The scalping strategy is typically used during times of small movements in the market. Scalping takes advantage of that period for profit.
The way it has worked in the past is that traders used the Level II bid and ask screens to select buy or sell signals. When demand was set up along the bid side, the trader would buy. When demand was set up on the ask side, these same traders would sell.
When the balanced conditions swung back to the spread, they would have quickly either made money or lost it. Scalping can be used as a primary style of trading, but it is used more often as a supplementary approach when the market is locked or choppy.
How Scalping Works
Market making is a type of scalping where the scalper aims to take advantage of the spread by putting out a bid and making an offer for a particular stock simultaneously. This works the best with stocks that are basically immobile, not showing Realtime price changes. It is a difficult operation to manage successfully, as the scalper needs to enter into a competition with the market makers for shares on offers as well as on bids.
It’s easy to lose in this style of scalping and wins are usually very small. Another kind of scalping is that which is handled through buying a large quantity of shares. Those shares are than sold for a profit with a tiny price movement. For instance, a trader can enter a position for thousands of shares and wait for that tiny move to happen.
When it does, there is profit to be gained. This method is used only for stocks that are highly liquid. The final style of scalping is closely related to traditional trading methods. After entering shares on a system signal or setup, the trader will exit as soon as there is a signal generated close to a risk/reward ratio of 1:1.
Winning at Scalping
While having the knack to finish profitably with a scalping trading strategy isn’t easy, there are some helpful guidelines to keep in mind. A good place for a beginner to start is on the buy side. Once feeling comfortable, it should be a little easier to go on the short side. It takes a while to learn how to balance short and long trades. Being efficient in executing orders is another trait held by scalpers.
After choosing a trade, be ready to jump in and execute your order quickly. Even if it was an outstanding trade, a bad or delayed order is liable to eat up what little profit there may have been.
Remember that scalping needs frequent entry / exit orders within a short time span. Also, it’s not a wise decision to leave positions open at the end of a day’s trading session. Since scalping only pertains to small opportunities, it’s best to not carry it over to the next day.
To scalp successfully, learn the rules and practice them.