Scalping is known for buying and selling within a matter of minutes. Unlike swing trading of holding positions for a few days or weeks, or even the day trading strategies of holding positions for hours, scalping involves holding a position for a matter of minutes. In just a few minutes, scalping can yield a highly leveraged trader thousands of dollars.
Professional traders that use scalping techniques are numerous. Scalping is best known for its impact on the foreign exchange markets where the commission is built into the price and prices move more smoothly than equities markets. Scalping requires buying and selling in a short amount of time for a very small return on investment. It is the volume of profitable trades that results in a lucrative strategy.
Small Wins, Smaller Losses
One major downside to scalping is the razor thin profits it produces. For example, traders must give up a few cents or pips in Forex just to make back the commission, and then have the stock move their way a few more pips. For most currency pairs, scalpers will pay up to 50% of their profits just in the spread. Highly liquid currencies get this ratio down to much lower levels of about 25%, but the challenge remains the same. Day trading lowers the overall profit considerably because of the high amounts of commission built into the price.
Some believe that producing consistent profits is much easier in scalping because of the short entry and exit times. The odds of constant success with scalping are much lower because of the amount of spread paid for each trade. Scalping also requires full-time position of monitoring your investments, as many professional traders will make up to 40-50 trades in one day alone. Losses are numerous in scalping, but the profits usually outweigh the losses.
Make Your Own Trading Style
Developing a proper trading style for scalping usually involves very short stop losses of just a few cents or pips, but profits are usually set at multiples of the stop losses. For example, a popular strategy in Forex is to place a stop loss at -10 pips but a take profit of about 15 pips. With this specific strategy, a professional trader needs to generate a profit on 2 out of every 5 trades, something that can be more easily accomplished than winning 50% or all of the trades. Scalping isn't for everyone, but for the few dedicated enough to make it work, huge profits can be realized in just a few minutes.
About the Author:
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide. Trading EveryDay also has many articles with unique perspectives on day trading.