Scalping is a trading method that aims to benefit from tiny price swings in a stock. Traders that use this method conduct anywhere from 5 to a few hundred transactions in a single day, believing that little price movements in stocks are easier to detect than huge ones; these traders are known as scalpers. If a tight exit strategy is utilized to avoid huge losses, many little earnings can readily compound into large rewards.
Scalping employs bigger position sizes to achieve smaller price gains in the shortest amount of time. It is done throughout the day. The basic purpose is to purchase or sell a large number of shares at the bid (or ask) price and then swiftly sell them for a profit a few pennies higher or lower. The holding durations can range from seconds to minutes, and in some circumstances up to many hours. The position is closed before the end of the complete market trading session, which might go until 8 p.m. EST.
Characteristics of Scalping
Scalping is a fast-paced pastime for quick traders. It necessitates precise timing and execution. Scalpers employ day trading purchasing power of four to one margin to maximize earnings with the most shares in the shortest period of holding time. This necessitates concentrating on smaller time frame interval charts, such as one-minute and five-minute candlestick charts. Momentum indicators such as stochastic, moving average convergence divergence (MACD), and the relative strength index (RSI) is widely employed. Moving averages, Bollinger bands, and pivot points on price charts are utilized as reference points for price support and resistance levels.
To prevent a pattern day trader (PDT) regulation violation, account equity must be more than the minimum of $20,000. To conduct short-sale deals, the margin is necessary.
Scalpers purchase low and sell high, buy high and sell higher, or short high and cover low. They often use Level 2 and time of sales windows to route orders to the most liquid market makers and ECNs for immediate execution. The quickest techniques for the quickest order fills include point-and-click style execution through the Level 2 window or pre-programmed hotkeys. Scalping is only focused on technical analysis and price changes in the short term. Scalping is considered a high-risk trading method due to the excessive usage of leverage.
Scalpers frequently make blunders such as bad execution, poor strategy, failing to take stop-losses, over-leveraging, late entrances, late exits, and overtrading. Because of the increased volume of transactions, scaling creates expensive fees. Scalpers benefit from a per-share commission price system, especially those that scale smaller shares in and out of positions.
The Psychology of Scalping
Scalpers must be disciplined and adhere strictly to their trading schedule. Any decision that must be taken must be made with certainty. However, scalpers must be highly adaptable since market circumstances are always changing, and if a deal does not go as planned, they must correct the situation as soon as possible without suffering too much damage.