Scalping is a popular intraday trading strategy where traders (referred to as scalpers) aim to make small profits from multiple trades. They do so by trading small price movements keeping the stock quantities high. Hence, scalping is one of the shortest-term strategies as trades are squared off within seconds or minutes rather than hours.
Let's understand how scalping works with the help of an example.Suppose a scalper is long on a stock of company A trading for Rs 100. The scalper will buy large quantities of A, say 10,000 shares, and sell them when the price increases. For instance, buy and sell the stock of A at every increase of Rs 0.5. This gives the scalper a profit of Rs 5,000 on each trade. And if the scalper does this ten times a day, the total profit would be Rs 50,000.Scaping works in both consolidating and trending markets. Remember, the idea is to make small profits from minuscule price movements. Scalping requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains the trader worked to obtain.
Pros of scalping
- You can trade almost any stock using this strategy, whether going up, down or sideways.
- Scalpers and intraday traders can make a lot of money if they get their strategies right
Cons of scalping
- Scalpers need to be highly disciplined and control their emotions. You should not be married to a stock but ride the tide and move on. You need to do this several times a day and perhaps in multiple stocks.
- Since profit margins are low, scalping may not work for you if you are working with small capital.
- Since you are making multiple transactions in scalping, the brokerage cost will be high.
Scalpers typically adopt various trading strategies that we have already covered in our earlier chapters.Scalping on Support and Resistance is one such strategy.We have covered the concepts of support and resistance in chapter 7.3, so read it in case you want to refresh your memory.
Scalpers, typically use short-term time charts – 5-minutes, 15-minutes, and 30-minutes – to identify these support and resistance levels.
Another strategy that scalpers use is the Spotting the trend and trading the momentum.
Some other commonly used strategies
Scalpers also use advanced technical analysis tools and charts such as Bollinger Bands (covered in chapter 8.6) and Stochastic oscillators (covered in chapter 8.8) to identify scalping opportunities during a trading day.
