What is Scalping Trading?

What is scalping trading?

Among different stock market trading, Scalping Trading is the shortest type of trading in the stock market, even shorter than Intraday trading. Scalpers are traders that enter the market and exit the market quickly in order to earn from a large number of trade over the course of a trading day. Their goal is to make maximum profit from these various small trades to equal the profit they could have made from a single day of bigger profit trading.

 

 

How Does Scalping Work?

In this type of trading, traders and investors purchase securities at a lower price and sell high. The main focus is to search out highly liquid securities that ensure frequent trading price fluctuations throughout the day. Also, if the securities aren’t liquified, you won’t be able to scalp. At the time of entering or exiting the market, liquidity also provides the best price possible.

 

Scalpers are of the opinion that making nitty-gritty deals is easier and reduce the high risk that would occur due to volatility. Scalp trading is on the other end of the scale, where traders and investors hold their positions overnight, or even for weeks or months, waiting and looking for a huge profit size to appear.

 

Scalping Trading strategies

Scalpers use three different Scalping Trading strategies that indicate the market behavior for short-term trading opportunities.

 

1). Moving Average Ribbon Entry Strategy-

Moving average ribbons is the first Scalping Trading strategy, it is basically a group of moving averages (MA) of different measurements that are marked or placed on the same chart to give it a shape that looks like a ribbon indicator. Distance between the moving averages shows the strength of the trader. Along with this, it also indicates the support or resistance by determining the price using the ribbon.

 

The formula for a Moving Average Ribbon:

Moving Average Ribbon= Multiple SMAs

Here, SMAs stand for Simple moving averages

SMA= Price 1 + Price 2 + Price 3 + ……… Price n/ n

Here, n is the number of periods

 

 

2). Relative Strength/ Weakness Exit Strategy

The relative strength index is the second Scalping Trading strategy, it is used to calculate the magnitude of the latest price fluctuations to analyze overbought or oversold conditions in the stock price.

 

To determine when to exit and hold positions, 5-3-3 stochastics and a 13-bar, 3-standard deviation (SD) Bollinger Band integrated with ribbon signals on two-minute charts.

 

The scalpers mostly set up ribbon trades when Stochastics change into lower from the overbought level or higher from the oversold level. Also, you need to exit quickly at the time when indicators move against your position after a profitable period.

 

 

3). Stochastic Oscillator

A stochastic oscillator is a third Scalping Trading strategy it is a very useful technical indicator that gives overbought and oversold signals. By comparing the price of a security to its recent range a stochastic seeks to predict probable turning moments.

 

Scalping with such an oscillator seeks to capture moves in a trending market, i.e. one that is constantly moving up or down. Before a turning point occurs, prices usually close around the extremes of the recent range. When the stochastic reaches the upper limit of its range, which is above 80, the trade is closed out.

 

Is scalping trading profitable?

It is one of the most profitable tradings for those who execute it as a primary. In scalping trading, you need a quite large amount of funds to trade and earn profit from multiple small trades but it depends on the trader-to-trader which strategy they use and how many deals they cracked at the end of the day. The number of deals is directly proportional to the profit, the maximum number of deals you make, and the maximum profit you get.

 

As there is a low-risk probability, it is very important to have the proper insights into the entry and exit strategies so you can prevent yourself from loss.

 

Is scalping trading illegal?

Most people considered that scalping trading is illegal in the stock market but it is not illegal. It's up to the broker's mindset because it requires a high volume of trades instantly.

 

Due to this regard, a lot of pressure has been placed on broker systems, so some of the brokers won’t permit scalping trading. Though, it is safe and legal in the stock market.

 

What are the Advantage of Scalping trading?

• Traders who follow an immediate exit strategy can obtain a large number of benefits.
• Scalpers do not take the help of the basic fundamentals as they deal only for a short period of time.
• The low risk involved throughout the trade.
• Scalpers can take advantage of small changes in a stock's price that may not definitely consider the overall trend of the commodity's price for the day.

 

 

What are the disadvantages of Scalping Trading?

• Scalping trading requires a lot of experience and is mainly preferred to those who execute trading since longer.
• Multiple trades at one time can confuse the scalper.
• Less profit while making a single trade in the scalping trading.
• You have to pay a high transaction cost.

 

 

Scalping vs Swing Trading

Both scalping and swing trading are types of short-term trading but there is a minor difference between them.

 

In Scalping trading traders make hundreds of trades every day in which positions are held very briefly, each trade takes at least a few seconds or minutes to obtain from price fluctuations. In this trade, the risk factor is very minimal.

 

In Swing trading, traders use technical analysis and charts to follow and profit off trends in stocks. Traders hold their position for more than a day till the market achieves their desired level of profit rather than making multiple trades. It is clear from the difference that Swing traders make fewer trades than scalping traders but no doubt swing traders usually get a maximum profit margin.

 

 

Conclusion:

Scalping trading is very short-term trading and is preferred only by those who have good experience in trading. It needs high dedication, a sharp mind, and careful entry & exit strategies to execute multiple deals in a day and earn maximum profits from them. In this trading, you need to take on the spot decision and if you need much time to search out the right asset then earning profits in scalping trading is quite difficult for you. But if you know the right strategies and have skills then no doubt you can perform better while making every deal.

 

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