It is a short term trading strategy that focuses on making profits from the volume of trades rather than emphasising the gains made on each trade. Here, we will talk about scalp trading and how we can use scalping to make a bigger profit through many small profits.
How does it work?
The traders involved in scalp trading think that it is a more straightforward trading strategy and is less risky, given that the volatility of the market persists. Traders aim to make profits from small movements in prices rather than being dependent o the larger movements. This process involves creating trading windows that are tighter concerning the timeframe and price movements.
Scalping does come with an opportunity to make gains, and it requires a lot of discipline. Instead, traders involved in scalping should get out of the trade when the target price receives a hit. They do not wait for the prices to move further so that they can earn more and more.
The same strategy is applied while exiting a trade when a price hits a pre-determined loss level. They do not wait to see if the trade is about to make a 180 in their favour. For the people, who cannot make firm decisions regarding the trade’s entry and exit, scalping is not for them.
Scalping: the right market
Traders involved in scalping rely on fundamental analysis rather than technical analysis. In technical analysis, the history of the underlying company is studied with the help of trading tools, charts being the most common tool.
With the information of previous price movements, the traders can observe daily sales and time patterns and predict how the security is about to move.
Scalpers also set up resistance and support levels which are based on the moving averages, and further use them to create efficient entry and exit points in the trade. On the other hand, fundamental analysis involves studying the company’s financial statements and some more tools to determine the company’s intrinsic value.
Understanding the company’s actual value can help traders manage their risks and exit long positions at the correct time.
When a trader is looking at long term investing, day trading seems more suitable, while technical analysis is more beneficial for short-term trading strategies like scalping.
Scalpers trade on almost anything, ranging from the news that impacts a company immediately after it is released. In other cases, scalpers use fundamental ratios too, but they are majorly dependent on technical tools such as charts.
Charts tell what has already happened, and because of this, they lose their value as time increases. What happened four hours ago might be of no use for a scalper at present. This phenomenon makes technical analysis more suitable for scalping since it is short-termed in nature.
Scalpers can also be of two types. They can either be systematic traders/scalpers or discretionary traders/scalpers. Systematic scalpers are dependent on the instinct that they possess and create computer programs that help in the automation of scalped trades.
These trades do not require any individual to make trading decisions. When a program finds it profitable, it will make the trade without waiting for the trader to look at the trade details.
This type of strategy can introduce a bias in the trading process which further introduces trading risks. Discretionary scalping can tempt a trader to make a wrong decision, or the trader can fail in making the appropriate decision at the correct time.
Day trading and scalp trading: The difference
Scalping and day trading look like they are the same concepts, but they are not necessarily the same thing. Scalping can be a strategy that can use in day trading, but not all day trading strategies fall under scalping.
You can hold a day trading position for as long as the market is open. The position can be opened right when the market is open at 9:30 AM, and then it can keep it as long as the market closes until 4 PM. Theoretically speaking, such a trade will still be considered a day trade.
It doesn’t matter for how long was the position open. The trade was executed when the trading day ended. Hence, making it a day trade. A scalper will not hold a position for more than a few minutes; it is usually under seconds that a position is opened and closed. Since they are looking at tiny timeframes to make profits, scalpers mostly conduct automated trades, helped by computer programs. Day traders may or may not opt to use such programs, depending on their own will.
Scalping can be of different types; one of them is referred to as market-making. Here, the scalper tries to make profits based on spreads by posting an offer for a stock with a bid. This strategy only works when immobile stocks are used. These stocks are the ones whose prices rarely move, and even if they do, the movement is not very large.
It is tough to succeed in such a trading strategy because the trader has to be in the ring with the people who make markets since bids and offers both are at stake. And since it is a scalping strategy, the profits are minimal that an unfair trade can debunk a lot of correct trades.
In the second type of scalp trading, scalping is done when a large number of shares are purchased to make again on a tiny price movement. A trader trading like this will enter a trade with a lot of shares, probably thousands if not hundreds and then wait for the pride to move.
This price movement is generally measured in cents. When a small pierce movement happens, and the scalper already possesses a lot of stocks, his personal profit amounts to a lot of money.
Tips for newbie scalpers
An art of efficient order execution is a must for any trader. A delayed order makes sure that the wallet is empty, and whatever earned little profit is now a total waste of time and money. The order’s execution has to be accurate, also because the profit margin on each trade is limited.
Costs, frequency and the right broker
The cost has to be kept in mind before making any trade. Since scalping involves a lot of buying and selling of trades in a single day, commission per trade can be costly. To avoid this, it is imperative to find the right broker. The broker should ask for a minimum commission and should have direct access to the market. To keep things easy for you, we present you with the leading online broker, HFTrading. HFtrading has been providing its services since its inception as a registered broker in 2019.
Since then,l millions of people have achieved their trading targets with the help of HFTrading. The broker majorly works around New Zealand and Australia and is regulated by both countries’ regulatory authorities.
Due to the government’s presence and involvement in each trade, the broker can be considered safe and not a scam. The financial service provider gives its users a choice of three main accounts: silver, gold, and platinum.
Each account is engineered, keeping the level of expertise of the trader in mind. The broker charges no commission on each trade but rather earns via variable spreads.
It also offers leverage that is variable on each account.
The correct trading
If a trader can spot a trend or a momentum, it can help enter and exit the trades efficiently, and they can even repeat the same pattern for a number of trades since the market is seeing a trend. A newbie scalper needs to understand the pulse of the market, and once that is known, a shift to trend or momentum trading can help create larger profits.
Some scalpers also tend to go short on the market, but new traders are not advised to do so.
Scalp Trading: The Final thought
Trading is a risky business. The higher you go with risk, the higher is the reward. Some brokers advertise the terms like leverage, margin trading and innocent investors are lured into these. Although these are legitimate trading terms but the mathematics they cover is also essential to understand.
Always remember, the right math will put food on the table, not the instinct.
Frequently asked questions:
What role does the broker play in making profits?
If the broker is asking for no commission, provides study materials and the correct signals, it is a great broker. To answer the question, the broker acts like a kitchen does when it comes to shaping up. The body is 80% about the kitchen and 20% about the gym. Similarly, The right broker can do wonders to a trader, and the wrong one can wipe the wallet out.
Can I lose my money in scalp trading?
Of course, you can. We recommend you to trade with the money you can afford to lose. Please do not use the money to put food on the table and make trades. The odds of making the right trade are relatively less when someone begins trading.