What is Scalping Trading?

"With us this moment, gone the rest. Gone to their maker, gone to their rest." This is how the trade works. This could also be your profit if you screw things up.

Investing in the stock market is highly popular in India, with over 8.3 Crore individuals registered with depositories CDSL and NSDL for their Demat account. Stock market investing has become even more popular in the country since the COVID-19 pandemic when many people lost their jobs and had very few options left for earning an income.

There are basically two types of individuals who put their money in the stock market: traders and investors. While traders aim to make quick gains with short-term holdings, investors add securities to their portfolios with a long-term view.

There are strategies available for both traders and investors to appreciate their wealth in the stock market. One such strategy is Scalping Trading.

As the name suggests, it is meant for traders. But what is Scalping Trading? How does it work? Is the Scalping Trading Strategy good enough? Let’s find out!

What Is Scalping Trading?

Scalping Trading refers to a trading strategy that aims at leveraging minor to small fluctuations in a security’s price. The traders who use the scalping strategy place a number of trades in the market every day, which can range anywhere from 10 to 100 trades, or even more. The traders who use the Scalping Trading Strategy are often called scalpers.

Scalping Trading is meant for those traders who are on the lookout for quick gains, which they can make in seconds or hours in a single day. Scalpers generally do a technical analysis of securities to find the right entry and exit points, and also to identify the required stop loss level.

Some of the popular momentum indicators tracked by scalpers include moving averages, support price levels, and resistance levels.

If you are interested in learning how technical analysis can be done, join our Technical Analysis Course today!

Scalping Trading demands a lot of discipline and attention from the trader. Scalpers must be quick in arriving at their trading decisions so that they can achieve their trading goals even in short time frames.

How Does Scalping Trading Work?

Scalping Trading can be understood by Julia Carney’s famous quote “Little drops make the mighty ocean”. In order to execute a scalp trade, traders take large positions in one or more securities on intraday and try to benefit from even a minor price fluctuation.

The high quantity of security balances off the low price movement and enables the trader to book a good profit amount.

The primary goal under scalping trading is to quickly buy or sell a certain number of securities at a bid price and then monitor and realise the trade the very moment the price moves in a favourable direction.

Let us understand this more clearly with the help of an example.

Suppose Mr. A buys 5 lots of 500 shares each of XYZ security at a price of Rs. 100 each share. Now, if within 1-2 minutes, the price of XYZ security reaches a price level of Rs. 100.50 per share, Mr. A will sell off his holding and book a profit of Rs. 1250 [=(100.50-100)*500*5] in just 1-2 minutes!

It is important to remember that scalping trading is not only limited to stocks, one can execute trades for scalping forex, commodities, and other market-linked securities.

3 Key Principles of Scalping Strategy

Most scalpers usually make use of the following three principles while executing their best scalping strategy - 

1. Acting on Trades Quickly 
Scalping traders always aim to act quickly on their trades. This not only helps them earn a profit in a short time span but also reduces their market risk due to their limited exposure to market volatilities. This requires the scalpers to be really attentive and alert so that they do not miss out on any good trading opportunities.

2. Small Price Movements
While executing a Scalping Trading Strategy, traders keep an eye on even small price movements which can even be as low as Rs. 0.01.

This is because of two reasons. Firstly, it is relatively easier to find such small price movements as they keep happening. Huge price movements are a rare sight and only happen when there is either major news or some geo-polictical shakeup. Secondly, even if they lose, one or two such price movements, they can easily get another such fluctuation too in a very short time span.

3. Play on Quantity
Scalpers prefer buying more and bigger lots of security so that the large volumes can make up for the small price fluctuations.

There are only two ways to make money in the stock market, either via big price fluctuations on small holdings or with high trade volumes which allow you to leverage every price movement.

Scalping Trading Vs Intraday Trading

It is quite natural for one to get confused between Scalping Trading and Intraday Trading and thus, in the below table, we bring to you the differences between the two popular trading strategies - 

Is Scalping Trading For You?

Well, the answer to this question depends on various factors such as your risk appetite, your investment style, investment preferences, trading speed, ability to make quick decisions, etc.

If you believe you have gained enough experience in the market and you can act on price fluctuations quickly, then scalping trading could be a good strategy for you which can help you build your wealth in a short period of time.

However, if you are a new entrant in the market or require time to analyse and trade, then scalping trading might not be right for you.

Conclusion

Scalping Trading is an effective trading strategy for the ones who want to earn quick money. It requires a good understanding of the market, a good trading speed, and an appetite for taking risks.

One must not confuse Scalping Trading with Intraday trading as they are quite distinct trading strategies. Scalping trading also requires one to have sufficient funds so that they can leverage from even the smallest price fluctuations.