What Is Scalping Trading?

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Every day, traders around the world buy and sell securities on stock market exchanges with the hopes of making a profit. These stock market exchanges see all types of traders, from long-term, focused investors who buy and hold shares hoping these investments will turn a profit someday to day traders who buy and sell every single day.

There are many different ways a day trader can earn profits in the stock market, and one of these ways is known as scalping. Keep reading to learn more about day trading and this particular, profit-turning method.

About Day Trading

Except for listed holidays, stock markets in the U.S. are open from 9:30 a.m. to 4:00 p.m. EST. Day traders buy and sell stocks “within the day” during regular market hours. Unlike long-term investing, day trading has an extremely short-term focus.

The goal of day trading is to get in and out of a position within the same day. Many day traders will close all of their positions by the end of the day to avoid surprises after hours, like the release of earnings statements, news reports, and other factors that can cause price swings. There are many different strategies for day traders.

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Day Trader Strategies

  • Breakout: buying a stock when it crosses a predetermined point, usually a previous price barrier.
  • Momentum: acting on news events and high volume that pushes a stock’s price up in the short term.
  • Reversal: making a bet that a recent trend higher or lower will reverse to the mean.
  • Pivot Points: trading based on predetermined points, including support and resistance levels.
  • Scalping: taking advantage of relatively minor price changes, but doing so many times during the day

This guide explores the scalping strategy and how it works. It also compares scalping to regular trading strategies and provides some advice for beginners.

What Is Scalping Trading?

Scalping is a strategy where stock traders take advantage of relatively small price changes in a stock’s price. Most scalp traders don’t hold their positions for very long because they’re looking for small but rapid changes in a short amount of time. Usually, the profit per trade is relatively small. However, they’ll make many of these types of trades during the day, so the profits add up over time.

Almost always, scalp traders will close all positions before the end of the trading day. That way, they don’t have to worry about the stock price dropping after hours when they can’t exit the position.

Relying on Technical Analysis

Traders that use scalping strategies rely on technical analysis to identify entry and exit points. Technical analysis is the art and science of analyzing an individual stock’s statistical trends and chart patterns.

Unlike fundamental analysis, the discipline of technical analysis ignores business results. Instead, it focuses on aspects like price patterns, volume and implied volatility. Scalp traders use this form of analysis to identify minor and short-term price movements they want to capitalize on.

How It Works

Scalping works on the premise that once a stock price moves, it will continue moving for some short period. Ultimately, no one can guess what the stock market will do. However, if you look at any stock’s chart, there are clear stages to a stock’s movement. Stock prices go up, and they go down. Scalpers try to capitalize on those small movements.

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Scalping is the opposite mindset of the long-term “buy and hold” approach to investing. That’s why scalping is considered a day trading strategy, not an investment strategy. Scalpers don’t intend to keep the stocks they buy longer than a few minutes. They may not even know or care about the underlying value of a stock. Scalpers want to capture short, quick movements that turn a profit.

During a trading day, small price movements are much more common than significant price movements. Aware of this, scalpers make money by executing short trades dozens or hundreds of times during the trading day.

Example

Let’s take a hypothetical stock trading at $100, for example. Apart from some considerable drivers, it’s unlikely that the stock’s price will move more than a dollar or two during the day. However, small price movements of $0.01 to $0.10 will be much more common.

In a hypothetical scenario, our imaginary scalp trader buys the stock at $100 then sells it at $100.25. That’s a $0.25 profit per share, which doesn’t sound like much. However, if the trader had purchased 100 shares, that would be a profit of $25. Do that multiple times during a day, and the gains start to add up.

Technical Indicators To Know About

If you want to explore scalp trading, you’ll need to have a strategy. While there are many basic and advanced trading strategies, here are a few chart indicators you’ll want to understand.

Support and Resistance

This strategy is pretty simple and takes advantage of recent support and resistance points. A particular price is considered support when the stock price drops to it more than once during a recent time period.

For example, if a stock price is trading around $10.50 and has dropped down to $10.25 a few times but never went under for long, you could consider $10.25 to be a support level. If that plays out, the strategy would be to buy when it drops back down to that level again.

Similarly, resistance levels are when a price goes higher to a specific price but never goes above it. Resistance levels can be sell indicators or if you’re playing the market short, a short sell indicator.

Moving Averages

A moving average is a statistical mean of the stock’s price over a given period. This metric is important in technical analysis and stock trading because it indicates whether the current price is high or low compared to the recent past.

If a stock has been trading higher than the recent moving average, this price can also act as a support level, as mentioned previously.

Stochastic Oscillator

A stochastic oscillator is another critical indicator you need to know as a scalp trader. This metric is a momentum indicator comparing the current price to recent prices to indicate overbought or oversold signals.

The oscillator ranges between 0 and 100. Anything above 80 is considered overbought, and anything below 20 is deemed oversold. Scalp traders watch these indicators for buy and sell signals, indicating possible price reversals.

Practice Makes Perfect

Remember, there isn’t a silver bullet or guarantee when it comes to trading. You should consider starting with a trading simulator account.

A trading simulator often works with real-time market data and acts almost like the real stock market. That way, you can get the feel of trading and practice your execution before risking any real money with day trading.

Primary vs. Supplementary Styles

Primary Trading Style

Pure scalp traders do nothing but scalp. This is their bread and butter. They use small time frame charts, like one-minute charts, to see every tick and price movement. Scalpers perform up to hundreds of trades per day and exit all positions before the markets close.

Supplementary Trading Style

Scalping can also be done as a supplementary trading style for traders that usually trade longer timeframes as well. For long-term investors or swing traders, scalping can be an excellent add-on to their regular trading.

One of the main reasons a longer-term trader adds scalping to their arsenal is when the market is in a holding pattern. When there’s no obvious uptrend or downtrend, the market bounces up and down inside a narrow range.

This scenario is a potentially great time to scalp while waiting for the market to re-establish a more significant trend. Traders can take advantage of the short-term pattern of the price bouncing inside the range on the long or short side.

Advice for Beginners

Individual traders can begin trading more quickly now than ever before. With the explosion of online brokerages and trading apps like Robinhood, you can get started in minutes. Many people have started trading without knowing what they were doing and lost a lot of money.

If you’re new to trading and want to try scalping, here are a few tips for you.

Technical Analysis Skills Are a Must-Have

As mentioned before, technical analysis is an essential part of scalp trading. We discussed a few indicators already, but there are others you should learn, like:

  • Crossover
  • Golden Cross vs. Death Cross
  • Bollinger Bands
  • Moving Average Convergence Divergence, or MACD
  • Relative Strength Index, or RSI

The Trend Is Your Friend

“The trend is your friend” is a common saying amongst stock traders. The “trend” here is the general direction of the stock price. If you zoom out far enough on the chart, it should become clear. The trend is either up, down or sideways.

An uptrend is when the general direction of the stock price is going up. You’ll see higher lows and higher highs as the stock moves up. By contrast, a downtrend is when the general direction of a stock is moving down. In a downtrend, you’ll see lower highs and lower lows as the stock moves.

Knowing the overall trend is vital for scalpers to identify entry and exit points for their trades, especially during trend reversals.

Keep Tight Stops To Minimize Losses

Because scalp traders are trying to find many small-profit trades, it’s essential to minimize the risk of loss. One way to do that is the use of stop-loss orders. A stop-loss order is a way to reduce losses by automatically closing a position when it reaches a certain level.

For example, you can set a stop-loss order at 5% below the purchase price. By doing so, your maximum loss will be 5%. A scalper may want to consider even tighter stops since a loss of 5% on a single trade could wipe out a lot of their profits.

You Need at Least $25,000 in Your Trading Account

There are regulations you need to know about if you’re interested in day trading. One such rule is the “pattern day trader” rule that defines a day trader as any customer who executes four or more trades within five business days.

As we’ve seen before, with the volume of trading that a scalp trader executes, this rule applies. Any account marked as a “pattern day trader” must have at least $25,000 in their accounts and can only trade in margin accounts.

Watch Out for Commissions

Some brokers charge a commission for every trade. This is important for scalp traders who perform dozens or hundreds of transactions per day. In 2021, most online brokers no longer charge commissions for stocks, options and ETFs, but it’s something to be aware of. Several good brokers offer free stock trading.

Key Takeaways

Scalping is a day trading strategy that capitalizes on many minor price changes throughout the day. It’s a strategy that requires intense focus, rapid decision making and quick reflexes. It can be a great way to trade the market, and the fact that you’re not in positions very long means your potential risk exposure is minimal and limited to the time you’re in the trade.

Successful scalp trading requires:

  • Solid understanding of technical analysis
  • Completing large numbers of trades per day
  • Discipline and strict stop-loss orders to minimize losses

Scalp Trading FAQ

Here are the answers to some of the most frequently asked questions about scalp trading.
  • What are the benefits of scalp trading?
    • Scalp trading, like all day trading, has risks. However, scalping can also generate great rewards. Some of the benefits of scalping include:
      • -Limited risk exposure
      • -Quick action
      • -Works no matter what the market is doing
  • When can I scalp trade?
    • The U.S. markets are open from 9:30 a.m. to 4:00 p.m. EST. If you're interested in international markets, those have varying hours depending on the exchange.
  • What is margin?
    • Buying on margin is essentially when a trader buys more of a stock than they have available capital. The trader borrows the balance from the broker. All day trading accounts are margin accounts, and the amount of margin you have depends on the broker. It can range anywhere from two times to four times your cash balance.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Scott Jeffries is a seasoned technology professional based in Florida. He writes on the topics of business, technology, digital marketing and personal finance. After earning his bachelor’s in Management Information Systems with a minor in Business, Scott spent 15 years working in technology. He's helped startups to Fortune 100 companies bring software products to life. When he's not writing or building software, Scott can be found reading or spending time outside with his kids.

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