Scalping – What is it? Working, Factors to consider while scalping

There are many trading styles that can be adopted by traders while taking a plunge into stock trading. Selecting the trading style or strategy depends on many factors like risk appetite, the amount available for trading, returns expectations as well as the trading hours that can be dedicated by the traders. One of such many styles is scalping which requires constant monitoring of the markets and is quite popular among traders across the country and the globe. Given here are the meaning of this term and related details to scalping.  

Read More: Swing trading – All you need to know

What is the meaning of scalping?

Scalping is a trading strategy where a trader buys and sells financial instruments, such as stocks or currencies, in a very short amount of time, usually a few seconds to a few minutes. The goal is to make a small profit on each trade, often just a small percentage, but to do it many times a day to ultimately add to the portfolio.

Scalping requires fast decision-making and quick execution of trades along with a disciplined approach. Traders need a strict exit policy to avoid any huge losses that can wipe out small gains in one instant. Traders often use technical analysis tools and chart patterns to identify short-term price movements and make trades accordingly. Scalping can be a high-risk trading strategy as it involves frequent trades, and the small profits made on each trade need to cover the trading costs, such as brokerage fees and taxes. It is therefore important for traders to have a solid understanding of the markets and trading strategies before taking a plunge into scalping.

How does scalping work?

Scalping is a trading strategy where a trader aims to make multiple small profits from quick trades during a single day. The goal of scalping is to make small profits on each trade but do it many times a day. However, it requires quick decision-making, fast execution of trades, and the ability to identify short-term price movements using technical analysis tools and chart patterns. 

Let us consider the following example to understand scalping in a better manner. Let’s say a trader is considering scalping on a particular stock in the Indian stock market. The stock has been trading between Rs. 100 and Rs. 101 for a few hours, which provides an opportunity for scalping under this pattern.

The traders can buy a certain number of shares at Rs. 100 and then wait for the price to increase, let’s say to Rs. 100.40. Traders can set a stop-loss at Rs. 99.80 and take-profit order at Rs. 100.40 As soon as it reaches that price, the take-profit order will be executed and the shares will be sold to make a small profit of 40 paise per share. This process can be repeated many times throughout the day, with each trade lasting only a few seconds or minutes. 

Top 5 factors to consider before going in for scalping trading

#1. Market volatility

Scalping requires price movements to occur frequently and quickly. As a scalper, traders look for small movements in price to make profits. Therefore, it’s important to choose markets that are liquid and volatile enough to provide trading opportunities. For example, if a trader is scalping forex, he/she might look for currency pairs that have a high trading volume and are known for their volatility, such as EUR/USD.

#2. Trading costs

Because scalping involves many trades with small profits, trading costs such as brokerage fees and taxes can eat into the profits. Therefore, it’s important to choose a broker with low fees and commissions and to be aware of any taxes or other costs associated with your trades. Some brokers offer specialized accounts for scalpers with lower fees which can be quite attractive for scalpers.

#3. Risk management

As with any trading strategy, it’s important to manage risk properly. With scalping, traders make many trades throughout the day, so it’s important to set stop-loss orders to minimize losses. Traders should also have a solid trading plan and discipline set in place and stick to it. This means setting profit targets and not deviating from them, as well as setting maximum loss limits for each trade.

#4. Technical analysis

Scalping often relies on technical analysis tools and chart patterns to identify short-term price movements. Therefore, it’s important to have a good understanding of these tools and how to use them. This might include using indicators such as moving averages, stochastic oscillators, or Bollinger Bands to identify entry and exit points for the trades.

#5. Experience and knowledge

Scalping is a high-speed, high-risk trading strategy that requires quick decision-making and execution. Therefore, it’s important to have experience and knowledge of the markets and trading strategies before attempting scalping. This might involve starting with a demo account to practice trading skills before moving on to a live account. It’s also equally important to stay up to date with market news and events that could impact the trades.

Conclusion

Scalping is a widely used trading strategy that appeals to experienced traders due to its high-stakes nature. However, for novice traders who lack sufficient market experience and a comprehensive understanding of stock and securities movements, this type of trading can be risky. Therefore, it is imperative for traders aiming to do scalping trading to have a basic understanding of the market, trading, and its key terms like stop loss, trailing stop loss, and more. 

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