What Is Scalping?

Definition & Examples of Scalping

Day trader considers his options for using a scalping technique

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Scalping is a short-term trading strategy that emphasizes profiting from the volume of trades placed, rather than focusing on maximizing the capital gains on each trade.

Learn how scalping can be used to collect significant profits through many small-profit trades.

What Is Scalping?

Scalping represents the shortest-term trading style—even shorter than some other forms of day trading. It got its name because traders who adopt the style—known as scalpers—quickly enter and exit the market to skim small profits off of a large number of trades throughout the trading day. Ideally, these small profits ultimately add up to what the trader would've earned making a single, more profitable day trade.

How Does Scalping Work?

Scalpers believe that it's easier and less risky from a market volatility perspective to profit from small moves in stock prices rather than taking the risk of relying on large moves. This involves setting tight trading windows, both in terms of price movement and timeframe.

Scalping comes with the opportunity cost of bigger gains, so it requires discipline. Scalpers get out of trades once the profit target has been hit, rather than waiting to see if they can earn more. The same goes for exiting trades when the predetermined loss level has been hit, rather than waiting to see if the trade turns around. If you would struggle with accepting those opportunity costs, then scalping might not be for you.

Market Analysis for Scalping

Traders who adopt this investment style rely on technical analysis as opposed to fundamentals analysis. Technical analysis is a type of market analysis that focuses on a security's past price movements, usually with the help of charts and other data analysis tools. With historical price information in hand, scalpers can observe daily time and sales patterns and predict the security's future movements—setting up support and resistance levels based on moving averages and using them to enter and exit trades.

In contrast, fundamental analysis usually involves using a company's financial statements, discounted cash flow modeling, and other tools to assess a company's intrinsic value. Understanding the actual worth of a company can help traders manage risk and exit long positions at the right time.

Fundamental analysis is more suitable for long-term investing, while technical analysis works better for short-term strategies like scalping.

Scalpers may trade on news or events that drastically affect a company’s value immediately after its release. In some cases, they use short-term changes in fundamental ratios to scalp trades, but they focus mostly on technical charts. Since these charts indicate what occurred in the past, they lose value as the time horizon increases, which makes technical analysis more suitable for the short-term nature of scalping.

Scalpers can be either discretionary or systematic traders. Discretionary scalpers quickly make each trading decision based on market conditions, and it is up to the trader to decide the parameters of each trade (timing, profit targets, etc.). Systematic scalpers rely little on their own instinct and instead create computer programs that automate scalping strategies and conduct trades without individual trading decisions. When the program sees a trading opportunity, it makes a trade without waiting for the trader to assess the particular details of that trade.

Discretionary scalping introduces bias into the trading process that can pose a risk. Emotions may tempt you to make an ill-advised trade or fail to take action at the appropriate time. Systematic scalping, in contrast, provides virtually no human control over trading decisions, which makes it unbiased.

Scalping vs. Day Trading

Scalping vs. Day Trading
Scalping Day Trading
Is always a day trade May or may not use scalping tactics
Positions are often held for a matter of seconds, rather than hours Positions can be held as long as the markets are open on a given day
Often automated using systematic trading systems May use either systematic or discretionary trading strategies

Day trading and scalping are similar concepts but they aren't necessarily describing the same thing. Scalping is always a form of day trading, but not all forms of day trading are considered scalping.

Day trading positions can be kept open as long as the markets are open. A day trader could open a position right when markets open at 9:30 a.m. EST and then close it right before markets close at 4 p.m. That would still technically be a day trade, even though the position was held open for more than six hours. A scalper, on the other hand, rarely holds a position open for more than a few minutes. Usually, a scalper's timeframe can be measured in seconds.

To operate within such small timeframes, scalpers often use computer programs that automate these trades. A day trader who uses longer-term strategies may be less likely to use these kinds of automated programs, though they may choose to use them, as well.

Key Takeaways

  • Scalping is a day trading strategy that involves making many small-profit trades rather than fewer large-profit trades.
  • Scalping is one of the shortest-term trading strategies, and many positions last only seconds or minutes.
  • Scalping requires discipline—once a set profit or loss has been reached, the scalper needs to exit the trade.
  • Some scalpers use their own discretion to place trades while others create computer programs that automate their trading strategies.