Scalping involves making a number of very quick trades in order to take advantage of price fluctuations with positions often lasting less than 5 minutes and occasionally counted in seconds. Most scalping strategies use low time frames like the 1 and 5 minutes charts.
The idea behind scalping is to take a number of small profits out of a general price trend while limiting the exposure to reversals.
Scalping in Theory and Practice
Scalp trades are generally based on identifying intraday trends, and then making a succession of quick trades based on technical analysis of intraday resistance levels.
For example, if the price of a security has been slowly increasing in peaks and troughs after a sharp initial increase on positive news, then a scalper would attempt to buy at the troughs and sell at the peaks one or more times based on the belief that the meandering upward trend will continue for some or all of the remaining day.
Scalp traders will usually lock in a stop loss at the break even point as soon as a trade turns positive, and then set an easily achievable take profit limit order that will close each winning trade out quickly. Scalp traders also make liberal use of trailing stop orders to quickly lock in any positive price movements beyond the break even point.
In practice scalping is an extremely difficult and time-intensive form of trading. The downsides may be limited by the low time exposure to sharp price reversals, but the profits from successful trades are relatively small and can be wiped out by a small number of bad trades.
Therefore, scalp traders need to exert a high level of discipline with their entries, even for the already challenging profession of trading.
Final Thoughts
Scalping is a unique form of trading that requires a different skill-set from most other popular trading strategies. It has a heavy reliance on technical analysis involving resistance and support levels and requires a substantial investment of time and effort.
While the low exposure time of scalping positions lowers the overall chance of negative trades, the low return per trade means that the ratio of right to wrong trades is paramount to scalp traders above all else.