What is Scalping Trading?

Scalping is a very particular style of trading that has been made easier to implement in the digital age of computerized trading. Scalping is often performed by computer programs, but it can also be done manually (point and click trading).

 

Read on if you are interested in knowing more about how scalping works, and what is required to trade in this way. We’ll go through all the basics in this post.

 

 

 

 

What is Scalping?

Scalping is a trading strategy in which the trader purchases and sells security within a short period, ranging from seconds to a few minutes. 

 

The intent is to make profits from small fluctuations in the security price. This strategy can be used with the aid of technical or order flow analysis for executing the trades and is an intraday trading strategy.

 

  • Smaller Trades

 

 

Scalping isn’t about swinging for the fences, but about taking smaller trades. Speed is of the essence, and trades that aren’t working out will be scratched at breakeven. 

 

  • More Often

 

 

Since traders are smaller in nature, they will be taken more often throughout the day. Most other day traders will be taking a maximum of a handful of trades each day, whereas scalpers can take tens or even hundreds of trades.

 

 

Since the frequency of trades is so high, commissions charged by the broker are as equally important as the strategy itself. Scalpers will look to trade markets with low commissions or even rebates, and will often try to get into the market with limit orders to further reduce costs.

 

 

 

How Scalping Works

Scalping is a fairly unique method of trading, and consists of the following elements:

 

  • Holding Trades for Shorter Time Durations

 

 

Scalping involves purchasing and selling securities over a short period of time. This span can range from seconds to a few minutes, but all positions will always be closed before the session or day ends. 

 

Scalpers must have a keen eye for small fluctuations and clues in the order book.

 

  • Catching Smaller Moves

 

 

Since scalping requires the trader to look for small fluctuations in prices to make profits, the trader must extract as much as possible from every move. 

 

An immense level of concentration is required to trade this way.

 

  • Lower Risk/Reward Ratios

 

 

Scalping not only has less price risk, but also less time risk. A good scalper will not let price move far against them before closing the trade, and some even have hard “time stops”, exiting the position if a move doesn’t materialize within a specific period of time. 

 

The gains are typically smaller than with other strategies on a per trade basis, but can result in considerable profits if executed consistently over the trade.

 

 

 

What Tools are Needed for Scalping?

Scalping has slightly different requirements for the tools required for the effective execution of such a strategy. These include:

 

  • Fast Internet

 

 

Scalping requires that the trader be able to react at lightning speed, sending and canceling orders instantly. For this reason, a fast and stable internet connection is an absolute necessity. 

 

Any delay between the price seen on screen and the price when clicking the mouse (or sending the instructions to the API, in the case of an algorithm) can be the difference between a winning and losing trade for the scalper. Therefore, low latency is of utmost importance.

 

  • Broker with Low Commissions

 

 

Scalping involves making multiple trades throughout the day to effectively execute the strategy and eke out any profits. 

 

Even though trades are for short durations, the frequency of transacting is high. A broker with low commissions is necessary to ensure the trader can make many trades without all the profits being eaten by commissions.

 

  • A Platform with DOM

 

 

A trading platform that shows market depth and volume profile not only gives the scalper vital information about the order flow of the market, but also allows the option of one-click trading. Since execution time for this trading strategy is so important, this is an edge in itself.

 

  • Low Spreads

 

 

The spread is the difference between the best possible price at which you can buy and sell the asset right now. A low spread ensures the scalper can quickly flip a position with ease.

 

 

 

How Many Trades a Day Does a Scalper Make?

With a scalping strategy, a trader can make anywhere between 10 to +100 trades a day.

 

The trades can increase even further depending upon market conditions of the market and the particular trader.

 

What Are the Benefits of Scalping?

 

Scalping is a trading strategy that has the following benefits for the traders in the financial market:

 

  • Less Time Risk

 

 

The longer you hold a position, the greater the chances of being caught on the wrong side of an unexpected move. 

 

Breaking news or passing comments from a CEO or central bank governor can occur at any time, so simply having short holding periods for traders drastically reduces this risk.

 

  • Small Moves Plentiful

 

 

Sometimes swing traders can wait weeks or even months for a trade. Since scalping takes advantage of the fractal nature of markets, a day when seemingly nothing happens for most other trades can be a very profitable day for the eagle-eyed scalper.

 

  • Higher Win Rate

 

 

Since scalping strategies usually target lower risk:reward ratios, they will tend to have higher win rates than other trading strategies. This can fit the pyschology of some traders better, as drawdown periods will be less often, keeping the trader confident in their strategy.

 

 

 

Wrapping Up

Scalping trading is one of the most unique but also skillful approaches to financial markets. If done correctly, scalping can lead to large profits for lower overall risk, but does require an immense level of concentration.

 

To scalp effectively, you need the right tools. Bookmap is specifically tailored to traders with shorter time-durations and comes with multiple tools specific for scalpers. You can try it out today for free. Click here to get started.

 

 

 

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#bmbluejacket winner Rob Davies shows his trades on the ES (S&P 500) based on a stop run above the VWAP (Volume-Weighted Average Price) within the context of his volume profile analysis.

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