Have you ever observed price fluctuations and changes over a day for any financial product? Be it for stocks or any derivatives, often, during a trading day, the price of a product goes up and down. And like every other possible financial situation in the stock market, traders use this to make small but quick profits. This technique, as the idea suggests, is called scalping
What exactly is Scalping Trading?
During a trading day, across different periods, the price of a financial product rises and drops. While this isn’t true for all assets, in many cases this comes as a recognizable pattern. And the traders specialised in the scalping trading, use technical and fundamental analysis to track such patterns.
So, the traders use this as a chance to buy and sell high volumes of trades to book this marginal profit. This, because of the large trading volume adds up to huge returns.
How does this technique work?
Whenever the seasoned trader identifies this pattern, they chart out an entry and exit strategy. In simple terms, this means that they decide on the price and volume of the shares they will buy and sell and when. This technique is very much similar to (intra) day trading but at a much shorter time period.
The traders take a long (holding) position by buying low and then selling at a higher price. Alternatively, they will short (releasing) position by selling at a higher price and then buying at a lower one. Each time they will execute these trades in high trading volumes and perform this multiple times during a trading day.
Important considerations and risks
The technique sounds way too lucrative and easy to achieve, but this trading method comes with its own set of risks. As it is said in the market, there is no return without risk. And if this strategy was robust, anyone and everyone would try this.
When executing such strategies, the traders often have to observe stocks for sprints of observation periods and run fundamental analyses. Moreover, there is no golden rule behind this strategy and there is always a high risk of losing the scalping position. Also, with each trade, whether buying or selling, there is an associated trading fee to offset.
Many large trading houses use high-performance automated processes to perform these analyses. Furthermore, they expand this to a niche system of algorithmic trading that uses specialised formulations for specific products. There are some trading apps that can mimic these methods.
Types of Scalping
With scalping trading, there are 3 recognised methods that traders often use to generate returns
- High Volume Trading – where traders deal in extremely high volumes of shares for each trade. However, this is only possible for stocks that are extremely volatile and are traded frequently on the exchange,
- Breakout Trading – where the traders enter into a position at the beginning of a breakout cycle and wait until the exit signal (indicator) is triggered before releasing the position.
- Spread Trading – where the traders try to leverage the difference by simultaneously buying and selling the assets at different prices. However, this strategy is suited only for stable markets and assets with greater liquidity.