A day trading technique where an investor buys and sells an individual stock multiple times throughout the same day
Written byCFI Team
What is Scalping?
Scalping is a day trading strategy where an investor buys and sells an individual stock multiple times throughout the same day. It is a popular trading technique that’s been around for a long time and is a common way to take advantage of a daily run up on a stock or sector.
The nickname for traders that employ the scalping strategy is “scalpers.” Scalpers can place anywhere from a few to one hundred-plus trades a day, always attempting to turn a small profit with each individual trade. It is often less risky than other trading strategies and is a relatively simple concept to grasp, which adds to its popularity.
Summary
- Scalping is a day trading technique where an investor buys and sells an individual stock multiple times throughout the same day.
- The goal of a scalper is not to make an enormous profit with each individual trade they make, but rather to make a small profit over many little trades.
- Effective scalpers must be able to read and interpret short-term charts. They must often make decisions based on stock charting that is within 1 to 5-minute intervals.
Scalping Decision Factors
- Research indexes, relevant news sources and examine market trends to develop a key hotlist
- Buy at key points, including but not limited to, quarterly reporting period, breakouts, or market rallies
- Sell quickly and take profits, or exit position if the stock begins to fall
- Set a goal for trades per day that you wish to accomplish based on comfort and experience
The “Little Win” Objective
The goal of a scalper is not to make an enormous profit with each trade they make, but rather to make a small profit over many little trades. It makes the trading style more manageable and sometimes easier to execute under pressure. Often, scalpers will buy and sell the same stock within minutes, rarely holding onto it for long periods throughout the day.
Scalping day traders are often on the hunt for highly volatile stocks – those that are the subject of positive news or perhaps an overall swing in the market. Then, scalpers begin to buy and sell the upswing of the stock, taking their profits many times throughout the day. It helps to avoid the pitfall of not timing the peak properly and being overexposed and failing to take any profits.
Executing an Effective Scalping Strategy
To execute the strategy effectively, a trader must be able to spot trends in the market, anticipate upticks and downswings, and be able to understand the psychology behind a bull and bear market.
Effective scalpers must also be able to read and interpret short-term charts. They must often make decisions based on stock charting that is within 1- to 5-minute intervals. Scalpers look for key indicators such as moving averages and pivot points in the market to quickly determine if they can execute a trade. Scalpers invariably always come across losing trades, but a successful scalping strategy and discipline can help maximize the wins and minimize the losses.
Scalpers must also have liquidity and adequate capital in their portfolio to trade. They must subscribe to generally Level II platforms that show live bids and asks for specific stocks, as well as have an exceptional – generally wired – internet connection. It helps to prevent technical factors from decimating your trading strategy.
If the data you were receiving as a trader had too much latency, it could mean you are acting on outdated technical data and have already missed your window for a buy or exit from a stock. It could make for frustrating losses and missed opportunities.
Scalping: Going Against Traditional Trading Instincts
Traditionally, traders want to hold onto stocks that are rallying, if at least in the short/medium term. Scalping goes against the traditional instinct, and a scalper will sell their position even if the stock is on a large uptick.
The scalper may jump back into the security at a later point that day or week, but they generally have the discipline to exit a stock even if they are experiencing significant gains. Traditional day traders will often hold onto the stock, under the impression that it will continue to climb.
Related Readings
CFI is the official provider of the global certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
- Day Trader
- How To Read Stock Charts
- Market Breadth
- Momentum Investing
- Net Change
- See all capital markets resources
- See all wealth management resources
