If you’ve ever taken the time out to look into the different trading styles that exist, chances are you’ve come across scalping. Much like the scalpers you’ve encountered selling tickets outside a baseball game, scalping in the financial markets is centered around a very similar idea, but with a lot more planning and precision. As a trading style predominantly reliant on speed and volume, discipline is a key attribute you will need if you want to give this tactic a try. But first, let’s start with the breakdown of what scalping is in the financial markets.
What is scalping?
The fundamental idea and goal of the scalping technique in trading is essentially to earn as much as possible from market movements that are all quite small. Unlike common swing trading strategies where numerous signals are used to follow operations to decide when to enter and exit, scalping works on a much shorter scale, relying essentially on the very first incremental movement. Considering this quick nature of operations and small price change, the overall goal in the long run is to ensure a relatively high win to loss ratio in comparison to swing trading. As a result, the exit strategy employed by the trader is an incredibly important factor in the overall outcome of the operation.
How does scalping work?
While there are always variations of different trading styles, there are two approaches that are especially common among experienced traders when it comes to scalping; using it as your primary strategy, or as a supplementary strategy. As a primary strategy, two factors you will need more than anything are volume and efficiency.
When scalping is your principal technique, you are essentially counting on the fact that smaller price changes occur more often than larger changes, and as such, should be easier to take advantage of. Moreover, considering this requires the use of short operations that limit risks, in order to ensure your financial goals are met in the long run, this normally also includes the execution of many trades per day.
Now this is where the broker and platform come into play. If your focus in the market is taking advantage of tiny movements tracked on a scale of minutes, the speed at which you are able to execute your orders is extremely influential on the overall outcome. Thus, one asset you will want to assure you have at your disposal is a direct access broker. Considering direct access brokers place more importance on speed and the execution of orders rather than market research and support, these are what allow scalpers in the markets to attain the efficiency they need.
Moving on to scalping as a supplementary style of trading, all of the above is still a factor, but there are some slight differences in the approach. For starters, while scalping as a primary style is utilized in almost any given situation, most traders that use it as a supplementary tactic tend to do so during times of high volatility or in tight market channels. Next, as these orders are not necessarily meant to make up the bulk of the trader’s operations, it is common for the average trade to be carried out with a quantity of shares that is substantially larger than usual. As a result, the overall gain from each operation is more worthwhile.
Things to Keep in Mind
Whether you are looking into scalping as a primary technique, or would just like to attempt to use it to supplement your existing operations, it is definitely worth trying out considering it can provide you the opportunity to carry out various operations within the same day. However, there are a few key points you should consider.
Firstly, one key point above all else mentioned is the necessity to have a sound understanding of market movements and be able to make accurate predictions. Even when you encounter a lack of trends in a given market, adjusting the time frame of the chart should provide you with enough opportunities to start scalping. Secondly, on top of the need for a direct access broker as priorly mentioned, an important thing to consider is the costs associated with making frequent scalping operations. Taking into account how much each trade costs you — whether in commissions or operation fees — is essential in determining the profitability in utilizing a scalping strategy. Thus, if you are looking to jump into scalping, make sure you have considered all of the above, and you will surely make the learning process a lot smoother.