As a beginner in trading when you google the meaning of scalping, it is easy to misunderstand the definition of it which is very often mixed up with day trading.
Let’s get it clear right away: Scalping is taking positions in the market to take advantage of small price variations.
The trader will keep his positions in the market from a few seconds to a few minutes.
To analyse the market, the scalper will use the order book, there he will find all the information in order to make his decisions:
- The Bid (Demand) allows the scalper to see the buying intentions of other traders on each price level.
- The ASK (Offer) allows the scalper to see the sales intentions of other traders on each price level.
- The PRINT TAPE-INSIDE displays the number of transactions actually made between BID buyers and ASK sellers.
- The VOLUME PROFILE represents the total number of transactions made on each price level. It is notably with the volume profile that the scalper establishes simple and effective strategies.
Not to be confused with day trading which consists in taking trades and keeping positions from several minutes to a few hours. All positions will be closed before the market closes.
The swing trader will take positions from a few days to several weeks.
Unlike day trading or swing trading, the scalper will usually take more trades during a trading session.
His risk will also be lower.
Why is this? There are two factors to consider when answering this question:
First of all, a professional scalping trader will use the order book.
Thanks to the order book the trader will be able to see instantly whether the market is moving in the direction of his position or not. If he sees that he is incorrect then he will exit his trade very quickly.
Usually the scalper will be able to exit at his entry point or at 1 or maximum 2 ticks of loss.
Unlike a day trader or swing trader, the scalper will not wait until his stop is hit to take his losses.
The order book gives real time information about buy or sell intentions, as well as all the trades that are executed. It therefore reacts to what is happening in the market at the present moment.
The day trader and swing trader will use technical analysis to make scenarios and trading plans in order to take positions.
Furthermore, since the scalper closes positions quickly, he will not be exposed to overnight risks (when a trader keeps a position after the market closes he is exposed to the risks of events or news that could affect the market).
In addition, the scalper does not hold positions just before important economic news. As a result, the scalper does not risk large movements if the news has a significant impact on the market.
Another characteristic of scalping is that the trader will only select a few markets to become an expert in.
Day traders and swing traders will interact in many different markets to take advantage of the opportunities available to them.
Becoming an expert in just a few financial instruments makes the trader’s job much easier over time. Also, if the markets selected by the scalper are calm, the scalper will not be able to make many trades.
I would lie to you if I told you that learning scalping is easy. On the contrary, it’s a very particular style of trading that requires a lot of effort for a beginner. Mastering scalping can take up to a few months before new traders feel comfortable.
However, one of the big advantages of scalping is that you will need to make only 2 or 3 trades a day to make a good living! It is not at all uncommon for a scalper to finish his working day within the first hour of the market opening.
The day trader will usually have to wait until just before the market closes in order to close his positions and finish his day. He will therefore spend several hours, or even the whole day managing his positions, while the scalper will be back home well before lunchtime!
Can one live of scalping alone?
Absolutely! Since the scalper keeps his positions for a very short period of time, he can commit a larger portion of his capital to trading.
On the other hand, day traders and swing traders only need to use a small amount of their capital for each position.
In order to scalp efficiently, the trader will choose markets with high liquidity, which means that no matter what the situation, he will be able to exit his trade very quickly at the price he wants.
This further limits the risk. The longer you stay in the market, the more risk you are exposed to.