Scalping Trading Strategies For Beginners

Scalping, day trading, and swing trading rely on the opposite approach – buying and selling securities fast to collect small gains with each transaction. Some traders are so adept at timing these rapid trades that they have amassed millions in profits. In the case of Carl Icahn, a famous short-term trader, he has accumulated billions.

So, how does scalping trading work? And does it differ from day trading and swing trading? Which scalping trading strategies are most effective? 

What Is Scalping Trading?

Day trading is, as the name suggests, a strategy that hinges on opening and closing positions on the same day. It is rare for day traders to hold positions overnight, and they often make multiple trades per day. 

Scalping trading falls under the day trading classification, but it is a specialized technique that moves much more quickly than traditional day trading. Scalping traders only hold positions for minutes – perhaps seconds – before closing them out. In other words, all scalping is day trading, but not all day trading is scalping. 

The goal of scalping trading is to generate small returns on minute pricing changes under the theory that all those small returns will add up to large profits. 

Scalping Trading Vs Swing Trading: Difference

There are distinct differences when it comes to scalping trading vs swing trading, all of which can be traced back to the timing of the trades using each strategy. Scalping trading involves a high volume of transactions – dozens or hundreds – within a single trading day. Swing trading is more drawn out. Swing traders might hold positions for days – sometimes weeks or even months – and there are far fewer transactions involved. 

Scalping trading requires investors to watch tick charts and one-to-five minute charts, while swing trading relies on daily or weekly charts.

In terms of personal characteristics and traits, the most effective scalpers are those who can focus on numbers for long, uninterrupted periods. They are comfortable with rapid, high-stress decision-making, and they don’t mind executing trades without having all relevant information.

Swing traders, on the other hand, prefer to have time to examine and evaluate trends, then make decisions with precision based on all available data. 

Scalping is generally considered to be an “extreme” trading strategy, while swing trading is relatively moderate. Scalping trading, when successful, generates small profits many times over, while swing trading produces fewer instances in which returns are realized but bigger profits for each transaction. 

Is Scalping Trading Easy?

Scalping trading isn’t easy, and it requires specialized tools to be successful. As a result, this strategy isn’t recommended for investors who are new to the market. Among other resources, scalping traders must have access and be able to monitor a live feed, and they have to devote large portions of the day to making trades. 

Aside from time, expertise, and the stamina required to focus on small price changes throughout the day, scalpers must use a direct-access broker. Standard online brokerage firms like E*Trade and Robinhood don’t move with the speed required for scalping trading. 

Most online brokerage now firms offer no-fee/no-commission trading. Instead, they generate revenue by selling the order flow to High-Frequency Trading (HFT) hedge funds and market-makers. The practice is referred to as PFOF or payment for order flow. Essentially, the platform, e.g., Robinhood, receives compensation from the hedge funds and market makers for directing their customers’ trades to those firms. 

The practice of payment for order flow is often a subject of debate. There are detractors who believe that PFOF doesn’t keep retail investors’ interests in mind. For the purpose of scalping trading, brokerage firms that practice PFOF aren’t the best choice because small price changes and a few seconds of lost time can turn a winning scalping transaction into a losing one. 

Scalping traders must have a direct-access broker in order to maximize their chances of generating a profit more often than they realize a loss. Direct-access brokers are focused on speed, using software that gives their clients the ability to place direct trades with exchanges. It is worth noting that most direct-access brokers also offer the tools and resources scalpers need to optimize trades, including streaming quotes. 

Scalping Trading Strategies

There are three standard strategies used in scalping trading. Each requires access to current information and the ability to make multiple trades in a short period of time. 

First, some scalpers attempt to capitalize on the difference between the bid-ask price by placing a bid and an offer at the same time. This particular strategy is exceptionally difficult for individual traders to complete profitably because market makers are also placing bids and offers. 

A more common method of scalping trading is to purchase a large quantity of stock – thousands of shares – and then sell as soon as there is a small amount of movement in the price. A few cents difference can generate substantial returns if the quantity is large enough. 

Finally, the third strategy uses similar techniques found in traditional trading but in a shorter time frame. As with swing trading and long-term investing, scalpers identify a stock that is likely to move based on indicators, then opens a position and closes it as soon as the expected rewards can be realized. 

Note that scalping trading strategies can be used for both long and short positions as appropriate based on indicators and trends. 

Scalping Trading Indicators

The scalping trading indicators that get the most attention include these five pieces of data: 

• Simple Moving Average Indicator (SMA) – shows the average price over a specified period 
• Exponential Moving Average (EMA) – similar to SMA, the EMA shows the average price over a specified period; however, it gives more weight to recent price changes vs. historical price changes 
• Moving Average Convergence Divergence (MACD) – shows the relationship between moving averages for different periods 
• Parabolic Stop and Reverse (SAR) – shows chart positions below the price during an upward trend and vice versa, suggesting future pricing 
• Stochastic Oscillator – shows momentum, suggesting what movements are imminent 

Before attempting any sort of scalping trading strategy, traders must become proficient in their understanding and application of these indicators. 

Scalping Trading Example

Scalping trading is best explained with an example that shows how small price movements can add up to big profits. Consider this scenario: 

• Stock XYZ is currently trading at $10/per share
• Using indicators, the scalper determines that Stock XYZ will increase slightly within minutes 
• Scalper purchases 50,000 shares of XYZ stock, then sells as soon as the per-share price is up $0.05 to $10.05
• Commission, fees, etc., aside, this pair of transactions generates 50,000 x $0.05 or $2,500

Repeating this many times per day can result in impressive profits, but only, of course, if every prediction is accurate. One error can wipe out an entire day’s returns. 

Is Scalping Trading Illegal?

When behavior indicative of pattern day trading, including scalping trading, is identified by a brokerage firm, the account is subject to additional rules and restrictions. That gives investors the impression that pattern day trading or scalping trading is illegal. 

Pattern day trading and scalping trading are not illegal, but they do carry a higher risk of losses. As a result, pursuing a day trading or scalping trading strategy requires extra security to protect the brokerage firm. 

Accounts are typically marked as pattern day trading accounts if they trade four or more times in a five-day period, and those trades collectively make up more than six percent of the client’s total number of trades during that same period. 

Once identified as pattern day trading accounts, that designation is typically permanent. Going forward, account holders must maintain at least $25,000 of equity in their accounts at the start of the trading day before any trades are executed.

Is Scalping Profitable? The Bottom Line

Like any investing strategy, scalping can be profitable. In fact, it can be very profitable, generating large returns in a short period of time. The trouble is that it only works for those who have the experience and expertise to accurately predict movements in pricing, as well as the discipline to close positions when a target has been met, rather than wait to see whether more profits are possible. 

Finally, remember that high-volume scalping trading may be subject to per-transaction commissions and fees. Those expenses must be considered in the calculation of profits before deciding whether or not a scalping trading strategy is worth pursuing. 

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