What you need to know about Scalping
Scalping is a popular fast-paced trading approach commonly utilised by day traders. A scalper
usually attempts to make gains from small price movements in financial markets. The
primary objective is to purchase or sell a number of shares at the bid or ask price and then
swiftly sell them at a slightly higher or lower price to make a profit. In other words, the
scalper seeks a narrower spread.
Using a scalping strategy, the trader will look to enter and exit a high volume of positions
within a trading day, holding onto trades for seconds, or at most minutes. This is why scalping
requires a distinct mindset in comparison to other trading strategies, with a focus on
increasing the number of winning trades rather than the size of each win.
The core principles of scalping include:
- Reduced exposure time: Shorter trade duration tends to limit the trader’s risk and
reduces the chance of the market moving against the trade. - Ease of small gains: Smaller trades are typically easier to achieve.
- Frequency of small moves: Small market movements are more common than larger
ones, allowing traders to generate revenue even during quiet market periods.
Other key features of scalping:
1. Consistency
Under normal market conditions, scalping tends to be consistent, allowing for steady profits
due to the relative stability of bid and offer prices. Scalpers usually set sell orders slightly
above the bid price or buy orders just below the offer price to swiftly close their positions
with a small profit.
2. Short duration of open positions
The short duration of active trades significantly reduces the trader’s risk, as market exposure
is minimal. If the trader is disciplined in swiftly accepting any potential losses and moving on,
the risk can be further minimised.
3. Narrow market spreads
An advantage of the scalping strategy is the ability to exploit narrow market spreads,
enabling profitability even in low-volatility markets.
The downside to scalping
A downside to scalping is the need for a substantial capital commitment to achieve a
worthwhile profit. Scalpers often rely heavily on expert advisors (EAs) to increase the
number of trades executed within a trading session.