Regina, SK Canada (PressExposure) February 28, 2012 -- Scalping is the name for a trading style whereby traders set target prices and stop-loss orders within a very short timescale (usually hours or even minutes) to make very fast profits
A 'Scalper' can make hundreds of trades by holding a security for a short period before selling it. Every rapid sale is designed to bring in a little profit.
'Scalpers' aim to decrease their loss and risk prospects by sacrificing potential larger profits by only looking for many smaller 'wins' that can lessen the probability of becoming a reverse.
This opposes the tactic where a successful deal is improved upon while letting other deals reverse; these wins might be larger but they don't occur as often.
There are three main principles behind scalping:
*Briefly exposing the trade to the market reduces risk as there is less time for a reverse to happen *The market can be erratic or smooth, yet most movement in prices are small, so increasing the possibility of more (but small) chances for profits.
*Logically, because more of the price moves are of the smaller variety, there is more chance to actually transact these low profit-making deals For example, a security can move 5 cents a lot easier than $5
There are several times when scalping can be employed.
The main approach is when a trader is seeing short-term only A high number of deals can transact throughout the course of one and they will use charts that can track prices per minute. They need to be able to react and deal instantly so will often use systems and specific brokers to help them do this.
Another use is when a trader who is scouting the long-term decides to employ scalping to reinforce their primary strategy in circumstances such as the market not showing any attractive trends.
A benefit of Scalping is that it can be effective in most trading styles. It can act as a risk management approach that also offers a reward that matches risk; the gain equals the amount gambled.
Using a $10 example, where the stop is set at $9.80, the gamble is effectively only 20 cents.. As soon as $10.20 is reached, the profits has equaled the maximum potential exposure of 20 cents.
The types of Scalping
A method known as 'Market making' is when a dealer seeks to maximise profits throughout a bid/offer spread by trading at both spread and bids on a specific stock.
The more stable stocks that are traded in bulkier amounts that have smaller movement in prices are where this style is most effective. A scalper will be competing against market maker brokers and as gains are likely to be low, any reverse in price can produce losses that are in excess of their initial profit goal.
Another style follows a more usual method where a high volume of stocks are bought (3,000 - 10,000) with the intention to sell once there is a little movement in price. Although there is a small profit for every share, as so many have been bought, the total profit is increased.
An alternative method is where a dealer inputs a quantity of stocks onto their system based on signals and shuts it immediately the first time the indicator approaches the matching reward / risk ratio.
Is this an Easy Profit?
Monitoring the large number of deals means the scalper has to spend a lot of time examining their screen for the smallest of movements in price for when to trade.
There needs to be an immediate supply of cash if the trader is to benefit from a possibly rewarding deal and the charges associated with that trade can negate any gains.
Maintaining the discipline of knowing when to leave a deal is essential for the scalper who wants to accumulate a series of little gains into a large overall profit. Charges can prove expensive and close attention is needed but the flexibility, large amount of opportunities for profit and the low-risk factor do make it a popular choice with lots of traders.