What is Scalping Trading & How Does It Work?

New traders are often confused about which trading style to pursue. It is imperative to pick a trading style based on your financial goal, risk tolerance, time that you can invest daily to follow the market, and several other similar factors. In this article, we will discuss the scalping trading style, which is about making numerous small deals during the day to earn a profit.

What Is Scalping Trading?

Scalp trading or scalping is a trading style that is employed to earn from small price changes to make profits that add up. Scalpers, i.e. traders who do scalp trading, trade frequently, in a matter of minutes and seconds. A scalp trader needs to have a strict exit policy because one significant loss could eliminate all the small profits made in the other deals. Scalp trading, therefore, needs discipline, decisiveness, and stamina. With these qualities and the right tools, you can become a successful scalp trader.

Scalp traders often enjoy the thrill that this trading style offers. But to strike successful deals, you will need the experience to execute the various technical trading techniques to identify profit opportunities in the market.

How Does Scalping Trading Work?

Scalping trading is a short-term trading technique that involves buying and selling underlying multiple times during the day to earn profit from the price difference. It involves buying an asset at a lower price and selling high. The key is to find highly liquid assets that promise frequent price changes during the day. You can’t scalp if the asset isn’t liquid. Liquidity also ensures that you get the best price when entering or exiting the market.

Scalpers believe it is easier to make small deals and less risky from the market volatility perspective. They make small profits before the opportunity evaporates. Scalp trading lies on the other side of the spectrum, where traders hold onto their position overnight, sometimes even for weeks and months, waiting for a bigger profit size to emerge. Scalpers believe in creating multiple profit opportunities within a small span rather than waiting for a bigger one.

Scalpers work on the market on three principles:

1. Lower exposure limits risks: A brief exposure in the market also minimises the chances of running into an adverse condition.
2. Small moves are easier to obtain: For a bigger profit, the stock price has to move significantly, which also requires a higher imbalance in supply and demand. Compared to that, smaller price moves are more comfortable to catch.
3. Small moves happen frequently: Even when a market is apparently quiet, there are smaller moves in an asset price that scalpers target to exploit.

While other trading styles, like position trading, depend on fundamental and technical analysis to identify trades, scalp traders primarily focus on technical trading techniques.

Technical analysis involves studying the historical price movements of the asset along with following the current trends. To achieve this, scalp traders use various tools and charts. Equipped with historical prices, scalpers observe patterns and predict future price movements as they plan a deal.

Scalp traders use trading charts and timeframes that are the shortest of all the trading styles. A day trader might use a 5-minute trading chart to make five deals a day. But a scalp trader will use timeframes as short as 5 seconds to make 10 to 100 trades during the day. To achieve this high speed of trading, scalp traders use several trading techniques, including the market’s ‘time and sales’ – a record of buying, selling, and cancelled transactions.

How Do Scalpers Analyse the Market Before Scalping?

Scalpers use market analysis techniques. Firstly, they focus on short-term charts, often utilising one-minute or five-minute intervals to capture fleeting market movements. Technical analysis is important, with a focus on indicators like Moving Averages, Relative Strength Index (RSI), and Bollinger Bands for identifying potential entry and exit points.

Furthermore, scalpers closely monitor market liquidity and order flow. A comprehensive understanding of market trends and overall direction aids scalpers in aligning their trades with broader market movements, reducing exposure to unexpected reversals.

Economic indicators, news releases, and events that could impact the market are integral to their analysis. Scalpers often avoid periods of heightened volatility surrounding major announcements, opting for more stable market conditions to minimise risks. Risk management is a key consideration, with defined stop-loss levels to mitigate potential losses. 

Combining technical and fundamental analysis, scalpers create a fine strategy, adapting swiftly to changing market conditions. This analytical precision enables scalpers to make split-second decisions, capitalising on short-term price fluctuations in dynamic markets.

Day Trading vs Scalping Trading

In nature, day trading is the closest to scalp trading. Like scalpers, day traders also make several trades during the day. But still, there are several differences between the two.

Advantages of Scalp Trading

The following are some of the advantages of a scalping trading strategy:

1. Quick Profits – Traders who prefer a faster pace of action prefer scalping. It allows them to make their profits in a matter of seconds. 
2. Multiple compounding – Scalping allows you to compound your capital by small amounts multiple times in a day. This helps grow your capital faster.
3. Lower risk – Since you are exposed to a smaller number of major economic events and the time period of each trade is low, the window for anything negative to happen is low as well. Moreover, if you are careful about employing only a small part of your capital per trade, then you have overall less exposure as well.
4. No issues from economic events – They do not have to worry about long-term market volatility based on any major economic events, as such events take time to develop and occur. Scalpers simply have to focus mostly on technical analysis.

Disadvantages of Scalp Trading

The following are some of the disadvantages of scalp trading:

1. Transaction costs – If you are trading with really low capital, then a large part of your capital may be going into paying transaction costs. 
2. Slippage and execution risk – If you are trading at high frequency, then there may be issues with the execution of the order, as the price at which you want to buy or sell might not be available by the time you place the order.
3. Mental pressure – If you are doing high-frequency trading, then you will have to make the decision to place trades frequently. This requires a higher degree of constant focus and may thus be stressful.

How Can You Do Scalp Trading?

You can do scalp trading by following the simple steps below. Firstly, you need to have a Demat Account. 

• Open a Demat Account on Angel One for free, and you can get started with the trading process. 
• Login to the Demat Account and ensure there are enough funds available for the trading.
• Explore the features and tools on the Angel One platform, including real-time charts and technical indicators.
• Formulate a scalp trading strategy based on short-term charts, technical analysis, and risk management.
• Execute the trade. Keep a close eye on your trades, adjusting as necessary. Scalping requires constant monitoring due to its short-term nature.

Note that Scalp trading demands a combination of technical proficiency, discipline, and a swift decision-making mindset.

Should You Scalp?

One can adopt scalping as a primary trading style or a supplementary style. A scalper will use short timeframe, tick or one-minute charts to plan trades. It demands dedication, discipline, and speed to execute scalp deals. If you would rather take your time to find the right asset and make your decision with time, then you wouldn’t enjoy scalping. However, if you like speed and want immediate profit, scalping might suit your personality.

Conclusion

Scalp trading is one of the many high-frequency trading methods that you can use to earn quick profits. However, it requires a certain degree of expertise to be able to do so. If you want to do scalp trading but do not have a Demat account yet, open a Demat account with Angel One today for free!

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