What is Scalp Trading?

Investors in the Indian financial market have one goal in mind: Profits. However, they start by trying a specific trading technique and move to the next one until they find one that’s most favorable and which can make them better profits than the rest.

Every investor has a trading style. Some of them believe in value investing, while others believe in intraday trading. When you think about intraday trading, the idea is quite simple: you buy stocks when the market opens and sell them before the market closes. If the price is higher than the cost price, you make a profit; otherwise, you realize losses on selling or converting the order into delivery. However, investors use different techniques within intraday trading to profit from the ongoing price fluctuations.

One of the most widely used ones is Scalp Trading or Scalping.

About Scalp Trading Strategy

Scalping is the shortest-term trading method where investors use high trading volumes to make a profit rather than trying to increase profits for each trade. Scalping utilizes small constant price fluctuations and relies on small profits from each trade. However, the number of trades done is much higher, adding to the profits.

For example, if you are executing the Scalping technique, you may make 50-100 orders and sell them after minutes to profit from the increasing price. Thus, you rely on high order volume even though your profits for each trade are low. Scalping requires investors to have immense discipline and a strict exit strategy. As the price constantly fluctuates, they have to exit as soon as the price shows an upward trend. If not, the price can go lower, wiping out the small profits made from other Scalping orders.

How does Scalping work?

The stock market technique of Scalping works on the assumption that most stocks would complete the first stage of price movement. However, after the first stage, it becomes tough to ascertain where it will go from there. This is the main idea behind Scalping. It ensures that the investor uses the movement rather than waiting for the stock price to advance further after the initial stage.

The investors who perform Scalping are known as Scalpers, and they believe that it is better to have small profits in several trades than to risk it over a single trade in a day. Even if their profits are smaller and they risk losing on bigger profits, the volume of their trades allows them to earn a considerable amount of profits.

Why is scalping risky?

Scalping is dangerous because the trading style is of a high speed and a high frequency. Decisions have to be made quickly, thereby garnering small profits from slight price movements. The constant attention demanded is due to the fact that slight shifts in price in the time frame of seconds will incur losses.

Scalpers primarily use leverage to boost the gain on small price movements. This also amplifies losses that may occur. Market volatility, unpredictable price movements, and other transaction costs can easily deteriorate profits, making this strategy difficult for a beginner to master.

Scalping requires advanced tools, fast execution, and complete knowledge of the market, as slight miscalculations in this strategy can lead to significant losses. Thus, this approach is high-risk in nature.

How do Scalpers analyse the market before Scalping?

Scalpers use quick and precise analysis methods to gauge short-term market trends and exploit minor price changes. Here’s how they prepare before executing trades:

• Technical Indicators: The technical indicators that include moving averages, Bollinger Bands, and Relative Strength Index (RSI) are the most important to immediate price direction and entry/exit points for scalpers.
• Timeframes: They focus on very short timeframes, like 1-minute or 5-minute charts, in order to closely monitor price fluctuations and capitalize on rapid movements.
• Volume Analysis: Trading volume is critical as it tells the strength of a price movement. Scalpers look for high volume, indicating strong interest in the stock, which can create more predictable price action.
• Level 2 Data: Level 2 quotes display the order book, from which the bid-ask prices are derived, and an immediate impression of supply-demand dynamics is obtained. This gives a short-term support-resistance level.
• News and Economic Events: Real-time news and other events immediately shift the market sentiment. Scalp traders follow reports on economic events and news from companies and the marketplace to predict wild reactions.
• Risk Management: Put tight stop-loss as well as take-profit points, so even small price movements can definitely change against your position.

Difference between Scalping and Day-trading

Although Scalp trading is a part of day trading, it fundamentally differs in style and objective. Here are the differences between Scalping and day-trading:

How can you do Scalp Trading?

Scalp trading involves a focused, fast-paced approach and includes these steps:

• Liquid Market: You should opt for the most liquid markets. That could be the forex or large-cap stocks because they offer easy entry and exit without significant price slippage.
• Platform Setting: Select a platform that executes very quickly and has very advanced charting tools. Set the platform to a short time frame. This could be 1 minute or 5 minutes.
• Define Your Strategy: For example, choose one based on technical indicators that will let you know when to watch for a potential buy or sell signal, using Moving Averages, Bollinger Bands, and the Relative Strength Index, for instance.
• Monitor Your Bid-Ask Spreads: Focus on narrow bid-ask spreads; this will determine profit margins. Tighter spreads make scalp trading even more profitable because each trade is going to cost less.
• Set Entry and Exit Points: Set specific price levels for entering and a small profit target to get out quickly. Scalping makes its money through small, repeated gains, so disciplined entry and exit are necessary.
• Implement Strict Risk Management: use stop-loss orders to limit the loss on each trade and avoid holding positions longer than intended because scalp trading seeks small, fast wins rather than large gains.
• Execute and Monitor Closely: Execute trades as planned and monitor each position closely. Scalping requires constant vigilance to manage rapid price changes effectively.

Advantages of Scalp Trading

• Quick Profit Generation: Scalping generates quick profits because traders make a number of small trades within the course of a day, capitalising on minor price fluctuations.
• Less Exposure to Market Risk: The risk of sudden market reversals or other external events affecting trades is kept at bay because scalp trades are held for an extremely short time, which is in the order of seconds or minutes, allowing traders to be better controlled.
• High Frequency of Opportunities: Scalp traders exploit numerous trading opportunities in a single session, considering the high market liquidity and the frequent fluctuations that characterise short timeframes.
• Scalable Profits: Scalping profits can be scaled with good risk management and strategy as trade frequency is increased. This leads to meaningful returns without large price movements.
• Short-Term Price Moves: These tend to be better forecasted using technical charts and indicators, therefore possibly more precise for people having mastered certain setups during scalping.
• Flexible Across Markets: Scalps are applicable to numerous liquid markets. These may comprise forex, stocks, as well as crypto markets, allowing a trader the means to diversify without creating different strategies.
• Improves Discipline: Scalping requires strict adherence to entry and exit points, which improves a trader’s discipline, decision speed, and focus, all of which can be helpful for other trading styles.

Disadvantages of Scalp Trading

• High Transaction Costs: Scalping involves buying and selling continuously, and in most cases, high fees or commissions are paid, which will eat into profit if the scalping strategy does not yield a significant return.
• Time-Consuming Strategy: Scalping involves continuous monitoring of the price movements and rapid decisions that have to be taken during the trading day, which can be very draining on the mind and extremely demanding for traders with other responsibilities.
• High Stress Level: Scalp trading is high speed and requires instant decision-making, which makes the trading style stressful. Often, pressure leads to stress, which can result in emotional stress that might interfere with judgment and performance.
• Low Margins of Profit: Scalpers must make very thin margins on each trade, so it requires them to accumulate numerous successful trades to generate a serious amount of money. Only a few lost trades are enough to eliminate the profits earned.
• Vulnerability to Slippage and Spread Costs: Scalpers are prone to slippage in highly volatile markets. The execution of trades may be at a slightly different price than intended. The spread costs also lower the profitability, especially in less liquid markets where the bid-ask spread is widened.
• Steep Learning Curve: Successful scalping requires deep knowledge of technical analysis and the ability to act decisively under pressure. Beginners may find it challenging to adapt without thorough experience and training.

Wrapping Up

You may adopt scalp trading as your primary trading strategy. Since there is very low-risk exposure, scalping makes up for the perfect trading tactic to realize the profits without waiting for years or taking the delivery. However, since scalping happens at a very high speed, performing a detailed technical analysis before anything else is always a wise idea.