Scalping, a subset of day trading, is a strategy that involves frequent entry and exit in a trade in order to realize small but multiple gains from the intra-day movement during the trading session. Traders who employ the scalping technique are called scalpers. Scalpers indulge in numerous trades during a day’s trading session with each position held for a very short span of time, ranging from few seconds to minutes. Scalping is not only used with stocks, but also with futures and forex.
With low barriers to entry in the trading world, the number of people trying their hands at day trading and related strategies such as scalping has increased. Scalping is not the best trading strategy for rookies as it involves fast decision-making, constant monitoring of positions, and frequent turnover. However, if you are keen to try your skill set at scalping, here is what you need to know.
The first thing a novice scalper needs to remember is that the aim of scalping is to pocket small profits over a short holding position. The target profit is usually very small. Say hypothetically, a scalper may buy a stock at $30.75 and sell at $30.90, and again pick it at 30.80, gaining around in few cents with every successful trade. Scalpers commonly look to take advantage of a stock’s bid-ask spread.
A novice needs to master the art of efficient order execution. This is because a delayed or bad order can wipe out what little profit was earned and even result in a loss. Since the profit margin per trade is limited, the order execution has to be accurate. This requires supporting systems such as the Direct Access Trading (DAT) and Level 2 quotations.
Frequency & Costs
A novice scalper has to make sure that he keeps costs in mind while making trades. Scalping involves numerous trades, as many as hundreds during a trading session. Frequent buying and selling is bound to cost in terms of commissions, which can shrink the profit. This makes the decision to choose the right online broker crucial. The broker should not only provide the requisites like direct access to markets but also competitive commissions. And remember, not all brokers allow scalping.
Spotting the trend and momentum comes in handy for a scalper, who can even enter and exit briefly to repeat a pattern. A novice needs to understand the market pulse and once the scalper has identified that, trend trading and momentum trading can help achieve more profitable trades. Another strategy used by scalpers is counter-trend. However, beginners should avoid using this strategy and stick to trading with the trend.
Beginners usually are more comfortable with trading on the buy side and should stick to that before they gain sufficient confidence and expertise to handle the short side. However, scalpers eventually must balance long and short trades for the best results.
Novices should equip themselves with basics of technical analysis to combat increasing competition in the intra-day world. This is especially relevant in today’s markets dominated by high frequency trading, as well as the increasing use of dark pools
Scalping as a technique requires frequent entry and exit within a short timeframe. Such a strategy can only be successfully implemented when orders can be filled, and this depends on liquidity levels. High-volume trades offer much-needed liquidity.
As a rule, its best to close all positions during a day’s trading session and not carry them to the next day. Scalping is based on small opportunities that exist in the market, and a scalper should not deviate from the basic principle of holding a position for a short time period.
As a newcomer to scalping, make sure that this style suits your personality. It requires traders to follow a disciplined approach, make quick decisions, spot opportunities, and constantly monitor the screen. Traders who are impatient and feel gratified by picking small successful trades are perfect for scalping.
Prableen Bajpai can be contacted via Investopedia