Scalp trading: Definition, advantages and how it works

Trading strategies vary widely. While some people buy stocks for years, others sell them after just a few hours. Then there are traders who hold positions for just a few minutes or seconds! This rapid-fire approach is called scalp trading. It's becoming popular among investors who prefer making many small profits rather than waiting for larger returns.

In this article, we’ll explore what scalp trading is, the advantages of scalp trading, and understand how scalp trading works. This will help you decide whether scalp trading suits your investing style or if mutual funds might be a better alternative for you.

• Table of contents

• What is scalping?
• How does scalping trading work?
• How do scalpers analyse the market before scalping?
• Day trading vs. scalping trading
• Advantages of scalp trading
• Disadvantages of scalp trading
• How can you do scalp trading?
• Should you scalp?

What is scalping?

Scalp trading means buying and selling stocks quickly, aiming for small but quick potential profits. Traders who use scalp trading enter and exit trades in seconds or minutes, hoping to make tiny gains multiple times throughout the day.

Scalp trading involves:

• Buying and selling stocks rapidly within seconds or minutes.
• Trying to gain small profits repeatedly.
• Executing several trades every day

How does scalping trading work?

Understanding how scalp trading works involves these basic steps:

1. Choose stocks carefully: Scalpers pick stocks with high volume (stocks many people trade) and good liquidity (stocks easy to buy or sell quickly).
2. Enter trade quickly: Traders enter trades as soon as they spot a small price movement.
3. Exit rapidly: Traders sell immediately once the price moves slightly in their favour, even if the profit is tiny.
4. Repeat throughout the day: Traders continuously repeat these quick trades to stack up small profits.

In some ways, scalp trading is like taking quick, small bites rather than trying to eat an entire meal at once.

Read Also: Stock Market Trading: Meaning, Types, and Historical Context

How do scalpers analyse the market before scalping?

Before starting scalp trading, traders analyse the market carefully using these methods:

• Technical analysis:
  • Looking at charts to spot price patterns and trends.
  • Using indicators like moving averages, RSI, or MACD to find short-term opportunities.
• Market depth analysis:
  • Watching buyers and sellers closely to predict short-term price movements.
  • Quickly identifying strong buying or selling activity.
• News and events:
  • Scalpers watch market news closely for events that can cause quick price changes.

Day trading vs. scalping trading

Scalp trading is sometimes confused with day trading, but the two are different:

• Day trading:
  • Traders hold positions from minutes to hours.
  • Aim for bigger profits per trade, trading fewer times a day.
• Scalp trading:
  • Traders hold positions for seconds or minutes.
  • Aim for very small profits per trade, executing many trades daily.

Simply put, scalp trading is day trading taken to an extreme level of speed.

Read Also: Trading vs. investing: Meaning, Key Differences and Which is Better?

Advantages of scalp trading

Here are some advantages of scalp trading:

• Potential for quick profits: Small profits can potentially quickly add up through frequent trades.
• Opportunities in any market condition: Traders can find potential opportunities in rising, falling, or sideways markets.
• Lower exposure to broader market risk: Since scalp trades are held for just a few seconds or minutes, traders avoid the risk of overnight news or large market swings. However, this comes with a trade-off – because profits are small and frequent, each trade needs to be highly accurate. One wrong move or delayed execution can wipe out gains from multiple winning trades.

Disadvantages of scalp trading

Despite the advantages, scalp trading also has disadvantages:

• Stressful and demanding: Requires traders to constantly watch markets.
• High transaction costs: Frequent trading means paying more brokerage fees.
• Small profits, bigger volumes: You need many profitable trades daily to earn significant money.
• Needs quick decision-making skills: Traders must rapidly analyse markets and make fast decisions.
• Risk of large losses if trades go wrong: Even a few bad trades can quickly wipe out profits.

Read Also: Online Trading: Meaning, Benefits & How it Works?

How can you do scalp trading?

If you wish to try scalp trading, follow these basic steps:

• Open a trading account with a reliable broker offering low transaction fees.
• Learn basic chart patterns and simple technical indicators.
• Practise scalping strategies using a demo account first.
• Start small with real money only after gaining confidence and experience.

Should you scalp?

Scalp trading is not for everyone. Mutual fund investors should be aware that scalp trading is entirely different from the slow, steady approach of funds. Consider scalp trading only if:

• You can make fast decisions without hesitation.
• You enjoy constant market activity.
• You can handle high stress without panicking.
• You have enough time to watch the market closely.

If you prefer relaxed investing and less frequent trading, mutual fund investments might suit you better.

Conclusion

While scalp trading offers exciting opportunities, it isn't suitable for every investor. Understanding the risks and rewards can help you decide if scalp trading matches your personality and investment goals.

FAQs

What is scalp trading?

Scalp trading involves rapidly buying and selling stocks within seconds or minutes, making many small profits repeatedly through the day.

Is scalp trading profitable?

Scalp trading can be profitable if executed correctly, but success requires skill, discipline, and a clear strategy. Profits are usually small but frequent.

What is an example of scalping trading?

An example is buying a stock at Rs.500 and quickly selling it at Rs.500.50 within a minute, repeating such trades multiple times throughout the day. (Example for illustrative purposes only).

How hard is scalp trading?

Scalp trading can be challenging because it demands quick decisions, constant attention, and the ability to manage stress effectively.

Which is better, scalping or trading?

It depends on your investment style. Scalping suits those comfortable with risk, speed, and frequent trades. Regular trading suits those who prefer longer holding periods and less stress.

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