Scalping trading is a trading strategy based on momentum. Day traders, who monitor market movements closely and make very quick trades based on small movements in asset prices, most frequently use this type of trading strategy. Traders typically make several small orders, rather than fewer large orders throughout the day. This is how scalping trading came to be named.
Scalping trading follows three main principles.
- Smaller exposure limits risk. This means smaller trades, with less money on the line (applicable to some scalping strategies).
- Smaller moves are less difficult to obtain. Many small trades based on small price movement will aggregate to mean significant gains. However, a large loss can wipe out gains made.
- Smaller moves occur more frequently than larger moves, and are arguably easier to take advantage of.
Market liquidity and volatility impact this type of trade significantly. The greater the liquidity of a market, for instance, the tighter the spreads. This can be either good or bad, depending on the trader’s preferences. Tighter spreads, and high liquidity, means positions can be opened and closed quickly and the trade itself is unlikely to impact the asset’s price. Larger spreads, however, mean more money can be made (or lost) with each trade. If markets are highly volatile, prices are unpredictable. This may heighten the possibility of losses. The time frame of a trade also matters in scalping trading. Trades are completed very quickly, and many occur throughout the date. This means that up to date, sophisticated information, like Accendo Markets provides through their unique trading platforms, is especially important.
In scalping trading, a broker providing live prices is preferable to make this trading strategy work, as are charts that show short time frames. Scalpers will often look at one-minute charts to determine trends and hypothesise on market movements. Direct access is required so that trades are made instantly, and slippage does not occur. Scalping is both a very disciplined and potentially risky investment approach, and is therefore not right for everyone. Scalping trading is considered risky as the market can turn the wrong way and money can be lost, which makes risk management and trading discipline of paramount importance. Often, day traders work on margin (leverage). Through margin, gains and losses can be accentuated which furthers the risk associated with this strategy.
Three types of scalping trading exist. The first method, called market making, is when scalpers bid both a bid and an ask. This can be difficult if fighting against larger institutions. The second type involves purchasing a large position with the expectation of a very small price movement. The third method of scalping trading is when a trader enters a position and closes it once the exit point is reached. The third type of trade is similar to normal trading, but the risk/reward ratio is different (closer to 1:1).
Accendo Markets platforms are set up to accommodate scalping trading, with both live prices and charts. Online and mobile platforms ensure trades can be placed and closed when required.