Scalp definition

Scalp, or scalping, is a trading strategy that focuses on opening and closing a position quickly. This is in the hopes of profiting from any minor price movements. Instead of buying and holding an asset for a long period of time, these traders make shorter trades, which may last only seconds or minutes. Traders who use this trading style are known as scalpers.

The theory behind scalping is that smaller price moves tend to be more frequent, and so are in theory easier to capture than larger ones. By quickly entering and exiting a trade, the smaller gains can compound into large gains and add up. Scalping is performed intraday, meaning that positions are closed before the end of the trading session.

Scalpers may rely on technical analysis to scalp. This includes the use of candlestick charts and momentum indicators to quickly find the best trading opportunities available in the market.

Scalping strategies

There are three main strategies scalpers use:

High-volume trading: Here, scalpers buy in large quantities to make the most of a small move. This approach requires them to have enough liquidity for the full position to be opened and closed with a tight spread.

Breakout trading: This strategy involves looking for breakouts, and then riding the market move until the first exit signal.

Trading the spread: This strategy is when scalpers look to profit on the spread by simultaneously buying and selling an asset. It relies on a stable market that is still popular to have deep liquidity.

Advantages of scalping

If a trader can implement a strict exit strategy, scalping can be very profitable, as traders can leverage small changes in the price of an asset that may not necessarily reflect its overall trend. Scalping is also a non-directional strategy, meaning that markets do not need to be moving in a certain direction for scalpers to use this method – it works whether the markets are going up or down.

Scalping strategies can also be easily automated in the trading system that is being used because scalping tends to be based on a series of technical criteria.

Limitations of scalping

There is no limit to how many trades a scalper can make in a day. However, opening a high number of trades may result in high transaction costs for traders, as many brokers charge traders a small fee each time a trader enters and exits the market. In this case, traders must generate substantial overall profit to offset transaction fees. Scalping can also be very time-consuming, as scalpers enter and exit markets for only seconds to minutes at a time, many times a day. Therefore, it may not be suitable for those who prefer a more hands-off approach to trading.

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