Scalping Trading: What is Scalp Trading & How Does It Work? | Espresso

Scalping Trading: What is it and How Does Scalping Work?

Stock market investors have just one thing in their minds, i.e., making profits. And to make these profits, every investor follows a different style. Yes, you read it right. As a result, there are various styles of investing in the stock market.

Published on 03 March 2023

Depending on their personalities, risk appetites, and investment objectives, investors need to choose a particular style for investing their money in the stock markets.

For example, some investors believe in investing and holding for the long term, whereas some try to gain an advantage from short-term market fluctuations by engaging in swing trading. Investors with fairly high-risk tolerance even engage in intraday trading, wherein the stocks have to be purchased and sold on the same trading day.

Even for intraday trading, investors use different trading techniques. For example, some investors enter and exit the markets with small profits, and some wait for a relatively long time to make high profits. So again, it’s all about the risk-taking capability and investment objective of the specific investor.

One technique that is commonly used during intraday trading is the scalping trading strategy. If you’ve heard this term for the first time, this article will help you clear the clouds over it. First, let’s discuss what is scalping trading, how it works, and how you can use it to make profits in the stock markets.

What is Scalp Trading?

Scalping trading is a unique style of intraday trading, wherein investors trade in high volumes of shares and exit with very small profits in very short time frames rather than waiting to earn high profits on each trade. Traders who use the scalping trading strategy are known as scalpers.

Scalping trading helps in gaining profits from the slightest of price movements. Scalpers believe in increasing the number of trades to make large profits rather than trying to gain large profits from one or two trades. This style is usually practised by investors who are either relatively new to the share market or don’t want to take too many risks.

Let’s understand scalp trading with the help of an example. Suppose a trader purchased 1000 stocks of ₹100 each. He waited for a few seconds and then sold all his stocks when their market price reached ₹101. This way, he will make a profit of ₹1000 on his trade. Scalping trading is usually done with very stringent exit strategies.

How Does the Scalping Trading Strategy Work?

Now that you know what is scalping trading, let’s understand how it works. Through this technique, traders focus on making short-term profits from the slightest of movements in share prices. This strategy works on the assumption that the stock would complete its first stage of the price movement. However, it’s tough to ascertain its price movement after the first stage.

A scalping trading strategy involves buying or selling securities at a price and then doing the opposite when the price has moved slightly in your direction. Scalping trading works best in highly volatile stocks because they show high fluctuations in short periods.

Scalp Traders believe in gaining profits by increasing the volume of shares and number of trades rather than concentrating on the size of the profits on each trade.

The main premises of scalp trading include:

  • Limited exposure to the market reduces the probability of incurring high losses.
  • It is easy to exit after small price movements rather than waiting for a big movement.
  • Small price movements occur more frequently than big movements. So even when the markets are bearish, small upward movements can occur.

How to Analyse the Market for Scalping?

As an investor, you can rely on two different strategies to analyse the stock markets before investing. These are technical stock analysis and fundamental stock analysis. However, if you want to execute the scalping trading strategy, fundamental stock analysis can be of little help. Hence, you will need to use technical stock analysis by reading trading charts, time frames, etc.

This will help you in speculating the short-term price movements of stocks and take scalping positions accordingly. You can execute several short-term trades to increase your profit margins for the day.

Scalp Trading vs Day Trading

Several investors often get confused between day trading and scalping trading strategies. Although day trading is very similar to scalp trading, these two aren’t the same thing. A day trader uses time frames of one or two hours or even more. They try to maximise their profits by waiting for the trend to reverse.

On the other hand, scalp traders use very short time frames of a few seconds to a few minutes. Therefore, they do not wait for the trend to reverse, but they exit their positions soon after achieving small profits.

Another difference between a day trader and a scalp trader is that while the former executes one or two trades in a single trading day, the latter can execute high volumes of trades daily.

To Conclude

A scalp trading strategy allows you to make high profits by increasing the volume of your shares and trades. However, you may lose the opportunities to make higher gains and incur hefty brokerage charges. Also, you will need to have very stringent exit strategies as a single instance of price movement in the opposite direction can offset all your profits.

Chandresh Khona

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