Scalp trading strategy: what to know

Scalping is a trading strategy that involves making a large number of trades in a short period of time. Learn more about it in our educational guide.

What is scalping?

Scalp trading is a trading strategy that aims to profit from a series of small price changes over the shortest time frames. While strategies such as day trading and swing trading may involve keeping positions open for hours or even days, scalpers tend to keep positions open for mere seconds. This means scalpers should pay very close attention to price action in order to maximise their chances of making the right decisions.

Scalp trading: key takeaways

Scalp trading often involves buying large quantities of an asset but only holding that asset for a short period of time.
Scalping strategies may include going long by buying low and selling that asset at a higher price, or going short by selling high and buying the asset low.
Two common assets to scalp are stocks and forex.

How does scalp trading work?

Scalp trading works by buying or selling an asset but only holding it for a short period of time. Scalping strategies may include going long by buying low and selling that asset at a higher price, or going short by selling high and buying the asset low. This means that scalp traders could potentially make a profit across a range of falling markets, though there is also risk of making a loss if the market moves against them.

Scalping is not usually a trading strategy that’s adopted by beginners. Because scalpers aim to profit from such small price movements, it means they have to make dozens, if not hundreds of trades each day. This requires time to monitor the financial markets.

Some scalpers use a computer program to help with their scalping strategy, which can ensure speed when entering and exiting positions and reduce the risk of trading based on emotions and bias.

Two of the most common types of asset to scalp are:

Shares: scalpers might decide to buy a large quantity of shares, wait for them to increase in value by a small amount and then sell.
Forex: forex scalping involves trading currency pairs over short time periods and in high numbers. Some forex scalpers will focus on high volatile events around economic data or breaking news as this is where large market moves tend to occur.

For example, say you decide to buy 100 contracts for difference (CFDs) on shares in Company A once it reaches $500 per share. Company A’s shares drop to $500 a share and you purchase the shares. The market moves in your favour and rises to $501, meaning the gain from this small position could be $100.

However, if the market moves against you, losses can quickly appear. Many scalp traders use stop losses as a risk-management strategy. However, stop losses are entirely foolproof, particularly in a highly volatile market. Guaranteed stop losses are also an option, as they don’t include any risk of slippage, though they do incur a fee.

What are the main scalping strategies?

Market making: this strategy is when the trader capitalises on the bid-ask spread. They will put out a bid and make an offer for the same stock at the same time.
Buying large: this involves buying a large number of shares and then selling them for a profit, after those shares have increased in value by tiny movements.
Risk/reward ratio: the trader purchases a number of shares and then exits that position as soon as a system is generated near the risk reward ratio of 1:1. An example of this could be that a trader enters a position at $15, with a stop at $14.90, the risk is $0.10, so a risk/reward ratio will be reached at $20.10.

Scalp trading example using the MACD indicator

The above chart shows an example of a potential scalping strategy using the MACD indicator, on the shortest timeframe. When the MACD (blue) line crosses above the signal (red) line, this can be a buy signal, and when it crosses below the signal line, this can be a sell signal. With scalping, each trade lasts only seconds. This chart is used for illustrative purposes only. Past performance is no indication of future results.

Scalp trading vs day trading

While scalp trading can be defined as traders holding trades for very short periods of time, sometimes minutes, day trading involves buying and selling assets or financial derivatives within a single trading session.

	Scalp trading	Day trading
How long are trades held?	Minutes	Hours
Common to open multiple trades a day?	Yes	No
Overnight holds	No	No
Stocks and forex	Yes	Yes

Pros and cons of scalping

Pros	Cons
As positions are smaller, scalpers can have less exposure to risk – however, scalpers still have to purchase large quantities in order to make sufficient profit.	Scalpers tend to submit more orders compared to other trading strategies, which can result in higher trading costs.
Since most trades are closed within minutes, the time spent researching every new trade tends to be lower.	Given that only small profits are obtained from each trade, scalpers tend to spend more time actively managing each trade.
Can be very profitable if executed correctly and the market moves in your favour.	Losses can be heavy if the market moves against you.
Can be easily automated within the trading system that is being used.	Can require a high level of concentration and be time-consuming.

Scalp trading considerations

Separate from the pros and cons, there are a number of things traders could want to consider if they wish to explore scalping.

Order execution

A delayed or bad order can wipe out profits, so mastering the art of order execution is a key part of scalp trading.

Frequency and costs

Frequent buying and selling can be costly and add up in terms of spread cost, which can cause profits to drop.

Trends

Trends and the cyclical nature of the markets can be helpful for scalpers. Knowing when to enter and exit a trade, and repeating a pattern could be helpful to a novice scalper.

Technical analysis

Understanding the basics of technical analysis may be useful when scalping. Certain technical indicators are intended for very small time frames, and can be helpful when looking at short-term opportunities, or multiple chart scalping.

Discipline

As a rule, most scalpers close all positions during a day’s trading session and tend not to carry them onto the next day. Scalping is based on taking advantage of the small opportunities that exist in the market.

The risks of scalping

It’s important to keep in mind that scalping, like any other strategy can be risky. It is important for traders to do their own research, taking into account their knowledge of the market, attitudes towards loss, among other factors. They should also avoid trading more money than they can afford to lose.

Frequently asked questions

What is scalping in simple terms?

Scalp trading is a trading strategy where traders attempt to profit from small price changes in financial assets. Scalpers may make hundreds of trades a day, each lasting as little as seconds, so it’s important for scalpers to always be watching their trades and understand price action and its influences at all times.

What is a scalping example?

A scalping example might be that you buy 100 contracts for difference (CFD) shares in Company A once it reaches $500 per share. Company A’s shares drop to $500 a share and you purchase the shares. The market moves in your favour over the next 20 seconds and rises to $501. The possible profit from this small position could be $1,000. Scalpers will often consider taking a similarly short-term position soon afterwards, meaning they will undertake dozens or even hundreds of trades a day.

Is scalping trading legal?

Yes, scalping trading is legal, but you’ll need to adhere to the rules and regulations when engaging in any form of trading. These rules may vary by jurisdiction, and it's essential to be aware of and comply with the regulations governing financial markets in your region.

How do I choose a stock for scalping?

When choosing shares for scalping, you might want to consider highly liquid shares, to ensure you can enter and exit positions quickly and minimise slippage. Also, stocks that are known for intraday volatility may provide more trading opportunities. Your choice may also be influenced by the time you trade, the indicators you use, and whether there are upcoming fundamental events that can move the price.

Is scalping harder than day trading?

Neither is harder or easier than the other. It is up to each trader to conduct their own research to decide which, if either, of the two is more suitable for their needs and abilities.

Is scalping good for beginners?

Scalping can be challenging for beginners as it requires an especially high level of focus during all active positions. This means a strong level of understanding of markets and the conditions under which they move is important. Traders should decide for themselves if scalping is suitable for them. However, they should consider that it tends to require a lot of time and energy.

Can you make money scalping stocks?

As with any trade, you can make money from scalping, but it requires a strong understanding of market movements as well as a good grasp of trading psychology, technical indicators, fundamental market conditions, and emotional restraint. Even then, scalping is risky and can result in losses.