Scalping Stocks

Scalping stocks is a fast-paced trading strategy that targets small market changes to accumulate profit. In this article, we review the definition of scalping, what it means in stocks trading, the various strategies available, and how to get started. We also list the best brokers for scalping stocks.

What Is Scalping Stocks?

Scalping stocks is a short-term trading strategy. It involves targeting minor changes in intraday stock prices and moving in and out of positions regularly to build profit. These tiny market shifts happen frequently on a day-to-day basis, even in exchanges that have little fluctuation, and so these small windows of opportunity are common and profitable. Scalping stocks can be your main trading strategy or used to supplement another technique.

Stock scalpers make numerous speedy trades, holding positions for very short periods of time, sometimes seconds, making multiple small wins before the market changes. Big wins are not the goal. Scalping stocks is appealing to investors who can devote time to monitoring markets and acting quickly—some even scalp stocks for a living.

During an average trading day, stock scalpers can make hundreds of trades meaning the size of wins may be small but the win to loss ratio is improved. However, as a result of making a large volume of trades, commission and fees can often build up, reducing total profit. Any trade can be turned into a scalp by taking a profit near the 1:1 risk-reward ratio.

Scalping Stocks Vs Day Trading Stocks

Scalping stock strategies are different from traditional day trading where positions are held for longer periods of time with the aim being to make more profit from each trade. Investors would normally hold a position, resisting exiting too early, therefore maximising their earning potential. However, the opportunity for bigger losses is increased in normal day trading as the longer you stay, the greater the risk that trades won’t stay in profit.

Scalping stocks adopts the opposite mindset. Scalpers holds positions for much shorter timescales—seconds or minutes rather than hours—especially in the case of micro-scalping where timescales can be reduced to 10-20 seconds.

In addition, scalping stocks depends on higher volumes and increased leverage compared to day trading, allowing investors to make a profit in shorter periods.

Scalping Stocks Strategies

There is an abundance of online resources for scalping stocks strategies, including YouTube videos of live tutorials and discussions on various forums. We have explained a few scalping strategy examples below too.

Scalping stocks is more frequently done using technical analysis, using various indicators to spot patterns and make stock price forecasts. By predicting trends, investors can make decisions as to whether the risk-reward ratio is appropriate. Fundamental analysis can also be useful by monitoring external market events to help you identify hot stocks.

Stochastic Oscillator

Scalping stocks using a stochastic oscillator aims to capture momentum in markets. By comparing the current price of a security to its recent price range, this indicator attempts to predict turning points. Prices tend to close near the extreme of the recent range.

This indicator is used to generate trading signals, using values between 0 and 100 to indicate whether a market is trading above or below its true value. For example, a value of 80 or more is considered to be overbought whereas a value under 20 would be seen as oversold.

Stochastic Indicator

The current value of the stochastic indicator is sometimes referred to as the fast indicator. The slow indicator is taken as a 3-day moving average of the fast indicator. Transaction signals are created when these two indicators cross, suggesting a reversal.

• Downward trending high stochastic indicators provide entry points for short positions while upward trending low stochastic indicators provide entry points for long positions. The stochastic indicator can be used in tandem with the moving average indicator (see below), by only trading when the stochastic indicator is in the same direction as the trend according to the moving average.
• If the stochastic oscillator trend continues into more than 80 or under 20 (the oversold or overbought areas), sell the position.

Moving Averages

One simple method of scalping stocks is to use moving averages (MA) to indicate trends in equities. It sums up data points of a security over a specific time period and divides it by the total number of data points. It is continually recalculated based on the latest price update. The indicator removes noise from the chart i.e. frequent short-term fluctuations and smooths out prices by updating the average over a specific period of time.

Moving averages

For example, select a 200-day period moving average to indicate an overall trend. You then select a short-term MA and a longer-term one, such as 5 day and 20-day periods, which will show you whether to buy or sell. The best timescale for this scalping stocks strategy would be 1 minute or 5 minutes.

• If the 5-day moving average crosses above the 20-day one, enter positions in the same direction as that trend (i.e. as indicated by the 200-day MA)
• If the moving averages cross each other back (i.e. the 5-day MA crosses below the 20-day one), sell the position

Market Making

Market making is an advanced stock scalping tactic where traders capitalise on the bid-ask spread by putting out a bid and making an offer on the same stock at the same time. This strategy works best with stocks that are not showing any real-time price changes. Difficulties arise because of competition with other market makers for the shares on bids and offers.

Find out more about scalping trading strategies.

Pros Of Scalping Stocks

The benefits of scalping stocks include:

• Fast and regular profits – Scalping stocks provides investors with quick returns thanks to the short-term investment periods
• Reduced level of volatility – Trading in stocks is less volatile than in other instruments
• Can profit from flat markets – By targeting small stock price movements, traders can operate in slower markets and still make a profit

Cons Of Scalping Stocks

There are also some downsides of scalping stocks:

• Requires focus and commitment – Scalping stocks can be intense due to the speed at which trades are executed. You need to be glued to your screen for effective scalping as possible entry points can appear and disappear rapidly
• Emotional pull – To be a successful stock scalper you need to know when to quit. The premise of scalping is to sell when making a profit and having the discipline to do so can be hard
• Potential losses – Scalping stocks is riskier as it uses high leverage. If you stay in a losing position too long, it could result in larger overall losses. Make sure you have an appropriate risk management system in place
• Multiple trades mean higher commission – Apps typically charge commission for trading stocks, unlike other instruments like forex. Scalping stocks involves executing hundreds of trades in a short period of time, meaning greater commissions. Stock trading volume is also lower vs forex, resulting in higher spreads and lower liquidity
• Timing – scalping stocks occurs within local exchange trading hours whereas forex, for example, can be traded 24/5

How To Start Scalping Stocks

Scalping traders need access to advanced charting tools which allow them to rapidly execute trades. To start scalping stocks, you will need to choose a good scalping broker that can provide you with these features and options.

Many brokers do not offer scalping on their platforms as they do not have the appropriate software to handle the speed needed for scalping. eToro, Plus500, and Trading212 are some of many brokers that do not allow stock scalping. IG is a recommended stock scalping broker in the UK.

Below is a checklist to make sure you pick the right broker before you start scalping stocks:

Platform

Scalping stocks requires extremely fast trade execution. Scalping traders need access to advanced charting tools such as live feeds with real-time price updates and a quote system, for example. Brokers may license a platform such as MetaTrader 4 or offer proprietary platforms. It’s vital that whatever platform you choose supports ECN and STP trading. Without this, the software will not be quick enough for scalping.

Regulation

Selecting a regulated broker is always a wise choice. The UK’s regulator the Financial Conduct Authority will ensure that your funds are protected if your broker becomes insolvent.

Automated Trading

Some broker platforms may have algorithmic bots that can execute trades including downloadable robots like Expert Advisor (EA) on MetaTrader. Some other platforms give traders the ability to develop personalised robots using popular programming languages like Python, for example.

Demo Account

Some brokers offer a demo account. As with other types of trading, it is worth practicing stock scalping techniques in real-time in a demo account before parting with real capital. Finding what works for you and learning as you go could lead to delays and risk damaging profits. Scalping stock CFDs requires a specific mindset and discipline so it’s wise to practice before committing.

Narrow Spreads

The strategy of scalping stocks aims to profit off of changes in the security’s bid-ask spread. Therefore, scalpers will want tighter spreads so be sure to check the difference between trading desks. The wider the spread, the less likelihood of a profitable trade. Brokers that offer direct access trading which will automatically track bid-ask spreads are recommended too.

Level II Quote System

We recommend choosing a broker that has a Level II order book that provides more information than its first iteration (Level I), including placed order details, meaning stock scalpers can predict short-term shifts in the market when larger bids are placed by other investors.

Leverage

Scalping stocks requires greater leverage to increase a position to the point where it can return significant profits, multiple times a day. Of course, using leverage can also have the reverse effect, resulting in larger losses too so act with caution. Beware of leverage limits applied to stocks which tend to be much lower than for other instruments including forex.

Commission

When executing large volumes of trades when scalping stocks, broker commissions can build up significantly and ultimately take away from your total profit. Beware that brokers aren’t charging other fees too. It’s worth noting that while Robinhood offers commission-free trading, it is not useful to investors wanting to start scalping stocks.

Scalping Stock Tips

Here are some 101 tips and rules on scalping stocks to consider before getting started:

• Times – Scalping stocks can only occur within local stock exchange trading hours. The busiest trading times are best for scalping, specifically 13:00 to 17:00 GMT as London and New York Stock exchanges intersect
• Have a plan – The high-octane nature of scalping stocks can be intense due to execution speeds. Investors need to concentrate at all times and make sure they don’t hold a position for too long. Set a target profit amount per trade and stick to it
• Stop – As above, setting a trading stop that reflects your risk-reward ratio reduces your risk of large losses
• Stay connected – Make sure that your internet connection is reliable when scalping stocks i.e. don’t trust your mobile phone network. By its nature, scalping requires the trader to be fast-paced and you need a connection that allows to you enter and exit positions efficiently
• Liquidity – Scalping stocks is not suitable for penny stocks which have low volume. Good scalping stocks have high liquidity and volume, making them easier to buy and sell
• Research – Scalping stocks requires investors to have a clear strategy and plenty of research will help to develop this. As well as YouTube videos and forum discussions, there are various resources such as books, eBooks, online courses, and downloadable PDFs to become better informed on scalping stocks strategies. Following economic news will also help to spot trends and keep on top of external factors that could impact security volatility.

Final Word On Scalping Stocks

On the surface, scalping stocks looks like an easy trading strategy to make a profit, even in flat markets. However, it is not for the faint-hearted. While there are many useful online resources, the high-pressured environment and opportunity to offset small profits with a lack of discipline means novice traders need to be careful before jumping in.

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