Scalping on financial markets: How to make money on short trades

Scalping is a popular style of short-term trading that involves making small but frequent profits. Learn what scalping is and how to start scalping in the financial markets, including Forex and stocks.

What is scalping

Scalping is a style of trading that focuses on making profits through small price fluctuations in the financial markets. Instead of holding positions for long periods of time, scalpers make profits by making many short trades that may last only a few seconds or minutes. The basic idea behind scalping is that small price movements occur more frequently and are easier to catch than large market fluctuations.

Successful scalping requires a strict trading strategy, which precisely defines the moments of entry and exit from positions, as well as the amount of capital involved in each transaction. Special attention is paid to the exit strategy, as one losing trade can wipe out most of the profits. Scalpers often use take profit and stop loss orders to automate the process of closing positions and minimise risk.

Scalping Trader

A scalping trader is a trader who uses scalping as their primary trading style, capitalising on small price fluctuations. Although scalpers are technically classified as day traders, what sets them apart is their strict adherence to the time frame for each trade. They never keep positions open overnight and close trades as soon as specific profit or loss targets are reached, avoiding the risk of turning a losing trade into a winning trade.

Scalpers are extremely disciplined and spend a lot of time monitoring the markets, as they can make dozens or hundreds of trades per day. For this reason, scalping is rarely chosen by beginners or part-time traders. Many scalpers prefer to automate their trading with software, which speeds up the process of entering and exiting positions, minimising emotional decisions and the associated risks.

Scalping on stocks

Stock scalping is short-term trades, lasting a few seconds or minutes, to profit from small price movements. A scalper can buy a large volume of shares at a certain price and close the trade when the price rises slightly, making a quick profit. However, such transactions carry high risks and it is important to use stop losses to minimise losses.

Liquidity is crucial as without it it is difficult to move large volumes of stock quickly, which can lead to unwanted position holding and widening spreads. Scalpers should consider all trading costs, including commissions and spreads, as they have a significant impact on overall profitability with frequent trades. Effective risk management and cost control are key elements of successful scalping.

Forex Scalping

Forex scalping involves trading currency pairs for short periods of time in order to profit from small price movements. Scalpers often focus on volatile events related to economic data to take advantage of large market swings. Due to leverage, they can take positions as large as 100,000 units of the base currency and profit even from changes of 1-2 pips. They usually close positions after a currency pair moves a few pips, which can happen several times a day.

Profitability of scalping and key strategies for successful trading

Scalping can be a profitable trading strategy if the trader manages to maintain a higher ratio of winning and losing trades. Unlike other styles, where a single losing trade can have a negligible impact on the outcome, in scalping a few bad trades can quickly wipe out all previous profits. Therefore, it is important for scalpers not only to be able to react quickly to market changes, but also to control the risks.

Scalpers usually use three main strategies: high volume trading, breakout trading and spread trading. Each of these strategies has its own characteristics, but they all require high liquidity and quick reaction to market changes. For example, in high volume trading it is important to open and close positions efficiently with a tight spread, and in breakout trading it is important to follow market movements until the first exit signal. Scalpers can utilise both long and short positions by using derivatives such as CFDs, options and futures.

How to start scalping trading

The very first step in starting scalp trading is to find a provider that offers you the features and tools you need to effectively implement your strategy. At a minimum, this should include:

1. Competitive costs and fees: Profits can be eaten up by high trading costs and commission fees. You must ensure that your supplier offers competitive pricing.
2. Advanced charts: The platform you choose should offer charts on multiple time scales. If you open and close positions in seconds or minutes, a tick of 10 minutes or more is not very useful.
3. Technical analysis indicators and drawing tools: Most scalpers pay more attention to price action and identifying familiar patterns on the chart than to fundamental analysis.
4. Up-to-date news and analysis: If you keep an eye on ‘hot’ news and trades every day, you will know where there are opportunities and what can trigger a sharp price change.
5. Appropriate risk management tools: Stops and limits are an essential part of a scalper's toolkit. Knowing how to set them before and during a trade can make the difference between a winning and losing trade.

Conclusion

Scalping is a dynamic and potentially lucrative trading style that requires a high level of discipline, a clear strategy and the use of the right tools. Successful scalpers know how to react quickly to market changes and manage risk effectively. With the right approach and choice of provider, this trading method can become an important part of your investment armoury.