Introduction
Scalping is a trading style used by participants in the markets who aim to achieve profits based on minute movements in the price of financial instruments. Scalping is a trading style wherein one executes multiple trades in one day and each trade gives a reasonable profit. Scalpers are the merchants using this technique relying on numerous low margin gains that collect into larger margins of profit over time based on huge volumes and high speed of transactions.
Scalping is the concept of trying to exploit minor price fluctuations that usually fall within one tick up to one pip for certain markets with less possible exposure to the risk of a market over a prolonged period. Scalping is markedly different from other trading strategies such as swing trading or position trading which focus on larger price movements to be established within longer periods.
For these reasons Scaling is one of the fastest trading strategies but it is also the most demanding when it comes to concentration discipline and technical understanding.
Fundamentals of Scalping
Scalping involves the buying and selling of financial instruments with a very short position usually for just a few seconds or minutes with the aim of generating small but consistent profits. In contrast to most other strategies that require waiting for larger more erratic price movements scalpers actually base their trading on frequency rather than waiting for large unpredictable profits. Some very important principles define scalping such as
Short Holding Periods
Scalping positions are generally maintained for a very short period holding an open position just for a few seconds or minutes and on rare occasions overnight.
High Trade Frequency
A trader may enter dozens and even hundreds of trades during the trading day with the intention of making small profits on each trade.
Low Price Targets
The concept is to capture small price movements mostly a few ticks or pips which are large enough to result in profits if the order is traded several times.
Tight Risk Management
For Scalping tight risk controls are required since small price movements could either be in favour or against expectations. Scalpers therefore set relatively tight stop loss orders so as not to get affected by unwanted moves.
Scalping in Different Financial Markets
Scalping is a versatile system that can be used in various financial markets and it has specific benefits and drawbacks for scalpers.
Stock Market
In the stock exchange Scalping refers to trading high volume stocks with relatively stable price movements. Scalpers look for stocks with high liquidity and narrow spreads so that their trades are quickly processed.
Key Factors in Scalping Stock Exchange
Liquidity
The stocks scalpers use should be highly liquid so that they can trade fast without price slippage.
Volume and Volatility
The better it is at predicting prices the higher the volume in a stock that the scalper will experience. In return volatility affords the scalper more opportunities but with heightened risks hence requiring balance.
Transaction Costs
Since Scalping involves continuous trading transaction costs like commissions will eat into the profit. Stock scalpers require low cost brokers.
Foreign Exchange (Forex) Market
Forex is more appealing to a scalper than any other market due to high liquidity availability 24/7 and relatively low transaction costs. High spreads with huge trading volumes make popular currency pairs such as EUR/USD or GBP/USD more vulnerable to scalpers.
Key Things to Know About Forex Scalping
Leverage Basically
Forex brokers provide a massive amount of leverage that makes it easy for a scalper to maximise his gains. However the higher the leverage the higher the risk therefore a scalper needs to be very cautious.
Pip Movements
Forex scalping is based on capturing several pip movements per trade ranging from one to five pips. This requires the accuracy of the scalper since Forex prices can change within seconds.
Economic News
There is always a great deal of major economic news or data releases that create instant and somehow unpredictable price movements.
Key Things in Future Scalping
Tick Size
Futures contracts have defined tick sizes or the minimum price increments by which they are allowed to change. Scalpers exploit small increments of price movement for their profit.
Transaction Costs
Similarly to the stock markets scalpers in the futures market must also bear the costs of high commission trading and exchange fees associated with frequent trading.
Market Hours
Futures markets may have special trading hours and scalpers need to be in tune with the liquidity and volatility patterns during such times.
Tools and Techniques for Scalping Successfully
Scalping is the blending of technical analysis good reflexes and execution all at one time. Scalpers rely heavily on sophisticated tools and techniques to gain an edge in the market.
Technical Analysis
The bulk of scalping techniques and strategies can be attributed to technical analysis. Since Scaling is purely time sensitive and based on short term price movements technical indicators and chart patterns become an easily available source for the scalper to make split second decisions.
Important Scalp Indicators
Average Movements
Short term average movements such as a 1 minute or 5 minute MA help scalpers identify how to find trends and proper entry/exit points.
Bollinger Bands
These measure volatility and can be used by scalpers to spot overbought or oversold conditions.
Relative Strength Index (RSI)
RSI is a momentum oscillator that measures how fast in terms of percentage and in what direction the price is changing it signals potential reversals.
Volume Indicators
Scalpers often use volume indicators to confirm the strength of price movements. High volume usually corresponds with strong trends.
Depth and Order Flow
A normal practice is to pay attention to level II market data which monitors the depth of the market showing all buy and sell orders pending execution. Order flow analysis allows scalpers to predict short term direction changes in price and position in keeping with those expectations.
Order Flow Techniques
Tape Reading
This refers to a reading of the order book detecting the flow of buy and sell orders to predict in which direction the market will head.
Volume Profile
This function shows the traded volume distribution at different price levels hence helping scalpers determine vital support and resistance levels.
Algorithmic Trading
Many traders deploy automated trading systems often referred to as bots that place orders based on pre specified conditions. Algorithmic trading allows scalpers to avoid impulse decisions and carry out their trades with maximum velocity and precision.
Advantages of Algorithmic Scalping
Speed
Scalper algorithms can execute trades faster than any human trader speed can be critical and for scalpers milliseconds make the difference.
Consistency
Automated systems allow for consistent application of a scalping strategy without deviation from emotions or second guessing.
High Frequency
Some high frequency trading systems also known as scalper algorithms complete thousands of trades within one day riding tiny price changes that generate profits.
Risk Management Tools
The risks inherent in Scalping are that even a minor adverse price movement may result in losses in the order of hundreds or thousands and risk management is an essential factor used by scalpers.
Risk Management Techniques
StopLoss Orders
Most scalpers use stop loss orders that are set only a few pips or ticks away from the entry price as a requirement to cut down the possible loss.
Position Sizing
This is one of the reasons scalpers rely on small position sizing with regard to risk leaving room for several trades to be executed.
Risk/Reward Ratio
The scalper will ensure that the gains are above losses because the objective was to have small profits regarding Scalping keeping the risk/reward ratio favourable in most cases.
Even though scaling presents an opportunity for profit making on a consistent basis it exposes individuals to huge challenges and risks as well. Scalpers face several setbacks that have the potential to undermine their general success.
Scalping Attracts High Transaction Costs
One major challenge scalping faces is the accumulation of transaction costs. Actually since the number of trades executed with Scalping is substantially high trade related fees such as commission charges spreads and other trading costs can easily mount and eat into the profits. However scalpers must be cautious about the fee structures charged by different brokers and look for trading platforms that charge them a good rate for high frequency trading.
Market Volatility and Liquidity
Scalping depends on liquidity and price stability to be effective. It is however prone to a sudden spiking in volatility and low liquidity situations where trades are executed at unfavourable prices. Scalpers have to tread carefully under these circumstances especially on news release days or other market moving events.
Emotional Discipline
Scalping demands a lot of concentration and speedy decision making that can be extremely draining to the mental state. Traders must stay very emotionally neutral as well as avoid over trading or chasing losses. There is a need for emotional discipline so that trading becomes consistent and is not based on impulsive decisions.
Regulatory Constraints
This practice may also face regulatory limitations in certain markets. Some brokers for instance will limit the number of trades facilitated within a short period or prohibit scalping altogether. Scalpers therefore must be aware of their legal operating environment to avoid contravention thereof.
Scalping is an extension of the much older and well known activity of day trading. While day trading is the process of entering and exiting positions often multiple times within a single day and scalping takes the concept another step further by matching every entry with a contra typically closed out within minutes.
However the biggest role technology has played in Scalpings evolution has come more recently with the rise of high speed internet algorithmic trading and advanced trading platforms.

HighFrequency Trading (HFT)
High Frequency trading is a subclassification of algorithmic trading which seeks to capitalise on minute price movements by making thousands of orders within a matter of a second. HFT is usually a preserve of institutional traders although individual scalpers may exploit HFTs notions which include speed and accuracy.
Direct Market Access (DMA)
DMA technology will enable the scalper to place orders directly on an exchange thus bypassing intermediaries like brokers. In sum it would be quicker in the execution and give a higher level of control over the orders making it an invaluable resource to the scalpers who are required to manoeuvre swift counts in line with market conditions.
Trading Platforms and Software
Modern trading platforms tend to offer tools and features that are customised for scalpers like live charting and plenty of complex order types and many providers allow for algorithmic trading systems to be integrated within them that way scalpers can automate their strategies.
Regulatory Environment and Ethical Considerations
Scalping policies differ across regions and markets. It is permitted in almost all jurisdictions although some brokers prohibit or restrict this practice often the specified reasons by the brokers for this are the effect of scalping on market liquidity and pricing.
Market Manipulation Concerns
Scalping particularly when traded through high frequency trading algorithms has also been criticised for potentially contaminating the integrity of the markets. Critics argue that market prices may get distorted with huge trades made at warp speed on an order book making it an unfair playing field for many retail investors. Regulators such as the SEC in the United States and ESMA in Europe have formulated regulations for monitoring HFT and other aggressive trading strategies.
Broker Restrictions
Most brokers institute some form of scalping restriction to protect their liquidity providers. For example some require a minimum holding period to be maintained for certain trades and other restrictions involve limiting the number of trades executed by a client during a defined period. A scalper would thus need to examine the policy of a specific broker very critically to determine whether it would actually serve to enable him to meet what is expected of him.
Viability of Scalping
Scalping is considered a viable strategy for the long term only in the presence of some specific circumstances prevailing at the moment for a trader including skill discipline and acquisition of the right tools and resources. Scalping would definitely be rewarding however it is not at all risk free or challenging.
Profitability Potential
Scalping offers the potential for actually making consistent profits above all for those who are successful in implementing their strategies with accuracy and discipline. At the same time the stunning small profit margins of each trade suggest that fairly mild mistakes or higher transaction costs can seriously hurt profitability.
Psychological Demands
Scalping requires strong mental stamina and concentration. Always watching the markets can keep traders always on the edge and subsequently burn them out. Such traders who cannot psychologically sustain the fast paced arena of Scalping may eventually flunk in playing this strategy in the long run.
Market Conditions
Scalping is greatly dependent on the required favourable conditions in the market thus it is more dependent on the markets liquidity along with its volatility. Low volatility or reduced liquidity means fewer scalping opportunities and thus much harder times to sustain steady profits.
Advanced Scalping Strategies and Adjustments
Although Scaling is largely concerned with short term trading and catching up on small price movements the crème de la crème in this field develops more advanced techniques to enhance its efficacy and profitability. Such high end scalping techniques demand not only a good sense of market mechanics but also the ability to evolve according to the changing market conditions. A few of these advanced techniques that can add value to the scalpers arsenal are as follows.
Range Scalping
Range scalping involves identifying a price range in which to hold an asset and trading based on that range. The trader will buy as the price approaches the range’s lower boundary sell near the top of the range sell short at the upper boundary of the range and cover this position near the lower boundary. It works best in low volatility environments where prices tend to move sideways.
For range scalping to work well it must be supported and resisted by clear levels. Support and resistance levels are drawn by scalpers using important technical analysis tools such as Fibonacci retracements pivot points or Bollinger Bands. The strategy quickly escalates the risk though of those nasty pitfalls where it will break outside of the said range as we increase into tighter conditions.
Scalping with Market Sentiment
The market sentiment method of scalping Scalping becomes much more subtle when it incorporates market sentiment into making a particular trade. Market sentiment refers to the tendency or mood and psychology prevailing amongst the participants within the market. It usually acts as an early indicator of potential price movements. Scalpers follow the sentiment by tracking news events social media trends and even data regarding order flow in the expectation of short term changes in the prices of assets.
For example earnings announcements and surprises or unemployment report data can shift sentiment drastically which may happen in real time and can cause temporary effects on the price. Scalpers who can pick up such shifts immediately can take advantage of small price movements before the rest of the market is reacting to that change. To pick up that shift sentiment analysis tools such as those online sites tracking social media sentiment can be used for such a scalping strategy.
Conclusion
Scalping is an aggressive high frequency trading style characterised by the potential for consistent small profits. That is scalp trading requires certain skills tools and discipline to be successful with different financial markets such as stocks Forex and futures. Scalping pays best for technical traders who can carefully manage their risk and keep themselves out of emotional distractions however the challenge should not be down played.
Due to high transaction costs market volatility and psychological demands from continuous trading it may not be profitable in the long run. Scalping has been revolutionised by technology algorithmic trading direct access to markets and high frequency systems all of which assist in making the process faster and more efficient. As technology increases however so does the authorities scrutiny of it citing fears of market manipulation and unfairness in the market.