What is Scalp Trading?

Investors in the Indian financial market have one goal in mind: Profits. However, they start with trying a specific trading technique and move to the next one until they find one that’s most favorable and which can make them better profits than the rest.

Every investor has a trading style. Some of them believe in value investing, while others in intraday trading. When you think about intraday trading, the idea is quite simple, you buy stocks when the market opens and sell them before the market closes. If the price is higher than the cost price, you make a profit; otherwise, you realize losses on selling or converting the order into delivery. However, investors use different techniques within intraday trading to profit from the ongoing price fluctuations.

One of the most widely used one is Scalp Trading or Scalping.

About Scalp Trading Strategy

Scalping is the shortest-term trading method where investors use high trading volumes to make a profit rather than trying to increase profits for each trade. Scalping utilizes small constant price fluctuations and relies on small profits from each trade. However, the number of trades done is much higher, adding to the profits.

For example, if you are executing the Scalping technique, you may make 50-100 orders and sell them after minutes to profit from the increasing price. Thus, you rely on high order volume even though your profits for each trade are low. Scalping requires investors to have immense discipline and a strict exit strategy. As the price is constantly fluctuating, they have to exit as soon as the price shows an upward trend. If not, the price can go lower, wiping out the small profits made from other Scalping orders.

How does Scalping work?

The stock market technique of Scalping works on the assumption that most stocks would complete the first stage of price movement. However, after the first stage, it becomes tough to ascertain where it will go from there. This is the main idea behind Scalping. It ensures that the investor uses the movement rather than waiting for the stock price to advance further after the initial stage.

The investors who perform Scalping are known as Scalpers, and they believe that it is better to have small profits in several trades than to risk it over a single trade in a day. Even if their profits are smaller and they risk losing on bigger profits, the volume of their trades allows them to earn a considerable amount of profits.

The premises of Scalping in the stock market

The main premises of Scalping in the stock market are as follows:

  • If the exposure to the market is limited, the probability of losing a huge sum of money diminishes.
  • Small price movements are easier to realize than waiting for a bigger movement based on demand and supply forces.
  • Smaller price movements occur daily and are more frequent than larger ones. Even when the market is bearish, small upward price movements are frequent.

How do Scalpers analyze the market before Scalping?

Any investor who invests in the stock market relies on two strategies to analyze the market: Technical Analysis and Fundamental Analysis.

Technical Analysis: It is a form of valuation technique that leverages an asset’s past price pattern to predict what its price will be in the future.

Fundamental Analysis: It is a form of valuation technique that analyses a company’s financial statements, competition, and the market sector.

When investors execute the Scalping technique, they prefer doing technical analysis and skip fundamental analysis. They use trading charts, time frames, etc., that are of the shortest horizon to understand the ‘by minutes or seconds’ past price movement of the stock they want to buy. After observing the patterns, they execute the high-speed trading style and can complete 10-100 orders per day.

Difference between Scalping and Day-trading

Although Scalp trading is a part of day-trading, it fundamentally differs in style and objective. Here are the differences between Scalping and day-trading:

Title of difference Scalping Day-trading
Timeframe Scalping uses a timeframe that fluctuates with seconds or minutes. Day-trading uses a timeframe that may last for several hours.
Trade Volume Scalping includes high trade volumes that can go up to 100 trades in a day. Day-trading includes 1-2 trades only in a single day.
Objective The objective of Scalping is to execute as many trades as possible and realize small profits from each of them. The objective of day-trading is to wait for the price to go up significantly and realize profits by selling the stock.
Speed Scalpers’ trading sleep is considerably high. They buy and sell stocks in a matter of seconds. Day-traders trade at an average speed. They wait for several hours to sell a stock.
Analysis Scalpers only prefer to do Technical analysis to predict future stock prices. Day-traders prefer to do both technical and fundamental analyses to predict future stock prices.

How can you do Scalp Trading?

For Scalp Trading, you need to open a trading account with IIFL. You can follow the below steps to open a free Demat cum trading account:

  1. Visit www.indiainfoline.com or the IIFL share markets mobile app. Click on open a trading account» Enter Basic details.
  2. You will receive a one-time password (OTP) on the mobile number.
  3. You will receive a link on your registered email id. You need to enter the OTP received on your registered email id.
  4. After verifying the OTP, you need to fill out the online Account Opening Form.
  5. Your Relationship Manager will then contact you for the necessary documentation.
  6. Once the documentation process is completed, and the forms are received at HO, the account will be opened within 24 hours.

You can adopt Scalping as your primary trading style or complement your current investments. As the risk exposure is quite low, Scalping makes up for an ideal trading style to realize profits without taking the delivery and waiting for years. However, as Scalping happens at a very high speed, it is always wise to perform detailed technical analysis beforehand as a small fall in the price can force you to realize huge profits. If you want to understand more about what Scalp trading is, you can contact the financial advisors at IIFL and start your journey as a professional scalper.

Scalp Trading: What You Need To Know

It certainly can be stated that the new traders will go to that point where they will be confused in deciding on which way of trading to practice. Of course, there are styles. Depending on the individual personality, you might select a style that matches. You must have a technique in place, and it should correspond perfectly with your tolerance of risks and financial plans, time to spend on investment, and other factors.

As a trader, scalping is one of the styles that you should strongly consider. It is especially ideal when you are just starting out your trading journey. It helps you get the feel of trading. Scalp trading typically means taking many small deals throughout the market day with one goal in mind, which is to make profits.

How Does Scalp Trading Work?

As soon as you have the meaning of Scalp trading sorted out, it is essential for you to know how scalp trading works. The trading method is considered one of the short-term methods of trading. This sort of trading basically involves you purchasing and selling many times during a day, gaining your profits through the differences in prices. Purchasing an asset when it is at its low price and selling it when the price goes up is the core of the scalping strategy. It is extremely crucial that you find highly liquid assets and grant you price fluctuations many times throughout the day. If, in any circumstance, the asset is not a liquid asset, you might not be able to scalp it. What liquidity assures you is the price that is ideal when you enter and exit the marketplace.

About Scalp Trading Strategy

The initial kind of scalping is known as ‘market making,’ whereby a scalper attempts to capitalize on the spread by posting a bid and an offer for a certain stock altogether. Certainly, this tactic may succeed only on the largely immobile stocks that trade large volumes without any sort of changes in real price.

This sort of scalping strategy is extra challenging to carry out successfully as a trader must go toe to toe with market makers for the shares on both offers and bids. Additionally, the profit is so tiny that any sort of stock movement against a trader’s position calls for a loss exceeding their original profile target.

The other two types of scalping trading strategy are based on a more conventional approach and necessitate a moving stock where the price changes rapidly. These two methods also need a sound method and tactic of reading the movement.

Spreads in Scalping vs Normal Trading Strategy

When the scalpers trade, they wish to profit off the changes in a bid-task spread of security. That is actually the difference between the price at which a broker will purchase the security from a scalper and the price at which the broker will sell it to the scalper. Therefore, the scalper is looking out for a narrower spread.

However, in normal circumstances, trading is actually fairly consistent and may enable steady profits. It is due to the spread between the bid and the ask that is also steady.

Wrapping Up

You may certainly adopt scalp trading as your primary trading strategy. Since there is very low-risk exposure, scalping pretty much makes up for the perfect trading tactic to realize the profits without waiting for years or taking the delivery. However, since scalping happens at a very high speed, performing a detailed technical analysis before anything else is always a wise idea.

Frequently Asked Questions Expand All

Scalping or scalp trading is a great way to diversify, minimise risk and realise profits as they add up after every successfully executed trade. As positive and negative price movements occur constantly, you have a good opportunity to make profits.

Yes, numerous scalpers make considerable profits from scalping stocks. However, you must ensure you invest in good stocks and after doing a detailed technical analysis.

Here are some of the most famous and effective scalping trading techniques:

  • An investor sells and buys the stock simultaneously by posting a bid and an offer.
  • An investor purchases a large number of stocks that are sold for realising profits after a very small rise in the price.
  • An investor buys many shares on any signal from their system and quickly closes the positions after the generation of the first exit signal.