Mastering Scalping in Trading: Strategies, Tips, and Profitability

What is Scalping in Day Trading?

Scalping is a day trading strategy where traders execute multiple trades with large position sizes within a short timeframe, with the goal of making quick profits from small price movements. Scalpers might make hundreds of trades per day if they are very active, or only a handful if they are more selective. Unlike other trading styles, scalpers prioritize speed and precision, aiming to take profits on what normal participants would consider an “insignificant” move. When done at a high level, all of these small profits add up to substantial returns at the end of the day.

Why Would Anyone Scalp Trade?

The scalping strategy is attractive to lots of traders because it focuses on reducing the time you spend in a position, thus decreasing the perceived risk of the trade. It seems attractive at first glance, but do understand that you’ll need to be extremely precise in your entries and disciplined with your stops otherwise a large position that goes unmanaged will wipe out your account.

Another reason people are attracted to scalping is that the odds of getting a small move are much higher than the odds of getting a large move. It’s easier for the market to move 5 cents instead of 50 cents. And thus, it is more achievable, and will happen more frequently in the market presenting multiple opportunities instead of trying to hit the home run size trades.

What You’ll Need to Execute Scalp Trades

Scalping requires mastery of various techniques tailored to capitalize on small price movements. Any trader should have a complete understanding of technical analysis and how markets move from level to level before getting involved with a live account. As a scalper this is even more important because you are required to have precise entries that give you the best price opportunity near a level of interest.

From a technical perspective you’ll need access to 1-minute charts, Level II quotes, and time and sales. Your broker should also have a reputation for fast execution speeds. You can imagine how as a scalper you are looking to place trades that might only last for a few seconds to just a few minutes. Scalpers who focus on profiting from small price fluctuations probably fall into the few minutes category, whereas others who exploit the bid/ask spread are probably only in trades for a few seconds.

In the technology age, the bid/ask spread trade is best left for algorithmic traders. Algorithmic traders need direct access brokers and data feeds to support their order routing and speed requirements. Most traders getting involved with scalping as a primary strategy, should focus on price movement scalps.

Scalping Strategy Overview

As scalpers we need to take positions with significant size for the small price fluctuations to add up to anything substantial. Be prepared to have positions that are much larger than normal and may require more capital than normal. Scalpers should definitely have account sizes that exceed the threshold for the PDT rule. It’s not uncommon to have position sizes that are $10,000 or more if you are scalping penny stocks. Imagine 10,000 shares of a $1.00 stock. Or 1,000 shares of a $10 stock. If the scalp trade’s aim is to take out only a few cents, you need the size to make it worth it. Scalping three cents with 10 shares is a waste of time.

So what does an actual strategy look like? Your scalping strategy could be to buy a large number of shares as price approaches a key support point, look for a small reaction, and instantly sell once you have profit on the trade, regardless of if price keeps going. Take for example, buying 10,000 shares of stock ABC as it falls from the opening price of $1.25 to support at $1.00. As soon as there is any fluctuation back to $1.03, $1.05 you sell the position to capture three to five cents of profit on that trade. It doesn’t matter if the price continues to go to $1.15, $1.20 or even the high of day. The point is to secure the profit and move on to the next trade.

This same thought process can be applied to stocks that are $10, $50, $100 and so on. It can also be applied to the short side of the market, where you look to profit from a market move that happens in the downward direction. You would sell to open the position and then buy to cover and close after a small price fluctuation. You can imagine how the more expensive the stock gets, the smaller the number of shares you may need, and the larger the profit target would be. Perhaps on a $100 stock you are looking for more like twenty to fifty cents, not two.

What Are The Best Stocks to Scalp?

The best stocks for scalping are liquid, volatile, and have observable price action. There isn’t a definitive list of “best” stocks for scalping, but these characteristics make a stock more suitable.

High Liquidity: Stocks with high trading volume and liquidity are often preferred by scalpers. Higher liquidity ensures that there is enough volume to enter and exit positions quickly without significant slippage. Slippage occurs when there is not enough volume at the bid or ask to fill your order.
Volatility: Scalping requires short-term price fluctuations. Stocks that have good intraday volatility provide more trading opportunities. More volatility allows for quicker price movements, increasing the chances of capturing small moves.
Tight Spreads: Scalpers often rely on small price differentials for their profit margins. Therefore, stocks with tight bid-ask spreads are desirable. Tight spreads indicate a narrower price gap between buying and selling, reducing the impact of transaction costs on profits.
Active Stocks: Scalping is more effective when you’re trading stocks that have a catalyst (news or technical) and have lots of traders getting involved. Stocks with more participation tend to have smoother price movements and better order flow, resulting in faster trade execution for you.

How is Scalping Different From Other Strategies?

Traders are advised to let their winners run and only sell when a specific profit target is hit. When scalping you need to quickly sell your winners and losers, and not hold out for a specific profit target. This strategy is counterintuitive to what most traders are taught and can be a significant mental hurdle to overcome. If your intent is to scalp, but you end up holding trades for a long period of time, what will happen is that your losers will start to far outweigh your winners.

We have seen time and time again that scalpers have no problem selling for quick profit, but have a much harder time selling for a quick loss. This makes sense from a psychological perspective for someone who has not committed to being a scalper and still wants to hold out on some trades. It’s easier to hold onto hopes of a trade turning around and succumb to the fear of a profitable trade going back against you. This is a recipe for disaster as a scalper.

Another counterintuitive part of scalping is that you’ll likely have lots of trades, not just a select few. A common piece of advice for normal trading is to be very selective in your setups and only take one or two A+ setups a day. As a scalper you’ll feel like you are over trading at first, but it is just the nature of the strategy. You need to have lots of trades that allow your high win rate, but small profit factor edge play out.

Risk:Reward in Scalping

Scalping strategies prioritize a high win rate. The trade off is that the risk-reward ratio in scalping is typically very low. It is normal as a scalper to have a streak of winning trades, and then one loser comes along and wipes out some of the profits. At best scalpers might have a 1:1 risk-reward ratio, or potentially even a negative risk-reward ratio. Mentally you need to be prepared for your losses in the scalping game to oftentimes be larger than your winners, but happen much more infrequently.

Scalpers by definition need to be some of the most disciplined traders in the market. Because of the large position sizes, and the unfavorable risk-reward conditions, losses must be cut almost instantly before they get too far out of control. If this is something that you have struggled with, scalping is most certainly not a strategy suited for you.

Is Scalping Trading Profitable?

Yes, scalp trading can be profitable for the right trader, with the right personality. It’s possible that you can make a substantial income as a scalper, but it’s also very possible that you can blow up your trading account. As an example, let’s say that a scalper can on average take 25 trades a day, netting $100. That would be 2 cents on 5,000 shares. That’s $2,500 a day times 250 trading days in a year comes out to $625,000 annually. Account for some losses and say that 50 of the 250 trading days are losses to the tune of $3,000 the annual salary is still $350,000. Use +/- $50,000 in days that are better or worse than average and there is still a very comfortable living being made.

Scalping is only profitable to this degree if you have the focus and discipline that it takes to constantly be watching markets, constantly evaluating whether or not there is an entry, and keeping losses under control. It is taxing work, that is not for the faint of heart or those just looking to make a quick buck trading stocks. Most traders who try to employ this strategy do not have the consistency, or discipline required to see the fruits of their labor.

Conclusion

Scalping can be a highly profitable trading strategy if you are disciplined enough to a strict exit strategy, allowing lots of small profits to stack up. It’s tempting to get involved with limited market exposure and the ability to get lots of frequent small moves. Just understand that this is for someone with unwavering focus and the capacity to be fairly emotionless when it comes to executing their trade plan. You see an opportunity, capitalize on it, and move on to the next one.