Key Takeaways
- Scalpers aim for profits from small price changes through frequent, quick trades using leverage.
- Scalping is a legal trading strategy and is used by both individuals and institutions.
- Successful scalpers must be disciplined and able to make fast, informed trading decisions.
- High-frequency trading has increased competition for scalpers by automating rapid trades.
- Scalping is a form of day trading focusing on short-term price movements.
What Is a Scalper in Finance and Trading?
Scalpers are traders who use leverage to buy and sell large volumes of securities quickly, usually in seconds, with the aim of procuring profits from minuscule price changes. “Scalper” also refers to someone who buys up in-demand merchandise or event tickets to resell at a higher price.
Scalpers buy and sell securities many times in a day with the objective of making consistent net profits from the aggregate of all these transactions. Scalpers must be highly disciplined, combative by nature, and astute decision makers in order to succeed.
How Scalpers Operate in Financial Markets
Scalpers buy and sell many times in a day with the objective of making consistent profits from incremental movements in the traded security’s price. A scalper attempts to profit from the bid-ask spread in addition to exploiting short-term price moves. They may trade manually or automate their strategies using trading software.
High-frequency trading (HFT) has made a scalper’s job more competitive. Programs can scour thousands of securities at once and take advantage of discrepancies between the bid and the ask in milliseconds. Black box algorithms also monitor Level 2 data, analyzing price and liquidity information to make short-term trades.
Scalpers typically use short duration, one- and five-minute—charts to make their trading decisions. Scalpers may use intraday scanning software to find new opportunities. Most engage in high-volume trading and choose online brokers with competitive commissions to minimize costs.
Fast Fact
Scalping is considered a day trading strategy.
Essential Characteristics of Successful Scalpers
- Disciplined: Scalpers need to be disciplined, strictly following their trading plan. They set daily loss limits and stop trading when the limit is reached.
- Combative: Scalpers are often combative by nature. They view the market as a battle zone and see other traders as the enemy. Many scalpers who trade manually have an “us vs. them” mentality toward black box trading programs. They look for repetitive patterns and try to exploit them for a profit.
- Decision Maker: There is often little time to react when making short-term trades. Scalpers often have to make trading decisions in seconds, or they miss the opportunity. They also need to make quick decisions if an error is made. For instance, they must decide whether to close a bad trade immediately or partially now and the rest at market close. Being a good decision maker helps prevent a scalper from panicking. In other words, they have to be calm amid chaos.
What Is Scalp Trading?
Scalp trading is a form of day trading. This investment strategy involves buying and selling securities many times throughout the day with aim of profiting from the total of all these trades.
Is Scalping Legal?
Is Scalping a Good Trading Strategy?
While it can be profitable, scalping isn’t for everyone. Successful scalpers typically have knowledge of the markets, well-honed analytical capabilities, the ability to make quick decisions, and are highly disciplined, among other traits.
The Bottom Line
Scalping requires traders to buy and sell securities throughout the day at a fast pace. Analytical capabilities, making trading decisions quickly, and sticking to an exit strategy are some of the skills needed to succeed as a scalper. If you’re an investor with a long-term time horizon, it’s likely that the scalper’s investment strategy isn’t a good fit for you.