Scalping is a short-term trading strategy that consists of opening and closing trades in seconds or minutes within the same day. It is the most aggressive version of day trading since a scalper usually makes more operations than the day trader during a trading session.
The operation of a scalper consists of carrying out many functions during the session, obtaining small profits, to accumulate sure profitability at the end of the day. The time scale with which a scalper operates is 1 minute, although 5-minute charts can sometimes use. A higher time scale will be more focused on day trading than scalping.
The most suitable environment for scalping finds in markets with high liquidity. We see the SP500, DAX30, Dow Jones, or the EUR/USD.
To make money scalping, it is imperative to know the main characteristics of this trading style. Factors such as market liquidity, broker commissions and leverage are crucial elements that we must consider. We discuss them below.
The scalper’s profile must meet particular characteristics. We list them below:
Liquidity: we are interested in operating in markets with high liquidity to avoid problems with executing broker orders. Some of the most liquid markets are FOREX, SP500 or DAX30.
Spread: it is convenient to operate in markets with small spreads. Conversely, scalping in a market with high spaces will limit our ability to make a profit.
Volatility: we must look for those markets with inevitable volatility to operate, where we find micro-trends that allow us to follow the price. A very volatile market will often make us hit the stop loss, while in a market with low volatility, we will not find the right environment to trade small trends.
Leverage: Leverage is a widely used tool in scalping since it allows us to multiply the invested capital and, therefore, obtain very high returns.
However, leverage is a risk multiplier, so it is essential to do good risk management, stop loss, and trade with caution if we use these tools. The most used product to leverage our operations is CFDs.
Commissions: In scalping, trading with a broker with low commissions is more critical than any investment type. The more trading operations we make, the more importance we should give to finding a broker that charges low commissions and offers us the rest of the services we need to operate. As a reference, a good broker for day trading is also usually good for scalping.
Scalping utilizes larger place sizes for smaller price gains in a minor holding period. It is performed intraday. The main objective is to buy or sell several shares at the bid—or ask—price and then quickly sell them a few cents higher or lower for a profit. The investment times can vary from seconds to minutes and up to several hours. The place is closed before the end of the entire marketplace trading session, which can make it bigger to 8 p.m. EST.
Scalping is a fast-paced action for nimble traders. It requires precision timing and execution. Scalpers use day trade buying power of four to one edge to exploit profits with the most shares in the shortest holding time. This requires focusing on the smaller interval charts, such as the one-minute and five-minute candlestick charts.
Momentum indicators commonly use stochastic, moving average convergence divergence (MACD), and the relative strength index (RSI). Price plan indicators such as moving averages, Bollinger bands, and pivot points use as reference points for price support and resistance levels.
Scalping requires account evenhandedness to be greater than the minimum $25,000 to avoid the pattern day trader (PDT) rule violation. In addition, the margin requires to carry out short-sale trades.
Scalpers buy low and sell elevated, buy high and sell higher, or small tall and cover short, or soft and more inadequate. They tend to operate Level 2 and time of sales window to way orders to the most liquid market makers and ECNs for quick execution.
The point-and-click style implementation through the Level 2 window or pre-programmed hotkeys is the fastest method for the speediest order fills. Scalping is purely based on technical psychoanalysis and short-term price fluctuations. Due to extensive influence use, scalping is considered a high-risk trading style.
Scalpers make common mistakes: incomplete completion, poor strategy, not taking stop-losses, over-leveraging, late entries, late exits, and overtrading. Scalping generates heavy commissions due to the high number of transactions. A per-share commission pricing structure is helpful to scalpers, especially those who tend to scale smaller pieces in and out of positions.
Suppose a trader employs scalping to profit from off-price movements for a stock ABC trading for $10. The dealer will buy and sell a vast tranche of ABC shares, say 50,000, and sell them during opportune price movements of small amounts. For example, they might decide to buy and sell in price increments of $0.05, making small proceeds that add up at the end of the day because they are making the purchase and sale in bulk.
It is very complex to answer such a broad question since it depends on multiple factors such as the experience of the scalper, the size of the account, the leverage and the volatility of the market.
However, we will present a practical case so that we can get an idea of how much a professional scalper can earn with an account of €10,000.
Own capital: €10,000
Annual return: 12%
10.000 x 5 = 50.000€
50.000€ x 12% = 6.000€
Thanks to the leverage and an excellent scalping operation, we obtain a 12% annual return, representing a 60% yearly return concerning our capital.
To get the most out of this type of trading, we must operate in times of high volatility, where price movements have more travel. And we can obtain more significant profits.
In my case, based on the time in Spain, the best times to do scalping are the following:
Europe: trade at the open, usually 08:30 – 10:30 depending on the index, and at the close 16:30 – 18:30. These are the moments where there is more volatility.
United States: operate at the opening 15:30 – 17:30.
The moment when I most often do day trading or scalping is precisely at the opening of the American market (3:30 p.m.). At this moment, something exciting is happening, given that the European and American markets overlap, increasing the volatility of both. Therefore, there are usually very good investment opportunities between 15:30 and 16:30 (Spanish time).
The best markets for scalping are liquid, volatile, with low spreads and above all, in which we feel comfortable operating.
Some of the most used for scalping are the following:
We can also do stock scalping. We will look for the same characteristics as those applied in scalping on indices and forex.
Scalping is a trading strategy that will allow us to operate at times of market volatility. This prevents us from being glued to the screen for long hours.
A good scalper operates 1 or 2 hours a day at most, although the pressure on the trader is very high due to the speed of operations, leverage and market volatility.
Not everyone is prepared to be a scalper, so we must try different investment styles until we find the strategy that best suits our preferences. Effort, dedication and perseverance are the three critical pieces to earning a living as traders.
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