strategy where an investor buys and sells an individual stock multiple times throughout the same day. It is a popular trading technique that’s been around for a long time and is a common way to take advantage of a daily run up on a stock or sector.
The nickname for traders that employ the scalping strategy is “scalpers.” Scalpers can place anywhere from a few to one hundred-plus trades a day, always attempting to turn a small profit with each individual trade. It is often less risky than other trading strategies and is a relatively simple concept to grasp, which adds to its popularity.
Summary
- Scalping is a day trading technique where an investor buys and sells an individual stock multiple times throughout the same day.
- The goal of a scalper is not to make an enormous profit with each individual trade they make, but rather to make a small profit over many little trades.
- Effective scalpers must be able to read and interpret short-term charts. They must often make decisions based on stock charting that is within 1 to 5-minute intervals.
Scalping Decision Factors
- Research indexes, relevant news sources and examine market trends to develop a key hotlist
- Buy at key points, including but not limited to, quarterly reporting period, breakouts, or market rallies
- Sell quickly and take profits, or exit position if the stock begins to fall
- Set a goal for trades per day that you wish to accomplish based on comfort and experience
The “Little Win” Objective
The goal of a scalper is not to make an enormous profit with each trade they make, but rather to make a small profit over many little trades. It makes the trading style more manageable and sometimes easier to execute under pressure. Often, scalpers will buy and sell the same stock within minutes, rarely holding onto it for long periods throughout the day.
Scalping day traders are often on the hunt for highly volatile stocks – those that are the subject of positive news or perhaps an overall swing in the market. Then, scalpers begin to buy and sell the upswing of the stock, taking their profits many times throughout the day. It helps to avoid the pitfall of not timing the peak properly and being overexposed and failing to take any profits.
Executing an Effective Scalping Strategy
To execute the strategy effectively, a trader must be able to spot trends in the market, anticipate upticks and downswings, and be able to understand the psychology behind a bull and bear market.
Effective scalpers must also be able to read and interpret short-term charts. They must often make decisions based on stock charting that is within 1- to 5-minute intervals. Scalpers look for key indicators such as moving averages and pivot points in the market to quickly determine if they can execute a trade. Scalpers invariably always come across losing trades, but a successful scalping strategy and discipline can help maximize the wins and minimize the losses.
Scalpers must also have liquidity and adequate capital in their portfolio to trade. They must subscribe to generally Level II platforms that show live bids and asks for specific stocks, as well as have an exceptional – generally wired – internet connection. It helps to prevent technical factors from decimating your trading strategy.
If the data you were receiving as a trader had too much latency, it could mean you are acting on outdated technical data and have already missed your window for a buy or exit from a stock. It could make for frustrating losses and missed opportunities.
Scalping: Going Against Traditional Trading Instincts
Traditionally traders want to hold onto stocks that are rallying, if at least in the short/medium term. Scalping goes against the traditional instinct, and a scalper will sell their position even if the stock is on a large uptick.
The scalper may jump back into the security at a later point that day or week, but they generally have the discipline to exit a stock even if they are experiencing significant gains. Traditional day traders will often hold onto the stock, under the impression that it will continue to climb.
Related Readings
CFI is the official provider of the global certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
- Day Trader
- How To Read Stock Charts
- Market Breadth
- Momentum Investing
- See all wealth management resources
- See all capital markets resources
FAQs
If a trader is able to implement a strict exit strategy, one of the biggest advantages of scalping is that it can be very profitable. Scalpers can leverage small changes in the price of a stock that may not necessarily reflect the overall trend of the commodity's price for the day.
What is the most successful scalping strategy? ›
Some top scalping strategies include using moving average crossovers, trading price channels, trading news events, using pivot points, and trading price action patterns. The best scalping strategies focus on liquid markets and utilize short time frames like 1 minute or 5 minutes.
What is the most profitable 1 minute scalping strategy? ›
One of the favored indicators for 1-minute scalping is Moving Averages, particularly EMA (Exponential Moving Average). It helps in identifying the short-term trend direction in a given asset. Scalpers use it to find entry and exit points, optimizing their trades for quick profits.
What is the 5 pip scalping strategy? ›
If you are looking for a 5-pip gain per trade (USD 50), this means that you would actually have to go up 7 pips from your initial starting price (7 pips - 2 pip spread = 5 pips). That is nearly 50% more pips. This is why you should aim to only scalp the Forex pairs with the lowest possible spreads.
Which timeframe is best for scalpers? ›
Scalpers usually work within very small timeframes of one minute to 15 minutes. However, the one- or two-minute timeframes tend to be favoured among scalpers. To action this strategy, you must choose a highly liquid currency pairing, and then you can open an account with us.
What strategy do most day traders use? ›
Common day trading strategies include Momentum, Breakout, Range, Reversal, Gap, Trend Following, Mean Reversion, Scalping, News, Pattern, Support and Resistance, Fibonacci, Volume Spread Analysis (VSA), Event-Driven, Arbitrage, and Statistical Arbitrage, each with its own set of rules and indicators for entering and ...
How many trades do scalpers do in a day? ›
The nickname for traders that employ the scalping strategy is “scalpers.” Scalpers can place anywhere from a few to one hundred-plus trades a day, always attempting to turn a small profit with each individual trade.
What is the most reliable indicator for scalping? ›
Top 5 Scalping Indicators and Strategies
- The SMA Indicator. The Simple Moving Average Indicator or SMA indicator is the most basic type of indicator traders rely on to device a trading strategy. ...
- The EMA Indicator. ...
- The MACD Indicator. ...
- The Parabolic SAR indicator. ...
- The Stochastic Oscillator indicator.
Scalping is for those who can handle stress, make quick decisions, and act accordingly. Your timeframe influences what trading style is best for you; scalpers make hundreds of trades per day and must stay glued to the markets, while swing traders make fewer trades and can check in less frequently.
What are the best hours for scalping? ›
How many hours of sleep are enough for good health?
| Age group | Recommended amount of sleep |
|---|
| 3 to 5 years | 10 to 13 hours per 24 hours, including naps |
| 6 to 12 years | 9 to 12 hours per 24 hours |
| 13 to 18 years | 8 to 10 hours per 24 hours |
| Adults | 7 or more hours a night |
2 more rowsMajor currency pairs, such as EUR/USD, GBP/USD, and USD/JPY, are characterized by high liquidity. This makes them suitable for scalping strategies as traders can quickly enter and exit positions without significant slippage.
What is the most profitable trading strategy of all time? ›
Three most profitable Forex trading strategies
- Scalping strategy “Bali” This strategy is quite popular, at least, you can find its description on many trading websites. ...
- Candlestick strategy “Fight the tiger” ...
- “Profit Parabolic” trading strategy based on a Moving Average.
Scalpers like to try and scalp between five and 10 pips from each trade they make and to repeat this process over and over throughout the day. Pip is short for "percentage in point" and is the smallest exchange price movement a currency pair can take.
How can I be the best scalper? ›
Key of Scalping Trading Strategies
- Trade hot stocks as per watch list each day.
- Buy at breakouts for instant move up and sell quickly when there is no up move.
- Even on small profit, sell instantly half and adjust exit on remaining position.
- Take 3-5 trades to achieve daily goals.
The aim is for a successful trading strategy through the large number of winners, rather than a few successful trades with large winning sizes. Scalping relies on the idea of lower exposure risk, since the actual time in the market on each trade is quite small, lessening the risk of an adverse event causing a big move.
Are day traders scalpers? ›
Day Trading Explained
Many traders think that day trading and scalping are similar. Although both trading styles do take place within one trading day, there are important differences that we need to highlight. Day traders open and close substantially less setups compared with scalpers.
Which is more profitable, scalping or intraday? ›
Day trading and scalping are both short-term trading strategies. Depending on your preferences you may find one to be better than the other. However, many day traders will tell you that they prefer day trading over scalping since day trading may not involve opening as many trades in a day as scalping might.
Which is more profitable, scalping or swing trading? ›
If you want to earn good profits without spending all day in front of your screen, swing trading is for you. It requires far less time commitment than scalp trading. Remember – with scalping, your goal is to capitalize upon momentary swings in a stock's price.
