Day Trading Strategy Scalping Explained

Dear day trader, in this article we will discuss scalping as a day trading strategy. Both beginners and especially advanced traders apply scalping to realize accumulating small profits. Whoever realizes 1% every day will have a large fortune at the end of the year. However, scalping as a day trading strategy is not easy. It involves high risks. Below we help you on your way with explanations and tips.

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What is scalping and what is its purpose?

Scalping is a trading style with the shortest trading cycle. It acquired its name because traders who use it, known as "scalpers", enter and exit the market fast to skim small profits on many trades during the trading day. Their objective is to make enough of these small trades to build up to the profit they could have gotten from a larger trade one day.

A trader enters a limit order to acquire a particular amount of stocks at a predetermined price. The trade is executed automatically when the price falls to the limit order. The trader then looks for positive movement. If the stock price rises one minute later, the trader will close the position. They would have made $80 if they had purchased 2,000 shares and the stock price increased by $.04 from their purchase price.

Day Trading Strategy ‘Scalping’ Explained

Below we will explain the day trading strategy named scalping. If you are a beginner, make sure you test this strategy first at a demo account. Use fake money and improve your skills during the following months. Also, it is recommended to start at one of the best day trading brokers that are reliable and relatively cheap.

3 Types of Scalping Strategies

The first type of scalping is known as "market-making," and it involves a scalper attempting to capitalize on the spread by simultaneously posting a bid and an offer for a specific stock. This strategy can only work on stocks that are traded in big volumes with little real price changes.

Scalping is extremely difficult to accomplish properly because a trader has to compete with market makers for shares on both bids and offers. Furthermore, the profit is so small that any stock movement against the trader's position results in a loss that exceeds their initial profit objective.

The other two ways are based on a more traditional approach and necessitate a moving stock with rapidly changing pricing. These styles require a solid strategy and manner of reading the movement.

The second type of scalping involves buying a big number of shares and selling them for a profit on a very small price movement. This style of trader may enter positions for many thousand shares and wait for a small move, generally measured in cents. Such an approach necessitates the use of very liquid stock.

The third type of scalping is seen to be closest to traditional trading methods. A trader opens a position for a specific share on any setup or signal from their system and closes the position at the earliest as the first exit signal is received, which is usually near the 1:1 risk/reward ratio.

Scalping as Primary vs Supplementary Style

A pure scalper makes a large number of trades every day, maybe hundreds. Because the time frame is small, they need to observe the setups as they take shape nearer to real-time as possible. A scalper typically uses tick or one-minute charts. Supporting technologies such as Direct Access Trading (DAT) and Level 2 quotations are essential for this type of trading. A scalper requires automatic, instant order execution. Hence a direct-access broker is a preferred method.

Scalping may be used as a supplementary approach with longer time frames. The most obvious way to use it is when the market is choppy or locked in a narrow range. When there are no longer trends, switching to a shorter time frame might show visible and exploitable trends, leading a trader to pursue a scalp.

The "umbrella" concept is another approach to adding scalping into longer-term trades. This method enables a trader to improve their cost basis while also maximizing their profit.

Want to learn more strategies? Check the 3 most popular day trading strategies.

5 Tips for Scalping as day trading strategy

To compete in today's intraday marketplace, novices need to equip themselves with the basics of technical analysis. This is especially relevant in modern-day markets, which are dominated by high-frequency trading (HFT). Not to add that the majority of trades now take place outside of exchanges, in dark pools that do not report in real-time.

Scalpers should employ technical indicators designed for very small time frames since they can no longer depend solely on real-time market depth analysis to receive the signals they need to make multiple small profits on a normal trading day. Moving average ribbon entry strategy, multiple chart scalping and relative strength/weakness exit strategy are three technical indicators that are good for short-term opportunities.

Scalping Tip 1. Spreads

Because you'll be entering markets frequently throughout the day, scalping relies on tight spreads. Resultantly, you should concentrate your efforts on assets with the greatest trading volumes. EUR/USD, USD/JPY, and GBP/USD are all viable options for forex traders. You should also concentrate on the most liquid times of the day when sessions overlap. These are from 02:00 to 04:00 EST through 08:00 to 12:00 EST.

Read more about how to begin with forex trading.

Scalping Tip 2. Order Execution

Scalping trading relies on razor-slim profit margins. As a result, beginners must execute quick and efficient trades. A delayed order might transform a small profit into a loss. With this in mind, it is a must to make use of supplementary methods such as Direct Market Access Trading and Level 2 quotes.

Scalping Tip 3. Timeframes

Scalpers must maintain discipline. In general, rather than rolling over positions, aim to close them completely in a single trading day. Scalping is based on holdings for a shorter timeframe. Beginners should resist deviating from this rule.

Scalping Tip 4. Costs

Scalpers can make hundreds of trades every day. With such a large volume of trading, fees and commissions may quickly add up, eroding profits. As a result, it offers critical to creating an account with a broker who charges reasonable fees. Even small price differences across trading desks might add over time. It's also worth observing that not all online brokers permit scalping.

Scalping Tip 5. Training

Scalping can be a time-consuming and complicated investment method. With that in mind, it's worthwhile to make use of the wealth of online guides, courses, and real-time lessons. Scalping booklets are available that guide you through strategy examples and can help you establish realistic results.

There are how to start scalping instructional videos and interactive PDFs for visual learners. Forums are also a good place to bounce ideas regarding indicators off of experienced scalpers. Additionally, keeping a journal where you log order book options and live trading room experiences might help you fine-tune your technique.