Investopedia Definition of Scalping below.
Scalping is a trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable. It requires a trader to have a strict exit strategy, because one large loss could eliminate the many small gains the trader has worked to obtain. Having the right tools, such as a live feed, a direct-access broker and the stamina to place many trades is required for this strategy to be successful.
Scalping is based on an assumption that most stocks will complete the first stage of a movement (i.e., a stock will move in the desired direction for a brief time), but where it goes from there is uncertain. After that initial stage, some stocks will cease to advance, and others will continue.
A scalper intends to take as many small profits as possible, not allowing them to evaporate. This is the opposite of the "let your profits run" mindset, which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse. Scalping achieves results by increasing the number of winners and sacrificing the size of the wins. It's not uncommon for a trader with a longer time frame to achieve positive results by winning only half or even less of his or her trades – it's just that the wins are much bigger than the losses. A successful scalper, however, will have a much higher ratio of winning trades versus losing while keeping profits roughly equal or slightly bigger than losses. (See also: Introduction to Trading: Scalpers.)
The main premises of scalping are:
Scalping as a Primary Style
A pure scalper will make a number of trades a day, perhaps in the hundreds. A scalper will mostly utilize one-minute charts since the time frame is small, and he or she needs to see the setups as they shape up in as close to real time as possible. Supporting systems such as Direct Access Trading (DAT) and Level 2 quotations are essential for this type of trading. Automatic instant execution of orders is crucial to a scalper, so a direct-access broker is the preferred weapon of choice. (For more, see: Direct Access Trading Systems.)
Scalping is a trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable. It requires a trader to have a strict exit strategy, because one large loss could eliminate the many small gains the trader has worked to obtain. Having the right tools, such as a live feed, a direct-access broker and the stamina to place many trades is required for this strategy to be successful.
Scalping is based on an assumption that most stocks will complete the first stage of a movement (i.e., a stock will move in the desired direction for a brief time), but where it goes from there is uncertain. After that initial stage, some stocks will cease to advance, and others will continue.
A scalper intends to take as many small profits as possible, not allowing them to evaporate. This is the opposite of the "let your profits run" mindset, which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse. Scalping achieves results by increasing the number of winners and sacrificing the size of the wins. It's not uncommon for a trader with a longer time frame to achieve positive results by winning only half or even less of his or her trades – it's just that the wins are much bigger than the losses. A successful scalper, however, will have a much higher ratio of winning trades versus losing while keeping profits roughly equal or slightly bigger than losses. (See also: Introduction to Trading: Scalpers.)
The main premises of scalping are:
- Lessened exposure limits risk: A brief exposure to the market diminishes the probability of running into an adverse event.
- Smaller moves are easier to obtain: A bigger imbalance of supply and demand is needed to warrant bigger price changes. For example, it is easier for a stock to make a 10-cent move than it is to make a $1 move.
- Smaller moves are more frequent than larger ones: Even during relatively quiet markets, there are many small movements that a scalper can exploit.
Scalping as a Primary Style
A pure scalper will make a number of trades a day, perhaps in the hundreds. A scalper will mostly utilize one-minute charts since the time frame is small, and he or she needs to see the setups as they shape up in as close to real time as possible. Supporting systems such as Direct Access Trading (DAT) and Level 2 quotations are essential for this type of trading. Automatic instant execution of orders is crucial to a scalper, so a direct-access broker is the preferred weapon of choice. (For more, see: Direct Access Trading Systems.)
