Scalping is a form of trading which aims to put on short-term positions and take profits after small price changes.
Scalpers look to trade intra-day momentum patterns, trading with the direction of the market and applying tight stop losses to positions. The ratio between the target price and stop loss will be lower than for a lot of other trading strategies. If the risk-return ratio on each Scalping trade is 1:1 then achieving profits for the day will be a result of picking more winning trades than losing ones. Other strategies with greater reward to risk ratios, rely on you picking a smaller percentage of winning trades but these go on to make relatively large profits.
Trading volumes will fluctuate with market conditions but trading over one hundred times a day would be typical. It can also be the case that the majority, or even all, trades occur within 30-60 minutes of the market opening to take advantage of peak trade volumes at that time of day.
All the usual Risk Factors apply, especially Gapping Risk but some risks are particularly relevant to the day-to-day management of Scalping trades.
As the intention of Scalping is to enter and exit a trade within a certain time frame trigger points indicating trading opportunities need to factor in times and markets where a trader might get stuck.
For example, entering into a scalping trade that may require up to ten minutes to reach target price is an issue if the instrument traded is an equity and the market is closing in five minutes time.
Equally, market volatility is not constant and is particularly subject to dropping off in the run-up to major news announcements. Accordingly, traders using a Scalping trading strategy will aim to be flat of any positions around news and market data releases.
You’ll want to use a Trading Platform that has reliable, high-speed connectivity to your place of trading. With the aim of the game being to pick more winners than losers, you don’t want to suffer periods of being unable to connect to your broker to execute. Its sound advice to try Scalping using a broker’s Demo account and to monitor the reliability and speed of your connection. It might even be that one platform is better for you for trading Forex and another better for trading Commodities. Also check the bid/offer Spread across brokers as a tight spread is crucial in Scalping trades.
Scalping can be applied to any instrument or market that has the right trading volumes and price volatility.
Bulls and Bears
Upward and downward market moves tend to be different in kind. Upward markets are associated with more gradual price movement; the commonly held perception is that this is what they naturally do. Downward markets tend to be more dramatic, sell-offs can look like price is falling off the edge of a cliff. The different type of market momentum means that Scalping in Bullish and Bearish markets is quite a different experience.
Scalping is fast paced, and despite Gapping Risk being an issue the perceived comfort from tight stop losses and high trade turnover means it appeals to a lot of traders.