People prefer different trading styles in the financial markets, and they all come with their own advantages and disadvantages. Among the profitable trading styles, scalping is a popular option, and it’s suitable for both beginners and experienced traders.
If you are a beginner and don’t know what scalping in trading means, you have come to the right place. In this article, we will discuss the important details about scalping and the steps you will need to follow to start scalping the right way. Firstly, let’s discuss what scalping is.
What Is Scalping?
Scalping in trading is a style that allows traders to capitalize on short-term price movements. Scalpers buy and sell individual stocks dozens to hundreds of times a day and aim to make small profits per trade. They don’t try to make a significant profit in a single trade, but the small profits they make usually add up over a period. In simple words, it’s a high-frequency operation.
Patience, the ability to handle stress, quick learning, sticking to the plan, and doing proper risk management are the most important qualities of a scalper. Now that you know what scalping is, let’s discuss how to become a scalper.
Scalping in Trading: How to Get Started?
Build your trading fund
Scalpers usually execute dozens to hundreds of trades each day, and it’s important for them to build a trading fund. If you enter the market without a trading fund, you may end up risking more money than you can afford to lose.
To be safe, you should add about 2%-5% of your monthly income to your trading account. You can add more money to your account each month, and you can also reinvest your profit.
Choose the right platform for scalping
Fast execution, competitive trading fees, advanced charts, a good user interface, and risk management tools are important for scalpers. They should keep these factors in mind when choosing a platform. Once you find a suitable option, create a live trading account and fund it to start buying and selling the desired stocks.
Choose a suitable trading strategy
Traders have many scalping strategies to choose from, and they should pick an option that suits their style, skills, and requirements. These are some of the best strategies for scalpers:
High-volume trading
To do high-volume trading, you will have to buy a large number of shares and sell them after a small price movement to book your profit. Even if the price increases only a few cents, you can make a decent profit by trading thousands of shares. Liquidity is an important factor for traders following this strategy.
Pullback trading
Pullbacks can provide many opportunities to scalpers. Traders following this strategy have to find an entry point during a pullback and ride the original trend until the next pullback or target price.
Breakout trading
Breakout trading can be an effective strategy for scalpers. To execute it correctly, you will have to look for breakouts, buy at the beginning of a breakout, and ride the trend until the first exit signal or target price.
Decide what to buy
After opening a live trading account, you should decide what to buy. You will need to conduct research and pick the right stocks based on your trading strategy, news, market trends, and other important factors. Liquidity and volume should always be on the priority list of scalpers.
Have an exit strategy
You should always have an exit strategy when you buy a stock, and you should stick to it. If you trade without a target price, you can get carried away, and your profit can turn into a loss, as pullbacks and reversals are a big part of the market.
Do proper risk management
Things won’t always go your way, so it’s important to do proper risk management to avoid huge losses. You should know how to make full use of stop-loss, stop-limit, and other risk management tools. With the right tools, you can automate your entries and exits.
Monitor and close your position
Scalpers should always monitor their positions because news and several other factors can lead to a price change. Once the stock hits the target price, you should close your position and book the profit.
These are the steps you will need to follow to start scalping. Scalping in trading is easy, but you will need a good strategy and execute it correctly to make a profit. Now, let’s discuss the advantages and disadvantages of scalping.
Advantages of Scalping
No overnight risks
Scalpers execute multiple trades every day, but they don’t hold positions overnight. They close their positions before the end of a trading day and eliminate overnight and weekend market risks. It means their profits won’t disappear overnight or over the weekend in the case of a financial market crisis.
Scalpers don’t have to worry about market conditions
Many investors and long-term traders panic during bad market conditions. Falling stock prices keep them from sleeping at night, but scalpers don’t have to worry about such issues, as long-term price movements don’t concern them. They can find many trading opportunities throughout the economic cycle as they try to capitalize on short-term price movements.
Money doesn’t get stuck in one asset
You can find many stocks to trade in the stock market, but if you get your money stuck in one asset, you could miss out on many opportunities. If you hold a stock and its price falls significantly, you will have to sell it and book a loss or keep holding it till the price increases. Scalpers don’t face such issues, as they don’t hold stocks for long enough to allow major downtrends to affect them.
Self-development
You can learn a lot of things in your journey as a scalper. Scalping will help you understand the market nature, trends, inputs, chart analysis, and other important things way better than other trading strategies or styles.
Since you will have to invest a lot of time every day, you’ll understand how stock prices react to the news, economic cycles, and other major factors. Once you master scalping, long-term investments and other forms of trading will look much simpler.
Scalpers can make profits fast
Every trader and investor enters the market to make money. Scalping allows traders to make profits quickly compared to some other trading styles, as traders don’t have to wait for extended periods to book their profits. However, the amount of money they make in trading depends on the amount of money they risk, price targets, and several other factors.
Disadvantages of Scalping
Trade commissions
Trade commissions are the biggest enemy of a scalper. Since most scalpers make dozens of trades every day, even a small trading fee of $5 can wipe out their profits. As a scalper, you should make the required calculations before executing a trade. If the trading commission is more than 50% of your profit, you need to change your strategy.
High risk
Scalpers have to make quick decisions, as a small delay can result in a loss. Sometimes a delay of just a few seconds can eat away a significant portion of a trader's profit. In some cases, delays are unavoidable, and scalpers suffer in these situations. If the internet speed isn’t up to the mark or the trading platform goes under maintenance, traders with open positions could suffer.
Market noise
Market noise doesn’t concern long-term investors, as rumors usually don’t affect an asset’s long-term price movement. However, things are different for scalpers and day traders. A rumor or bad news can lead to a short-term downward movement, and scalpers with open positions may have to book a loss. Nevertheless, they can also find new entry points in such volatile situations and make even bigger profits.
Stress
Scalping is a demanding profession, and full-time traders lead a busy lifestyle. They must be good at handling stress, as they execute multiple trades each day, and not all of them go their way. Their profit per trade is also usually small, so they have to stay patient to end up on the right side.
Now that you’re clear about the advantages and disadvantages of scalping in trading, you must be wondering if it’s a profitable option or not.
Is Scalping Profitable?
Scalping is a popular trading strategy for a reason, and it can undoubtedly be profitable. To make a profit as a scalper, you must do proper risk management and have a solid strategy. Without proper risk management, a single losing trade can blow away your profit.
Scalpers usually find many opportunities throughout the day, and if they identify the right entry point and stick to their exit strategy, they will likely make a profit. Among profitable trading styles and strategies, options trading is also a popular option. If you are also interested in options trading but aren’t able to invest the time it demands or don’t know how to start, getting an options-picking service can be a wise decision.
FoolProof has a team of professional analysts who have 25+ years of trading experience. It’s a popular, trustworthy, and reliable option. You can get the subscription without worrying about your budget, as it’s fairly priced. You can also get a 14-day free trial to check the quality they offer.
As a member, you can expect at least three trade alerts per week, guidance, and a full trade plan. FoolProof’s customer support is also excellent, and it also offers a 200% refund guarantee. These features make it a must-have service for options traders.
Conclusion
We hope you liked this article and got clarity on all your doubts about scalping. Scalping in trading can be very profitable if done correctly. However, scalpers can also lose money if they start trading without a clue.
You must have a solid strategy, defined entry and exit points, a risk management plan, and patience to become a successful scalper. If you choose scalping as your primary trading strategy, it won’t be easy to combine it with a 9 to 5 job, as you will have to spend a lot of time and effort on research and trade execution. But if you choose it as your secondary strategy, you can easily combine it with other trading styles or jobs.
If you have read this article carefully, it will be easy for you to make the right plan and choose the right option.