Scalping

Quick definition

Scalping is a short-term trading strategy with strict rules that capitalise on small price changes.

Key details

• Scalping is an active trading strategy deployed by traders looking to take advantage of small price movements in the market. 
• Scalping is an ideal trading strategy for volatile and liquid markets as it makes it easy to open and close positions at desired price levels.
• Some of the best securities to trade include gold, stocks of blue-chip companies, and penny stocks. Currency pairs such as EUR/USD, GBP/USD, and USD/JPY also come with ideal price movements worth scalping.

What is scalping?

Scalping is an active trading strategy deployed by traders looking to take advantage of small price movements in the market. Scalpers open and hold positions for short periods while relying on strict exit strategies.

Once a position is opened, a trader will hold the trade as long as it is working in his favour. Conversely, the trader would close the position at the slightest move that results in losses.

The idea is to avoid one major loss eliminating all the gains accrued over a long period. Unlike day traders or position traders, scalpers don’t look to exploit large price moves. Instead, they focus on small price movements.

Scalping technical analysis

Scalpers are essentially technical analysis traders as opposed to fundamental traders, as they focus on price movements rather than what causes the price to move.

Such traders rely on historical price information to try to predict securities’ future movements. However, scalpers may also trade news or events that might cause the price to move drastically from time to time.

Technical analysis in scalping can either be discretionary or system-based. Discretionary scalpers, in this case, strive to make trading decisions in real time. System scalpers try to follow a proven scalping decision without making individual trading decisions.

Scalping and low timeframes

The fact that scalping seeks to take advantage of the slightest price movements sees scalpers rely on shorter periods for trading. Scalpers use one-minute charts to make trading decisions.

Each price bar, in this case, represents one minute, allowing the traders to place zero to 100 trades on a single day.

In contrast, day traders use five-minute charts and make four to five trades a day, each held for a maximum of 30 minutes.

The psychology of a scalper

A scalping trading strategy is best suited for a specific trading personality. The strategy works best with self-disciplined traders who can follow their trading strategy strictly. The ability to make decisions in real time without hesitation is essential if one is to enter and exit positions with ease.

The trading strategy works best with traders who like fast trading and excitement, as well as traders who do not mind being focused on charts for several hours at a time.

The strategy also works best with impatient traders who do not like to wait for long trades as well as those with fast fingers able to enter trades as soon as they detect a pattern.

Conversely, scalping is not an ideal trading strategy for traders who get stressed about fast-moving markets. The strategy also does not work with traders inclined to make fewer trades with higher profit margins.

What to consider when scalping

Scalping does not work with all markets. The strategy works best with liquid securities as well as currency pairs of some of the biggest economies in the world.

Some of the best securities to trade include gold, stocks of blue-chip companies, and penny stocks. Currency pairs such as EUR/USD, GBP/USD, and USD/JPY also come with ideal price movements worth scalping.

While scalping, you also want to ensure that trading spreads are as tight as possible to be able to enter the market frequently and at the right price.

The scalping trading strategy also works best during the busiest times of the day. Some of the best times to trade liquid assets are when the European and U.S. markets are open.