By definition, scalping means to resell something (either share, assets, Forex, and so on) at a large or quick profit. This is the general meaning of the word, so to say.
In the world of trading, however, scalping implies making profits with small price changes that occur in the market.
What Scalping is and How to Use it to Your Advantage
With some due diligence and power of will in place, a scalper (the trader who engages in scalping) aims to make small and quick profits in a short span of time. Basically, they don’t try to predict the market or engage in long-term trading.
They take into account only the immediate changes in the value of a stock or currency and sell it according to their exit strategy.
Given that a lot of Forex brokers that allow scalping operate out there, it might be just the time for you to learn how to take advantage of this particular trading strategy!
The Basics of Scalping
As mentioned above, scalping allows day traders to make a profit, usually on the same day they engage in a trade. Scalpers prefer to avoid waiting days or weeks for a business to be profitable and, instead, take advantage of small and sudden movements within the market.
Naturally, the best benefit/advantage of scalping is the lack of overnight risk – you will never wake up in the morning to a failed/unprofitable trade if you engage in scalping.
Last but not least, when it comes to basics, it’s worth mentioning that scalping is not an easy trading strategy, and it doesn’t come with small profits only. Even if the profit per trade is relatively small compared to long-term traders, huge gains can still be achieved during a productive and full day.
The Essence of Scalping
So, what’s the essence or central point of scalping? Well, the art of scalping requires highly active traders. A scalper can engage in hundreds of trades a day – which is almost a requirement if they want to make as much money as long-term traders.
If we pair the number of traders with the high-octane speed of scalping, the result is that the trader must spend most of their day in front of their computer screen, waiting for the best exit point possible.
Things are pretty balanced, if we may say so. Long-term traders take a higher risk but don’t have to spend as much in front of the computer, while scalping trades often come with no risks, require small investments, but must be tended regularly and continuously.
The Main Benefits of Scalping
- Very low trading risks – trades based on a scalping strategy can be closed in less than a minute and usually don’t last for more than an hour
- Availability of smaller moves – long-term traders rely their profits on price changes in the rank of full dollars, while scalpers use changes as little as $0.01 to engage in a trade and make a profit.
- Frequency – thanks to the above (small mover), scalpers can engage in many traders every Quiet day for long-term traders can be full of profit for scalpers. Scalping allows you to exploit the market more.
Because of the above, scalping can be used as a secondary trading style as well. A larger part of your capital can be used for long-term trades, while small sums (in the ranks of $100-$500) can be used for scalping and daily profits.
When it comes to scalping, there are three main strategies that traders might use. Each of them comes with a different degree of risk and must be considered carefully before applied to a trading account.
- Traditional scalping – in this strategy, the trader engages in a certain amount of shares/currency on any signal. Then, they close their position with the very first exit signal. This guarantees a 1:1 ratio in terms of risk and reward.
- Large Number Scalping – this strategy implies purchasing a large number of stocks, amounts, or currency units. These will later be sold – usually at the first price movement, even though very small. For example, a trader can buy around 10,000 units of a currency valued extremely low and, when the money moves even $0.05 up, the trader could still make a profit of approximately $500. In this case, purchase power and amount matter the most.
- Competitive scalping – last but not least, we have one of the more challenging strategies out there. It implies competing with the (in)famous market makers for assets/shares/units – both on offers and bids. Despite its complexity, the profits are not that big either – not to mention that the slightest movement in the opposite direction can come with rather significant losses.
Usually, traders engage in the first and second strategies, while more experienced ones might try their luck with the third.
How to Use Scalping to Your Advantage
Scalping relies on trading momentum, as well as on the availability of small price movements. However, one of the most important aspects is the commission they’re charged for each trade.
Given the small profits they make with a single trade, the broker they use must come with a tiny commission. If not, they will most likely lose their gain once the transaction is ended.
This is why we consider that scalping can be very effective only when trading within the proper environment and having the right momentum for scalping strategies.
The Bottom Line
As you can see, scalping is not a problematic trading strategy. For some, it’s merely long-term trading on a much smaller scale. If a trader has more than enough focus, can handle the market’s momentum, and wants less risk with their trades, they can easily engage in scalping.
There are quite a lot of brokers out there that allow scalping, meaning that most of them must come with low fees – or else people wouldn’t use them. This means that you can use scalping to your advantage without having to worry about your profits being too small!