Do you ever wonder about the effectiveness of scalping as a trading strategy? For many traders and investors, both part-time and full-time practitioners, the idea is an attractive one. While there’s no agreed upon textbook definition of the practice, a generally accepted definition in the financial trading sector is that a scalp is nothing more than a short-term trade, typically ranging between one and several minutes. In order to determine whether you should add these super-short-term kinds of trades to your repertoire, it’s imperative to do several things first.
Begin exploring the topic by learning what a typical scalper does and then review some of the method’s pros and cons. Later, if the idea still appeals to you and seems to suit your personal risk tolerance, try out a few scalps on your favorite broker’s demo account. That way, you won’t need to risk real money but can still use live data from the markets to make decisions about what assets to buy, how long to hold them, and how to set stops. Here are the pertinent details.
Most traders who scalp rely on having an excellent technical analysis provider such as TradingView so they can always have access to the best trading tools. Scalpers are different from day traders in many ways, though there is a lot of overlap in their attitudes, habits, goals, and the kind of analysis they use. However, there are a few features of a scalper’s toolbox that are relatively unique. For instance, all trades will be closed before the end of the day. Thus, no overnight holds, ever. Plus, most transactions tend to last just a few minutes, may or may not include the use of leverage, and always make use of carefully placed stops to minimize losses.
Profit targets are usually in the neighborhood of just a few ticks per trade. On a normal day, the practitioner might complete as many as 50 transactions. If all goes well, and when stops are set correctly, there is very little exposure to financial risk because of the shortness of the trades and the tight stop-loss points. Unlike day traders, scalpers are happy to take very small profits. When scalping, a person will often rely on just a few technical indicators, namely those that show momentum, resistance, support, and overall volatility. As for time ranges, there’s currently a huge preference for one-minute and five-minute charts.
Advantages and Disadvantages
What’s true for all methods and systems is true for the scalping enthusiast’s favorite technique: there are good and not-so-good aspects of the practice. However, those who do it regularly would not choose anything else. Likewise, those who have tried to scalp and found it not to their liking will probably never go back to it. Much depends on personal preference. The practice can be lower risk compared to most other trading styles. With tight stops and just a few minutes of exposure per transaction, there’s not much room for loss on a single position. You don’t need a lot of capital or time to be a scalper. On the downside, it can be emotionally strenuous having to make so many trades per day, and there are obviously higher transaction costs for people who use brokers that charge per transaction.