What is Scalping Trading and how is it different from Day Trading?

If a new trader has been wondering about scalping in the stock market, they should first note that there are different styles of trading. People should select a trading style well-aligned with their risk tolerance, financial aim, time to spend on their investments and other factors. Traders with patience and sufficient knowledge consider scalping, where they undertake multiple small deals in one day to earn profits.

Important details about scalping trading will be covered in the following sections.

Who exactly are scalpers?

Traders who engage in scalp trading are called scalpers. As mentioned earlier, scalping in the stock market is a style of trading where a person earns money from small price fluctuations. Over many trades, these small profits add up to substantial gains. Scalpers maintain a high frequency of trading but trade in small quantities. Scalping trading requires much discipline, stamina and decisiveness.

A scalper trader needs a strong exit strategy because one huge loss can erase all the small profits made in a single day. While this trading style may be thrilling for new traders, some experience is needed to strike successful deals consistently. Only with experience do traders execute different techniques that work and identify good opportunities in the market.

Now, let us learn how to scalp trade in the stock market.

How does the scalping trading strategy work?

The key to carrying out successful scalping trading is finding highly liquid assets which hold the promise of frequent price changes throughout the day. It is not possible to scalp if the asset is illiquid. Furthermore, liquidity ensures the trader receives the best price while entering/ exiting the market.

There are many strategies that scalper traders can employ. For instance, position trading is based on fundamental and technical analysis. Other traders who engage in scalping in the stock market may use only technical trading techniques.

Scalping trading mainly involves studying the past price movements of an asset and being aware of its latest trends. To plan a trade, scalpers observe patterns and make predictions of future price movements.

They utilize trading charts over short periods. For instance, a day trader may use a five minute-trading chart to make five deals in one day. On the other hand, a scalper trader may use time frames as short as five seconds to make ten to a hundred trades in one day.

Scalp traders use various techniques such as recording buy and sell orders, canceled transactions and assessing different trading hours to achieve a high momentum. They may also require a Demat and trading account with low charges to increase their profit margins.

Day trading vs. scalp trading

While day trading is quite similar to scalp trading, there are critical points of difference as well. Let us understand the distinct characteristics:

Day trading

• Usually, a day trader may use a timeframe that will last for one to two hours
• A day trader will typically have an average account size
• While a day trader will be aware of trends and may follow them, their trading decisions depend on technical analysis
• While day traders trade in quick succession, their trades take place at an average speed

Scalp trading

• Unlike a day trader, a scalp trader uses a timeframe between 5 seconds and 1 minute
• A scalper trader will have a large account size because he/ she tends to take higher risks
• Scalpers have the benefit of experiencing and understanding where a market trend is heading. So, they will wait for closing trades to earn profits
• Unlike day traders, scalpers execute trades promptly and aim for immediate results

Should a person scalp?

A person can engage in scalping as a primary or supplementary trading strategy. Regardless, this trading style demands discipline and experience. If a person wishes to take his/ her time to find the right asset and make decisions after much thought, he/ she should not opt for scalping.

One may follow the scalping trading strategy if he/ she wants these benefits:

• Low exposure risks
  Lower exposure in the market reduces the chances of running into adverse conditions.

• Small moves are easy to obtain
  It is easier to benefit from smaller price movements. In contrast, a stock's price has to move significantly if a trader wishes to earn higher profits which require a higher imbalance in supply and demand.

• Small moves take place frequently
  Smaller price movements take place even when the market seems quiet. Scalpers focus on benefiting from such small price changes.

To sum up, scalping in the stock market is an apt trading strategy for those who seek immediate profits. An important benefit of this trading strategy is that traders can quickly close their positions to limit their losses if the market starts moving against them. This trading strategy keeps traders constantly engaged in the market and they can benefit from price movements as and when they happen.

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