Stock scalping is a short-term trading style that requires traders to enter and exit the stock market quickly. Traders find opportunities in the markets in short time spans – their positions can last from a few seconds to a few minutes – and they make small profits from incremental changes in stock prices by relying on one-minute stock charts.
This article will explain what stock scalping is, why traders do it, and what you should consider if you are planning on taking up this short-term trading style.
The right conditions for stock scalping
Traders may scalp stocks as part of their main trading style. They may also scalp as a supplementary style alongside regular, ‘traditional’ trading within a bigger timeframe. However, one thing is for sure: traders succeed only in the right market conditions.
As mentioned, scalping occurs when traders enter and exit the stock market anywhere from dozens to hundreds of times within one trading day, finding and seizing opportunities as they arise. This means markets must have a level of volatility and liquidity that can allow traders to profit. This usually limits the types of stocks traders can scalp, and many like to stick to blue-chip companies with a high active trading volume.
Many traders like to avoid volatility in trading. However, when executing short-term styles, the good thing is that volatility is not inherently bad. It can, for one, make it easier for traders to find opportunities in markets. Traders also never leave their positions open overnight. Therefore, stock prices fluctuating when the market is closed is not a concern for scalpers.
An example of stock scalping
One of the most common examples of stock scalping is a trader buying a substantial number of shares, waiting for small increases in stock price, and closing the position as soon as there is movement in the market and the position reaches profitability.
For example, a trader enters an order to buy 1,000 shares of a hot stock at the price of $10 with the expectation that the market price will increase. The trader then monitors the 1-minute chart closely, and once the stock price does appreciate and reaches a higher price – say, $10.03 – the trader sells and makes a profit of the $0.03 price movement, which, multiplied by the number of shares they hold, becomes $0.03 x 1,000 = $30.
Benefits of scalping stocks
If you are interested in short-term stock trading, scalping can bring a lot of benefits. Below, we examine some of the most common ones.
Potential for profit
When it comes to scalping, traders tend to find small profits and make money from accumulating these small profits. This is a great way for traders to slowly build up their wealth, and it reduces the risk they take with each trade with an increased exposure to the market.
Traders will also find plenty of opportunities as the stock market tends to move in small increments throughout the day, compared to traders who wait for large changes.
No overnight charges
As scalpers do not leave their positions overnight, another noticeable benefit is that they do not risk incurring overnight charges when they trade. This is a great way for reduce the overall cost of trading.
No need to conduct complex analysis techniques
If you are a stock trader who does not like conducting fundamental analysis, you may find scalping to be a favourable method. This is because all trades take place in an exceedingly small timeframe, there is simply no need to consider the wider economy or other fundamentals.
At times, traders may also get away with not needing to conduct much technical analysis. This is because scalping requires quick reactions and traders respond to stock market changes by the minute. This leaves very little room for in-depth analysis in day-to-day trading activities.
Considerations when taking up scalping
Despite the benefits of scalping as a trading method, it is also wise to weigh several considerations before you get started. These considerations include fees, your available time for trading, the liquidity of a stock, and more.
Transaction fees
Scalping requires traders to enter and exit markets many times a day, and depending on how fast-moving your assets are, you may only be in markets for a minute each time. Due to this, you should be aware of any transactions you incur from trading this frequently.
There are brokers you can work with that have different transaction fee structures for high-frequency traders. For example, they may offer a sliding scale commission or lower spreads for certain instruments. Do check if your broker offers any of these incentives, as it can help you keep your trading costs to a minimum. This can help you make the most of your trades and keep as much of your profits as possible.
Time available for scalping
Next, you should consider if you will have time to scalp, as this is a trading method that is relatively tedious and requires monitoring markets closely throughout the day. Traders may also need to make up to hundreds of trades per day to accumulate their profits, as scalpers do not typically make big gains from any single trade. If you have a full-time job or caretaking duties, you may find it difficult to scalp and make a steady income from the method. However, you are still very welcome to scalp to supplement your primary source of income.
Stock price volatility
Successful scalping requires choosing stocks with prices that carry some volatility and are highly liquid. This is because scalpers profit from incremental changes throughout the day, and this is dependent on how much and often a stock price fluctuates. A scalper simply cannot find opportunities to profit in an illiquid market. Therefore, when choosing a stock to scalp, you must consider its daily trading volume.
Execution speed
When you are planning on scalping stocks, you must master efficient order execution. If you decide to trade manually, you need to ensure you have fast Internet connectivity and are familiar with the platform enough to avoid slippage. Even a small delay in response time can lead to losses, which is why many scalpers like to automate their trades with algorithmic trading tools.
Your endurance and capacity for quick-thinking
Finally, if you are thinking of scalping, consider your personality and preferred trading methods. Are you someone who likes to jump on new opportunities as they arise? Or are you someone who prefers planning out their trades and weighing the pros and cons before opening a position? On top of that, being nimble is not the be-all-end-all in scalping. If you are the spontaneous sort, will you be able to incorporate speed and precision into your trading?
The bottom line
Stock scalping can be a lucrative trading method when done right, and there are many scalpers who have managed to find and seize opportunities in volatile and highly liquid markets. However, before you start scalping, you should still make sure you have a trading direction and know what your goals are. Just because you jump in and out of markets quickly does not mean you do it aimlessly. You should also remember that there are risks involved with all types of trading, so you should never trade more than you can afford to lose.
