Introduction to Scalping
Scalping is a very short term trading style, and despite its odd name, it is quite a popular trading style among professional traders. Scalping is the shortest term style of trading (even shorter than day trading), and is so named because it attempts to make many small profits throughout the trading day.
Scalping is Technical Analysis
Discretionary scalpers will make each trading decision in real time (albeit very quickly), whereas system scalpers will follow a scalping system without making any individual trading decisions. Scalpers primarily use the market's prices to make their trading decisions, but some scalpers also use one or more technical indicators (e.g. moving averages).
Scalping chart timeframes, and the amount of time that each trade is active, are the shortest of all of the trading styles. For example, a day trader might use a five minute chart, and make four or five trades per trading day, with each trade being active for thirty minutes. In contrast, a scalper might use a five second chart (where each price bar represents only five seconds of trading), and make twenty or thirty trades per day, with each trade being active for only two minutes.
As with any other style of trading, there are many different methods of scalping.
The most well known scalping technique is to use the market's time and sales to determine when and where to make trades. Scalping using the time and sales is sometimes referred to as tape reading, because the time and sales used to be known as the tape. Other scalping techniques are similar to other trading styles in that they use bar or candlestick charts, and determine when and where to make trades using price patterns, support and resistance, and technical indicator signals.
Scalping is most suitable for a specific type of trading personality. Scalpers must be very disciplined, especially in the case of system scalpers, as they must be capable of following their trading system precisely no matter what. Scalpers must be able to make decisions without any hesitation, and without questioning their decisions once they have been made. However, scalpers must also be flexible enough to recognize when a trade is not proceeding as expected (or hoped), and take action to rectify the situation (i.e. exit the trade).
To Be or Not To Be a Scalper?
If you are a position trader that uses daily charts, and makes your trading decisions over the course of an entire evening, you are most likely not going to make a good scalper. However, if the thought of waiting several days for your next trade drives you insane, then perhaps scalping would be suitable for you. Scalping can appear easy because a scalper might make an entire day's profit within a few minutes. However, this is an illusion, and in reality scalping can be very difficult because there is very little room (read as no room) for error. If you do decide to try scalping, make sure that you do so in simulation, until you are consistently profitable, and are no longer making any beginning mistakes (such as not exiting your trades when they move against you).