What is Scalping?
Scalping is a term used to describe a specific investment strategy wherein a trader attempts to profit from small market movements, by opening and closing numerous positions on the market, in a short period of time and within a single trading session. Traders that engage in this type of investment strategy are referred to as ‘scalpers’, and will usually place anywhere between ten and a few hundred trades per day. The goal of scalping is to use minor price movements to make small profits, which will add up over the course of a single day due to the number of trades placed..
What Are the Characteristics of a Scalping Strategy?
Scalping is a relatively fast-paced trading strategy usually reserved for experienced traders with comprehensive knowledge and experience of both the financial markets and price movements. A scalper needs to be focused and disciplined, as the strategy requires the investor to be precise in the timing and execution of their trades. Investors looking to engage in scalping must also be aware of the volatile nature of the financial markets, as prices can move unpredictably and scalpers must be able to adjust their positions accordingly.
When scalping, an investor will usually focus on the smaller time frames, such as the 1 to 5-minute candlestick charts, as this will allow for the volume of trades required to maximise any potential profits. Scalpers also make use of numerous indicators to assist them in making more informed trading decisions, including momentum indicators such as the MACD, and price indicators such as Bollinger Bands, which can be used as references for support and resistance levels.
What Are the Common Issues Associated with Scalping?
Due to the experience required to execute scalping successfully and the fast-paced nature of it, there are a few common mistakes investors make when attempting this trading strategy. If an investor is not adequately disciplined when employing a scalping strategy, or if they fail to execute their trades in a precise and timely manner, this will severely diminish their chances of being successful. Additionally, failing to conduct appropriate risk management, including the implementation of stop loss and take profit levels, can also be significantly detrimental. Finally, an investor looking to trade using a scalping strategy must also be aware of the potential for heavy commissions to be accrued due to the sheer number of transactions required to maximise profit potential. This cost must be taken into account when an investor plans their scalping strategy, to avoid any miscalculations.