Scalp trading is a high-frequency, low-risk form of benefiting from the stock market. If you want to use this practice, you need to make sure you follow a strategy.
A lot of investment strategies work by looking at the long term. You might have to hold onto the same stocks for years or even decades in order to get a solid return on your investment.
Often, patience is the most important virtue for investment. However, this is not always the case, especially when it comes to scalp trading.
Scalping is a high-frequency tactic that works by making a lot of small wins rather than a few big ones. The aim with each trade is to make a small profit, potentially just a single point, then close it and move onto the next one. In this way, a trader can make dozens or even hundreds of trades in a day, leading to a good profit overall.
The Advantages Of Scalp Trading
Scalping can be an extremely low-risk strategy, as the small amount of time for which a trade is open makes it less likely that you will be caught out by large moves in the market. The idea is to focus on stocks that are extremely likely to move in the direction you expect. These are typically seen as low-risk, low-reward stocks, but that is okay; with scalping, you are only looking for a low reward. By making a large number of trades, the profits quickly add up.
Many traders will point out that scalping doesn’t require a lot of knowledge of the stocks you are trading, unlike other tactics. Of course, it is a high-energy, high-effort form of trading. You will need to be paying attention to the markets and making a large number of trades per day, which can take a lot of concentration. Pulling it off, however, can be very profitable.
The Best Scalp Trading Strategies
There are a number of approaches you can take to scalp trading, each with its own pros and cons. For all of these to work, you will need a solid platform. For example, you might want to look at IG Markets offering & account types to see what they have to offer. Once that is sorted, you can make use of these strategies:
Moving Averages
The moving average (MA) of a stock is a constantly updated measure of its average price. You can set this for different time periods to see the various ways the stock is performing. For example, the 200-day average will give you a good idea of whether the stock is rising or falling in value in the long term, while the five-day average will be much more keyed into the current movements of the market.
Looking at multiple averages at once will give you a good idea of when to trade a stock. The longest average - usually 200 days - will tell you whether the stock is trending up or down, which in turn will tell you whether to go long or short. Then you can look at a pair of shorter averages to see when the stock is looking likely to move in that direction.
Bollinger Bands
This tool uses a simple moving average alongside standard deviations on either side of it, showing essentially how volatile a stock is. As a tool, they are extremely adaptable. Scalp trading can use them because they show when a stock is becoming more or less likely to move, enabling you to catch movements early.
Stochastic Oscillator
This indicator identifies when a stock is either being overbought or oversold and notifies its user when a potential buying or selling opportunity occurs. This can be very useful but should be taken with a grain of salt. It is best not to rely solely on an oscillator and combine it with other tools instead.
Parabolic Stop And Reverse
By showing a series of green or red dots over or under a stock price, the parabolic stop and reverse (SAR) indicates when reversals are likely to happen in the market. The first green dot after a period of red dots indicates the stock price is about to increase, and vice-versa. These points are great times to start a trade, as you will be buying low and selling high.
Relative Strength Index
The relative strength index (RSI) measures the likelihood of the market changing using levels of support and resistance. It provides a number between 0 and 100 to indicate the strength of a stock. If it rises above 70, it is a sign the stock has been overbought and is likely to fall in price. If it is under 30, the opposite is true. Again, these points mark good times to buy or sell.
Smart Scalp Trading Strategy
As you can see, scalp trading might seem simple, but working out when to buy and sell requires you to pay close attention to the market. Using the strategies laid out above can give you the information you need to scalp trade successfully.
