I’m often asked what is scalping. Scalping stocks can generally be described as day trading for somewhat small gains in a relatively short intra-day time frame. Small meaning $0.05 to $0.10 price movement over less than an hours time. However, this is a narrow definition. A scalp can be better defined as a trade that is never allowed to go against you regardless of where the trade situation is at. Scalping techniques can be applied swing trading but not very easily to investing.
For example, you may have a 10 cent gain or a 50 cent gain at any one time. If the stock appears to be weakening or loosing strength, you would exit as a scalp. This also stands true if you only have a 5 cent gain. The point here is that scalping is getting out quickly while the stock is still moving in the direction of profit. Watching the stock slow down or pull back, or waiting for it to move in your preferred direction again is not scalping. The idea is to spot an opportunity, quickly capitalize on it, and leave. Exiting your position before the stock finishes it’s run will result in less profit per trade, but it is secured profit. Waiting too long and watching a stock turn against you can result in far less profit per trade and is also bad trading practice.
Scalping stocks leaves you in a cash position more frequently
Although taking smaller gains at shorter time frames can limit your profit in any one trade, it also limits your risk. Since your exposure to the market is limited, you are less susceptible to the wilder ride of holding a stock for a longer period of time. The short time frame also lends itself to having a cash position more often which frequently leaves you open to more valid trading opportunities. Throughout the trading day, a scalper strives to have a high average of small profitable trades.
Tools a scalper uses when day trading
Level 2 is definitely a necessity, as well as times and sales. Charts are helpful to get a feel for the general set up, but times and sales and Level 2 provide a precise entry and exit point.
What is scalping psychologically speaking
Because scalp trading has such a short time frame, reasons for price movement surrounding the stock are irrelevant. A scalped day trade is not dependent on news, but rather on the trade itself. Level 2 and times and sales reveal all you need to know about what a stock will probably do next. As a scalper, it is your job to read other traders using these tools to interpret price movement. The interpretation of the news is already built into other day traders behaviors. You must possess the correct trader personality to correctly read these behaviors without investing any emotion into it.
Scalping stocks without news means you’re emotionally neutral
There is a huge benefit to not focusing on news while day trading. It keeps you psychologically neutral. Each new trade is a fresh situation where you are only trading what you see, not what you think should happen based on CNBC. You need to be cold blooded as a scalper. Staying away from flashy news events will only enforce your cold blooded nature, and keep you focused. When you ask yourself “what is scalping emotion?“, your answer should be that there is no such emotion.
What is scalping risk like?
Scalping has some low risk characteristics, but done incorrectly, can still be risky. Scalping stocks can be difficult to learn. A beginner should not adopt this style of trading without a fair amount of paper trading under their belt. Your timing and ability to read the stock market must be very precise. However, once mastered, it is one of the safest ways to trade since you have more control over your trades than using other methods. What is scalping good for at the very least? Definitely lowering your risk.
A scalper’s risk to reward ratio is not as attractive as someone trading a longer time frame in a single trade. However, a scalper’s trades are more accurate. At least they should be if you’re doing it correctly.
A scalper will also have to endure far more trading commissions compared to traders with longer time frames. So several scalps a day can be costly. Keeping your scalps as accurate as possible will allow you to make small, consistent gains, despite trading commissions. Always using limit orders and stop loss orders will help you too keep your gains and losses tightly controlled.
What is scalping going to do for my confidence and profits?
An important thing to note is that if you are scalping consistently, you create confidence. A solid sense in confidence in your trading supports good overall trading which in should lead to profits.
That is one of the benefits to scalping. It is designed to grow profits slowly and consistently, preventing you from experiencing catastrophic losses (or gains).
What is scalping in summary
There is much to be said about keeping your day trading experiences free of excessive greed or pain. It’s generally more profitable in the long run. If anyone asks you what is scalping compared to other types of trading, I think you’ll now have a good picture of it..