In general, long term investors make their money by buying a stock and then selling it at a higher price for a profit. These market participants can remain invested for a few weeks or a month or years in order to make profit. On the other hand, we have traders who hold stocks for a few days or get in and out of the stocks several times within the same day.
Based on the holding period of a trade, the market defines the type of trader you are. If you are holding a trade for more than a day to a few days, you are referred to as a swing trader.
Buying and selling within the same day is referred to as intraday or day trading.
What is Scalping trading technique?
Scalping is a style of day trading where traders used to profit from the market through many small trades. This means, using this style, traders buy and sell securities multiple times within a day for a small profit.
Traders use scalping techniques based on small opportunities that exist in the market. It’s the shortest trading cycle in comparison to all other forms of day trading.
Traders who adopt this style of day trading are called scalpers. These traders use charts and technical indicators to find trading events and create entry and exit points.
For example, a scalper enters a limit order to buy 10,000 stocks of ABC limited at a price of Rs. 100. Once price reaches that level, the limit order gets executed and he is into the trade. If the price moved to Rs 100.25 within a minute, he gets out of the trade with a profit of Rs. 0.25 per share i.e. 2,500 in total. Thereafter, he moves on to the next trade.
A pure scalper can make more than 100 trades each day by using smaller time frame charts.
Fundamental analysis involves using data from a company’s financial statements to calculate ratios that helps to assess value based on investing goals. This method is suitable for long-term investing.
For short term trading, especially for day trading, technical analysis is used.
Scalping is also used by many traders when the market is choppy or locked in a narrow range.
Please note, scalping is not for novice traders as it requires fast decision making, constant monitoring of positions, discipline and patience.
As a rule, intraday traders close all their positions during a day’s trading session and do not carry them over to the next day.
Pros and cons of Scalping
Here are the pros and cons of scalping;
- Can be very profitable if executed with the right entry and exit strategy.
- Opportunities to leverage small changes in the price of a stock even in choppy and sideways trends.
- Not required to follow basic fundamentals.
- Less market risk involved as you enter and exit within a few minutes.
- High transaction costs as scalping involves a maximum number of trades compared to other intraday trading strategies. Your profit would quickly be eaten up by high brokerage costs.
- Require high accuracy to make a profit. Not everyone will have the mentality to use scalping effectively.
- Requires a high level of concentration and lightning-fast trade execution.
Basic Comparison of Scalping, Positional Day Trading and Swing Trading
|Parameters||Scalping||Positional Day Trading||Swing Trading|
|Basics||It’s a trading technique in which a trader enters and exits a number of times from a security that they have selected to trade for the day. Number of trades per day depends on the trader. In general it may be 20 to 100 trades per day.||It’s a trading technique in which a trader takes less number of trades within a day based on his entry and exit set ups. They don’t prefer to trade more than a predefined number of trades. In general they don’t prefer to go for more than 5-6 trades per day.||In swing trading, a trader prefers to hold his position for more than a day to take advantage of small price gains. Based on the strategy, he may hold the trade for a few days to a week. They don’t exit the trade on the same day.|
|Trade frequency||Multiple trades in a day.||Several trades but not more than 5-6 trades a day.||Multiple trades in a week.|
|Target||Target for small profit per trade.||Target for large profit per trade.||Target for large profit per trade.|
|Trade holding period||Few seconds to a few minutes.||Few minutes to hours.||Few days to weeks.|
Liquidity of the underlying assets affect the performance of the scalping. Most of the scalpers like to trade more liquid assets as they can easily move in and out of large positions easily.
The other most important thing is to have a strict exit strategy. Otherwise, small profits from a number of trades can be eaten out by one large loss. A successful scalper is the one who achieves a higher ratio of winning trades versus losing ones, while keeping profits roughly equal or slightly bigger than losses.
You are required to choose the right online discount broker as frequent buying and selling are bound to be costly in terms of brokerage, which can shrink the profit.
Scalping might take longer to master. But you should include it in your arsenal, especially when the market is very choppy for a long period of time. Day traders can use scalping as a supplementary approach. The best and most obvious way is to use it when the market is choppy or sideways.
In addition to the stock market, scalping techniques are also used to trade in cryptocurrency, commodities, currency pairs, options and future markets.
Here is a list of candlestick patterns for your reference;
- Evening Star
- Morning Star
- Bearish Abandoned baby candlestick pattern
- Bullish Abandoned baby candlestick pattern
- Three Inside up/down
- Three outside up/down
- Inside Bar
- Bullish Piercing
- Spinning Top
- Shooting Star and Inverted Hammer
- Hammer & Hanging Man
- Gravestone, Dragonfly and long-legged Doji
- Engulfing Candlestick Pattern
- Spinning Top
- Dark Cloud Cover Candlestick Pattern
Be sure you practice identifying and trading these candlestick patterns on a demo account before trading them with real money.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.