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Scalp Trading in Stock Market          

Scalp Trading in Stock Market

Scalp Trading in Stock Market

Scalp trading is a method of trading used by intraday traders. Scalp traders try to make use of smaller price changes in the market. Scalp trading is a type of intraday trading. Intraday trading refers to the practice of buying and selling stock during market hours on the same day. Intraday traders try to make use of sudden market movements that happens within one trading day. 

Scalp trading happens when an investor tries to buy and sell the shares in a matter of minutes. Scalp traders try to use the smaller price variations the stock price has. 

Usually, the trades (buy and sell) happen in a matter of seconds in scalp trading, making only smaller profits. But the idea of scalp trading is that small profits add up in the long term. Volume has a key role to play in the case of scalp trading profits, too. Volume refers to the number of stocks that are bought and sold. Higher volume scalp trading ensures higher profit even if the profit from a single trade is lower. 

For example, the profit from a single trade could be Rs.10 only. But the profit becomes Rs.1000 if the trade volume is 100 (if the trader buys and sells 100 stocks at the same time). Scalp trading requires a higher level of stock market knowledge and expertise. Investors usually do thorough research to devise a scalp trading strategy before they begin trading.

What is Scalping Trading?

Scalping is a style of trading where small price changes are taken advantage of in large quantities. Stock market prices tend to move every second, and scalping trading makes use of that. Instead of the normal way of trading, where buying and selling have an interval of up to a few days, scalping traders (scalpers) buy and sell in a matter of seconds. 

Let us see an example to understand scalping better. Let us assume the price of stock XYZ is Rs.100 at 11.00.01 AM on a trading day. Then, a few seconds later, on 11.01.05 AM, the price becomes Rs.102. Scalpers will buy the stock at 11.00.01 AM and sell it at 11.01.05 AM, pocketing a profit of Rs.2/per share.

The above is how scalping works. But a profit of Rs.2  seems very insignificant, especially after considering brokerage charges as well. Brokerage charges are fees charged by the brokerage for their services here.

To ensure the earnings from scalping are not insignificant, scalpers buy in bulk. For example, the profit will become Rs.2000 instead of Rs.2 if the scalper buys 1000 shares instead of two. Buying in bulk helps scalpers ensure a higher profit. 

How does Scalping Trading work?

Scalping works by helping traders earn profit from the volatility that lasts a few seconds. Volatility is an element that helps traders earn from stock markets by ensuring price movement. For instance, traders earn from stock markets from the price of a stock they have invested changes. 

How does Scalping Trading work?
How does Scalping Trading work?

For example, a trader will earn Rs.50 if they buy a stock for Rs.100 and sell it for Rs.150.

The buy and sell happen in a time span of just a few seconds in the case of scalping. 

For example, let us assume that a trader is planning to scalp a price hike a company could have. The investor first has to identify the opportunity using their market knowledge and analysis. The investor makes use of different options, including technical analysis, to try and predict the market. 

Technical analysis is a study used to try and predict the market using past patterns found in the charts. Once the potential has been identified, the investor will pay close attention to the charts, wait for the opportunity, and will buy the share when the opportunity is visible to them. The trend could change in a matter of seconds. 

In this example, let us look at a three-second time gap. The profit the trader make is Rs.3 if the stock price has increased Rs.3 in three seconds. If the investor has bought 100 shares, the profit will be 100 times Rs.3 = Rs.300. 

What are the Scalping strategies in Stock Market?

Investors use different scalping strategies to make a profit from the market. Scalping strategies refer to the plans investors make according to their research. Market making and purchasing a large number of shares are two such strategies that are commonly used in scalping.

1. Market-Making

Market making refers to the practice of buying and selling a particular stock simultaneously. Market-making accounts for scalping since investors buy and sell the shares in a matter of seconds in both practices. But market making is mostly done by brokerages and other similar firms, and they are usually designated by an authority. Firms that are designated to do market-making by an authority is usually called designated market maker. Market making is done to ensure there is enough liquidity and to help limit the volatility associated. There will be a difference between the buying and selling price called the bid-ask spread when designated market-makers do scalping. The bid price is the buying price, and the ask is the selling price.

Retail investors also take part in market making and profit from an increased selling price. 

2. Purchasing a Large number of  Shares

Scalp trading is usually most successful when investors purchase a large number of shares. Scalp trading only accounts for a minimal profit for each share as they focus on share price movement that happens within a few seconds. For instance, a stock only gains a rupee or two in a matter of a few seconds. One or two rupees per scalp be insignificant profits for the trades who do scalp trading, and to avoid this, they buy a large number of shares. For instance, a profit of one or two rupees will be magnified if the number of shares bought is higher (for example, a thousand). Look at the example below for a better understanding.

Profit per share for scalping – Rs.1

Total profit if only one share is scalped  – Rs.1

Total profit if 1000 shares are scalped – 1000 * Rs.1 = Rs.1000

Hence, investors always try to purchase a large number of shares when scalping.

Scalp trading can therefore be done by traders who are vigilant and focused. It depends on how steadfast the trader is and how disciplined they are. They should also be careful and prudent to not lose the chance to exit when it is time.  

What are the Pros and Cons of Scalping Trading in the Stock Market?

Scalping trading comes with its pros and cons. The biggest advantage of scalping trading is the shorter time frame. A shorter time frame fits investors who don’t like to stay invested for a longer time period. Instead, investors who do scalp trading look to profit from smaller and quicker stock market price movements. At the same time, scalping makes investors a significant amount of money if applied with proper planning and adequate volume. Volume refers to the number of shares that are bought and sold in one scalping. 

The biggest disadvantage investors face with scalping trading would be higher risk. Scalping trading has a higher risk because the fraction of error is tiny. An investor ends up with a loss instead of a profit just because of the delay of a second. Due to the higher volatility nature of the stock market, it demands investors to be extra vigilant during scalp trading. 

Another advantage of scalp trading is that it is a good way for investors to try out trading for the first time. Trading requires more market knowledge and expertise than investors, and hence, investors usually master investing first before they try their hand at trading. Scalping, if done in minimal quantities, gives investors an option to try out trading without risking too much. For instance, an investor could buy just one or two stocks and aim for a few seconds of trading. The potential for profit will be minimal, but the chance for loss will also be reduced. At the same time, scalping in smaller quantities helps investors understand the nuances of stock market trading.

On the other hand, scalping trading is something that demands a higher level of market knowledge. Markets always tend to move up in a longer time frame, and this helps when someone is investing. But markets are more volatile and unpredictable in the shorter time frame & during stock market crashes. Due to the higher volatility, an investor needs a proper plan that is backed by thorough research to be successful in scalping.

What are the other Strategies of Stock Market Trading? 

There are multiple ways of doing stock market trading other than scalping. The first is intraday trading. Intraday day trading refers to the practice of buying and selling stocks of a company within the span of a day. Intraday trading usually has a larger time interval between buying and selling compared to scalping, where the time gap between buying and selling is just a few seconds or minutes. Investors who do intraday trading try to take advantage of the stock market movement that happens within the span of a market working day. The stock market prices could move considerably in a day since markets are volatile. There is no fixed time gap between buying and selling for intraday trading as long as both are done on the same day. For instance, an investor could buy a stock at 10 AM and hold it for five minutes or five hours; both are classified as intraday trading regardless. 

One important factor investors should keep in mind when they do intraday trading is its limitations on the time you hold stock. The investor must sell the stock before the end of the day when you opt for the intraday day. Otherwise, the broker auto-sells your share, and you end up losing money since you will be unable to plan the exit. 

The risk associated with intraday trading is dependent on the money an investor puts in. A large amount of money could prove to be risky during intraday trading, but it has a higher potential for growth and vice versa. Intraday trading is often a full-time job similar to scalping. An investor needs to focus throughout the day during intraday trading to not miss out on opportunities. The returns from the intraday day are not as significant as returns from long-term investing as well.

Swing trading is another trading strategy that investors use. Swing trading refers to the practice of buying and selling stocks with a time gap of a few days. Swing traders try to take advantage of the market movements that happen in the span of a few days. It is less dynamic compared to scalp trading, where the stock bought is sold within seconds, and intraday, where the stock is sold by the end of the day. Swing trading also demands a higher level of market knowledge. Investors should have a rock-solid plan and do proper research when doing swing trading. 

When is the Best time to use Scalping Trading in Stock Market?

There is no golden rule about the time to invest in the stock markets. The right time to scalp trade depends on the conditions of the stock market. Investors should ideally research the stock they are trying to invest in and find out the best time to invest in a particular market. 

How to use Scalping Trading in Stock Market?

Investors use scalping in stock markets to earn from slight market price movements within a span of a few seconds. An investor log in to their broker account and choose to scalp to start trading. Then, the investor buys the share and sell it within a span of a few seconds to use scalp trading in stock markets. 

What are the tips for successful Scalping Trading for newbie Scalpers?

Scalping is an advanced trading method, and newbie scalpers should have a few tips in mind to ensure they get the best out of it. Firstly, they should ensure that scalping is something that matches their investment goals and risk appetite. Investment goals refer to the aim of the investment, and risk appetite refers to the maximum risk an investor afford to take in the relationship. Some investors have goals that don’t work with scalping. For example, retirement fund building. Scalping should be avoided in such cases. 

How to choose the right stock to scalp?

Investors should apply the practice of proper research and learning in the case of scalping. Investors will have to carefully analyze the market and find a few seconds of opportunities. The first task is to set a goal. An investor’s scalping goal should define how much they aim to earn and how much risk they afford to take. Once the goal is identified, they find stocks that match their goals. Finally, investors should time the entry and exit (buy and sell) perfectly as well for the best results. 

Is Scalping a Profitable Trading Strategy?

Yes, scalping is a profitable strategy. Many investors use scalping on a daily basis to profit from the stock market. But to ensure scalping is profitable, an investor should first understand scalping thoroughly. Through understanding of scalping will enable investors to have realistic goals from the trade. A higher level of stock market knowledge will also enable traders to better understand the nuances of the stock market and scalp trading. This better understanding of the utmost importance of ensuring scalping is a profitable trading strategy for investors. 

Is Scalping Stocks Trading the best strategy for Beginners?

No, scalping is not often the best trading strategy for beginners. Scalping does not suit beginners because of its advancement. Scalping demands a higher level of stock market knowledge, just like any other method of trading. An investor needs to understand how to choose stocks, how to time markets, and how long to hold when scalping. Scaping also requires investors to be highly focused on the stock market as well. Hence, scalping does not work for a beginner, and instead, it is advisable to begin with investing. 

Is Scalping Trading Better than Normal Stock Trading?

Yes, scalping could be a better strategy than other methods of stock trading if you have ample stock market knowledge and understand how to employ scalping perfectly than other methods. 

But it is impossible to compare scalping with other methods of stock trading. Different investors will have different trading methods that work best for them. For instance, a trader could be an expert in intraday but not perform best when scalping. Hence, the best course of action is to choose an investment option that works best for you. 

What differentiates Scalping Trading from Other Trading Strategies in Stock Market?

The most significant factor that differentiates scalping from other trading strategies is the time gap between entry and exit. Entry happens when you buy a stock, and exit happens when you sell a stock. The time gap between entry and exit will always be less than or equal to a minute. A trader enters and exit within a matter of a few seconds when it comes to scalping. But on the other hand, you enter and exit at any time of the day in intraday trading. You could enter in the morning and exit in the evening, as long as both fall within a day in intraday. At the same time, you enter and exit within a gap of a few days in swing trading. 

Arjun
Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam
Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.

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