What Is Scalping in Trading?

What Is Scalping in Trading?

Let me explain scalping to you directly: it's a trading strategy where you aim to profit from tiny price changes in an asset. As a scalper, you'd be placing anywhere from 10 to a few hundred trades in one day, betting that those small moves are easier to catch than big swings. I call traders like this scalpers, and the key is that many small profits can add up to big gains—if you stick to a strict exit strategy to cut losses short.

Key Takeaways

Here's what you need to grasp right away: scalping means profiting from small price shifts, and it depends on technical tools like candlestick charts and MACD to make it work. Those small profits can grow if you consistently apply an exit strategy to lock in gains and limit losses.

Understanding Scalping

Scalping involves taking larger positions for those small price gains, and you do it all within the day—intraday trading. Your main goal is to buy or sell shares at the bid or ask price, then flip them quickly for a few cents more or less to grab a profit. Holding times are short: seconds, minutes, maybe hours, but you close everything before the market shuts down.

You have to be disciplined and follow your plan closely. Decisions need to be certain, but stay flexible because markets change fast. If a trade goes wrong, fix it quick without letting losses pile up.

Scalping Characteristics

This is a fast-paced game for traders who can move quickly. You need precise timing and execution, often using leverage to amp up profits with more shares in less time—but remember, leverage ramps up risk too.

Focus on small time frames like one-minute or five-minute candlestick charts. Use indicators like stochastic, MACD, and RSI for momentum, plus things like moving averages, Bollinger bands, and pivot points to spot support and resistance.

Your account needs more than $25,000 in equity to dodge the pattern day trader rule, and you'll need margin for short sales.

Scalping Strategies

As a scalper, you might buy low and sell high, or short high and cover low—variations like that. You use Level 2 quotes and time of sales to route orders to liquid market makers or ECNs for fast fills.

The quickest ways are point-and-click via Level 2 or hotkeys for instant orders. It's all about technical analysis and short-term price moves, but with heavy leverage, it's high-risk. Common pitfalls include bad execution, ignoring stop-losses, over-leveraging, late entries or exits, and overtrading. Expect high commissions from all those trades, so a per-share structure helps, especially if you're scaling in and out of positions.

Example of Scalping

Picture this: you're trading ABC stock at $10. You buy a big block, say 50,000 shares, and sell during small price bumps. You might trade in $0.05 increments, racking up small profits that add up because of the volume by day's end.

Is Scalp Trading Illegal?

No, it's not illegal. Buying and selling large volumes for small price moves is fully legal under regulations, but it's risky and demands knowledge and discipline.

Why Is Scalping Risky?

To make money scalping, you handle tons of trades for tiny profits, and the risk-reward on large positions might not appeal to everyone. You could be doing dozens to hundreds of trades daily, all closed same-day, which takes serious time, focus, and constant watching.

Why Do Brokers Not Like Scalping?

Brokers might dislike it because the constant trading stresses their systems. Managing risk gets tough with all those high-volume, rapid trades.

The Bottom Line

Scalping is a specialized intraday approach that isn't for every trader. It demands flexibility and discipline to turn small moves on big orders into profits. If you're considering it, ensure you're experienced or practice first before risking real money.