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Scalp trading is deployed to earn many small profits from the price change of stock. The frequency of trades is much higher and many small trades add up to give a sizable profit. It involves buying and selling many times in a day. There may be even 50-100 trades in a day. The belief is that it is easy to profit from small price moves and the persons who follow this strategy are called scalpers.
The recent boom has attracted many people who want to make money in the stock market. It is quite understandable considering the interest rate for the fixed deposits in the bank is very low; around 5% which may not even beat inflation. People are looking for avenues to deploy money. In the long term, the returns from the stock market are always higher provided you know which stocks to invest in.
The lockdowns and work from home provided people with enough time and many of them got interested in the stock markets. There are above 7 core Demat accounts in India and people trade both on the National Stock Exchange and the Bombay Stock Exchange. Some may prefer to hold the stocks for the long term while others may prefer to trade and may be involved in swing trading, day trading, or scalp trading.
Scalping requires the trader to have an exit strategy as even one large loss could wipe out all the profits in the numerous trades that he has carried out. The positive results for a trader on a longer time horizon may be achieved by winning half or even less than half of their trades, as the gains are much bigger than the losses. A scalp trader will require a much higher ratio of winning trades to the losing trades keeping profits equal or more than the losses.
The thought behind the scalp trading is-
- Small price movements occur regularly and even in a quiet market small upward or downward movement can be observed.
- The big price movements may take long time to develop maybe even days or weeks. It is easier to take small profits that can be taken daily and quite regularly.
- When the exposure to the market is for a short period the chances of a large loss diminishes.
The study of stock charts provides people with better entry points for a stock. The knowledge of technical analysis is useful in trading. A day trader can utilize a timeframe of 5 min, 15 min., or even 30 min. for day trading; while a scalp trader utilizes a chart of 1-minute time frame.
Things Scalp traders should be aware of-
- Costs Involved-
A person doing scalp trading should be aware of all the costs involved. There are brokerage commissions and taxes. Since low profits are made on each trade the brokerage would eat into his profits. A discount broker would be preferable with a low brokerage.
- Trends in the market-
The scalp trader should be aware of the trend in the market. If he spots the trend early it would be helpful in making profits. It will take some time and experience to learn the trends. Being aware of the trend in the market the trader can go long or short. Always remember that the trend is your best friend.
The trader should be disciplined in his approach and exit on a small profit or a small loss. He should exit at a predefined level and not wait for the market to turn around if a trade is going against him. One big loss and it would wipe out all his profits. If possible he should not carry the position to the next day as there are many factors influencing the market in the short term.
The trader should select stocks having high liquidity. If he enters into illiquid stock it would be difficult for him to exit when the trade is not turning in his favor.
The other thing is that the trading volume can help a trader identify momentum in a stock and the trend. When the trading volume increases the price too generally moves in the same direction. When a stock is moving higher the volume also increases in an uptrend.
- Technical Analysis –
In the markets there are 2 schools of thought; the fundamental and the technical analysis, and both are used to forecast the price movement of a stock. While fundamental analysis is for the long term, for day traders and scalp traders awareness of technical analysis and knowledge of chart is very useful. Technical analysis does not try to find the intrinsic value of a stock like fundamental analysis but instead uses charts to identify patterns and trends and try to predict how a stock would move in the future.
Scalpers should be aware of the basics of technical analysis to be able to compete with traders from around the world. They should use technical indicators applicable for very short time frames.
Some of the scalp trading strategies are-
- The trader buys and sells the same stock simultaneously. This works in stocks that don’t move much and have good trading volumes.
- A trader enters into stock and purchases very large quantity in thousands and waits for a small move to sell. This requires a stock where the price changes very fast.
- The trader enters a specific number of shares on signal from his system and sells as soon as he gets the first exit signal.
Let’s now discuss the difference between day trading and scalp trading:-
Pros and Cons of Scalp Trading:-
- The trade size is very small requiring less money for every trade.
- The scalp traders are exposed to less market risk as each trade size is very small.
- The target can be reached very easily with a small change in price.
- No need to follow fundamental analysis and dive deep into research of stocks.
- The transaction costs are high due to more number of trades carried out.
- Since more number of trades is placed there are chances of committing error.
- Concentration required is very high for carrying out so many trades. Over a period of time this may lead to stress and affect the health.
A trader may carry out swing trading, day trading, or scalp trading. It depends on the risk appetite, time availability, and the trading tools that he uses. Different methods can be tested over a period of time and see which suits him the best and which he is comfortable carrying out. The ultimate aim is to make a profit and see where you can perform the best. Scalping can be profitable with proper discipline and knowledge of trends.