What is Scalping?

Scalping represents the shortest-term trading style—even shorter than day trading. It got its name because traders who adopt the style, known as scalpers, quickly enter and exit the market in order to skim many small profits off of a large number of trades throughout the trading day.

Scalpers believe that it's easier and less risky from a market volatility perspective to catch and profit from small moves in stock prices rather than from large moves, which is in part why it's popular among professional traders.

However, scalping comes with the opportunity cost of bigger gains from those large moves and is only for disciplined traders who seek small, repeated profits. Learning what is required for successful scalping can help you decide if it's the right trading style for you.

Market Analysis for Scalping

Traders who adopt this investment style rely on technical analysis as opposed to fundamentals analysis. Technical analysis is a type of market analysis that focuses on a security's past price movements, usually with the help of charts and other data analysis tools. With historical price information in hand, scalpers can observe patterns and predict the security's future movements as they set up their trades.

In contrast, fundamental analysis usually involves using a company's financial statements, discounted cash flow modeling, and other tools to assess a company's intrinsic value. Understanding the actual worth of a company can help traders manage risk and exit long positions at the right time, which makes fundamental analysis more suitable for long-term investing.

Scalpers may trade on news or events that drastically affect a company’s value immediately after its release. In some cases, they use short-term changes in fundamental ratios to scalp trades, but they focus mostly on technical charts. Since these charts indicate what occurred in the past, they lose value as the time horizon increases, which makes technical analysis more suitable for the short-term nature of scalping.

While scalpers use technical analysis, within this style, they can be either discretionary or systematic traders. Discretionary scalpers quickly make each trading decision in real time based on market conditions, and it is up to the trader to decide which market to enter, when to trade, and for how much. Systematic scalpers rely little on their own instinct and instead adopt a scalping system that uses computer programs to carry out trades and limits or eliminates individual trading decisions.

Trading Timeframes

Scalping chart timeframes and the amount of time that each trade is active are the shortest of all of the trading styles. For example, a day trader might use a five-minute chart or make four or five trades per trading day, with each trade being active for 30 minutes.

These longer holding periods grant the day trader more generous profits resulting from larger market shifts that occur over the long run—but also greater risks because they subject holdings to long-term market volatility.

It's not uncommon for a scalper to use a five-second chart where each price bar represents only five seconds of trading. The trader may make anywhere from 10 to 100 or more trades per day, with each trade being active for a few seconds to a few minutes.8 Traders who practice scalping believe that the style is less risky since these shorter holding periods mean that they are only exposed to short-term market fluctuations, but the opportunity cost is that traders miss out on larger profits from ongoing market trends and shifts.

Scalping Techniques

As with any other style of trading, many different methods of scalping exist. The most well-known scalping technique uses the market's time and sales—a record of buying, selling, and cancelled transactions—to determine when and where to make trades.

Some scalping techniques are similar to other trading styles in that they use bar or candlestick charts, and traders determine when and where to make trades using price patterns, support and resistance, and technical indicator signals.5 These indicators include moving averages, oscillators, channel bands, and other chart patterns.

Trading Psychology

Scalping is most suitable for a specific type of trading personality. Specifically, traders must be highly disciplined, especially in the case of systematic scalpers, as they must be comfortable handing over trade decisions to a computer and be capable of following their trading system no matter what impulses might arise.6

In addition, scalpers must be able to make quick decisions without hesitation and without questioning their decisions once they have been made. They also need to be flexible enough to recognize when a trade is not proceeding as expected or hoped and take action to rectify the situation by exiting the trade.

To Be or Not to Be a Scalper?

If you are a position trader who uses daily charts and makes your trading decisions over the course of an entire evening based on the worth of a company, you probably won't enjoy scalping. However, if the thought of waiting several days for your next trade irks you, and you prefer seconds-long trades informed primarily by price patterns, scalping might be suitable for you.

Scalping can appear easy because a trader might make an entire day's profit within a few minutes. In reality, ​scalping can be challenging because there is little room for error. If you decide to try scalping, use a trading simulator until you are consistently profitable and no longer make any beginner's mistakes, such as not exiting your trades when they move against you.