What Is Scalping Trading and How Does Scalping Trading Work?

There are broadly two kinds of players in the stock market – the investors and the traders. The difference between the two is that while the investors are in for the long haul, traders hold securities only for the short term. They look for quick gains by buying securities at a low price and selling them as and when they rise in value. Traders use many strategies to secure gains. One of these is scalping trading. 

This article touches on the important points of scalping trading, how it works, how traders employ it, and more. Keep reading!

What is Scalping Trading?

Scalping trading is a strategy employed to make small profits by buying and selling securities multiple times within a short time frame. It is considered to be an aggressive strategy as it involves quick decision-making.

The idea behind scalping is to benefit from the tiny price changes in the market throughout the day. These changes may seem insignificant to an investor. However, for a scalper, even a small change can result in a profitable trade. A scalper looks to exploit such tiny changes by buying and selling securities multiple times during the day.

The strategy requires the trader to have a deep understanding of the market as it involves making split-second decisions. Scalpers usually conduct technical analyses of securities to know the right points to enter or exit a trade. This helps reduce the risk of loss. Scalpers require a high level of concentration and discipline as even a small mistake can lead to losses.

How does Scalping Trading Work?

Scalping trading is done by opening and closing multiple positions within a day. The trader looks to benefit from small changes in the security price.

Traders open their position by buying securities at a low price and selling them as soon as the price rises, even minimally. This is repeated multiple times during the day. But, the scalper closes all positions before the end of the day to avoid any overnight risk.

Here, the trader looks to make small profits from each trade which cumulatively add up to a significant amount at the end of the day. The main aim of scalping is to make such small profits regularly rather than waiting for a big opportunity that may or may not materialise.

Let us understand this with the help of an example. For instance, assume that the price of a stock is Rs.100 at the start of the day. The scalper buys 100 shares at Rs.100 each. He sees that the price has gone up to Rs.101 after a few minutes. Right then, the scalper sells the shares, making a profit of Rs.100 (1 rupee x 100 shares). Assume that the stock price then falls to Rs 99. The scalper again buys the stock at this lower price and sells it when it rises. This process is repeated multiple times during the day. At the end of the day, the scalper makes a good profit by scalping stocks even though the stock price does not move much.

Thus, we see that scalping is a strategy that can be employed even when the markets are not very volatile, and there are slight changes in the security price.

Also Read: Complete List Of BSE Trading Holidays In 2022

How to do Scalping Trading?

You can employ the scalping strategy by following the steps given below:

• Look for a stock that is trading in a tight range. This means that the difference between the high price and low price of the stock is small.
• Set up your trading terminal so that you can place orders quickly. This is important as you need to make quick decisions while scalping.
• Place a buy order at the lower end of the trading range.
• Place a sell order as soon as the stock price rises by even a small amount.
• Repeat these steps 3 and 4 multiple times during the day.
• Close all positions before the end of the day to avoid any overnight risk.
• Repeat the process daily to make small profits regularly.

The Premises of Scalping in the Stock Market

The key premises of scalping in the stock market are as follows:

• The markets are efficient, and prices reflect all available information. Moreover, exposing your funds to a limited part of the market for a short time reduces the chances of incurring a loss.
  
• It is impossible to consistently beat the market, even after making fundamental or technical analyses. However, with the best scalping strategy, you can benefit from even minor price fluctuations.

• The only way to make money in the markets is to take advantage of the small price changes that happen throughout the day.

• The scalping strategy requires a high level of discipline and concentration, as even a small mistake can result in losses.

• The trader needs to deeply understand the market as split-second decisions need to be made.

3 Key Principles of Scalping Trading Strategy

The three key principles of the scalping strategy are:

• Focusing on small price movements: The scalper looks to take advantage of even the smallest changes in the price of the security. A change as small as Rs.0.05 can fetch scalpers some substantial gains if they hold a large lot of that particular share. Moreover, such small fluctuations in price are more frequent than major changes.

• Taking many trades: The scalper opens and closes many positions during the day. This is because the aim is to make small profits from each trade, cumulatively adding up to a significant amount.

• Holding each position for a short time: The scalper avoids holding any position overnight as it can result in losses if the price moves against the trader’s expectations. The focus is on quickly closing the trades, for which stocks with high trade volumes are prioritised.

Let us see how scalping in the stock market is different from intraday trading.

Scalping Trading vs Intraday Trading

The difference between scalping and trading is as follows:

• Scalpers take many trades during the day as their aim is to make small profits from each trade. Intraday traders take fewer trades as they look to benefit from the larger price changes that happen during the day.

• Scalpers hold each position for a very short time, while intraday traders can hold their positions for several hours or even overnight.

• In scalping, the trader needs to have a deep understanding of the market as split-second decisions must be made. Intraday trading requires comparatively less knowledge as the positions are held for a longer time.

• Scalping stocks is a more risky strategy as even a minor mistake can result in substantial losses. Intraday trading is relatively less risky as the trader has the time to wait for the market to move in their favour.

Thus, we can see that scalping and intraday trading are two different strategies that aim to make profits from the stock market. While scalpers look for small changes in the price of the security, intraday traders take advantage of the larger fluctuations.

Who is Scalping Trading For?

The scalping trading strategy requires a high level of discipline, focus, and knowledge. Thus, it is not suitable for everyone. If you are patient and can sit in front of the screen for long hours, can make quick decisions, are comfortable with taking risks, and have a deep understanding of the market, scalping trading may be suitable for you.

Also Read: What Is Intraday Trading? Know The Strategies To Maximise Profits

Final Word

Scalping trading is a strategy that requires the trader to take many trades during the day and hold each position for a very short time. Scalpers make profits by making quick buy and sell decisions every time there is a minor price fluctuation. This strategy is suitable for those comfortable with taking risks and have the time to sit in front of the screen for long hours. While scalping can be profitable, it is a risky strategy and not suitable for everyone.

FAQs

Before you go…

Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.