How Does Scalping Stocks Work?

26 May 2021

Scalping stocks strategy is one of the most popular trading strategies among stock traders. It is pretty much day trading but more extreme. The main idea behind scalping is that it allows traders to accumulate small gains through price changes in the marketplace, which means that scalpers (people who are using scalping strategy) take advantage of even the smallest market movements imaginable.

For example, their leveraged trades would even try to profit off of a $0.001 growth for a single stock. Depending on the leverage size, this type of movement could give them a $100 profit if they’re lucky enough. Investors who use this strategy, usually, place 10 to 100+ trades during a day which is what makes this strategy so viable.

Stock market scalping strategies are mostly used by experienced traders, because of their comparatively less risk and great opportunities of gains. Moreover, traders are able to combat greed when they aim for very limited returns.

The main risks with scalping strategy and any other strategy, are the potential losses. This is why the most important thing scalpers need to consider is their exit strategy. When do they close a trade once they’ve opened it? This is important because the smallest of movements in the stock market are usually sustainable for a few minutes or even seconds. Therefore, a good scalper needs to know when it’s time to exit.

What’s the Best Stocks Scalping Strategy?

Scalping may seem like you’re trading in the dark, not knowing what you’re opening trades up for or anything. But, scalpers use 2 very distinct scalping strategies in the stock market when they’re trying to trade. These are technical analysis and news trading. Let’s explain them in detail below.

Technical Analysis

Technical analysis consists of so many strategies in itself that it would take way too long to explain it. The main idea behind technical analysis is that traders usually use 3 or 4 technical indicators to analyze the data, which is accumulated through the changes in the marketplace. The most used indicator is the moving average. Calculating how the stock has moved in the future and trying to find a pattern (this can be a week ago, or maybe even an hour ago).

For scalper strategy stocks there are numerous charts that are worth observing, including candlestick charts, that usually show the changes in stock prices for a certain period of time. Depending on the candlestick chart patterns traders are allowed to guess the next movement in prices. What’s more, it shows the traders’ sentiments which is one of the most used factors while defining the next move in the trading process.

Technical analysis strategy is exceptionally useful if a particular stock is known for being scalped often. This guarantees that thousands of other traders will come to the same conclusions and therefore influence the price much more.

Apart from the candlestick charts, usually, scalpers use moving averages to determine their trades and take immediate action the moment they see some kind of pattern in a stock’s performance.

Depending on the scalping stock's meaning and its importance for successful trading, investors usually take a look at a stock’s chart with a very small time frame, like 1 hour maybe. Generally, they can see hundreds of ups and downs. That’s usually how every stock trades. What scalpers are trying to do is utilize those easily predictable ups and downs to make a profit.

News Trading

As scalping strategy is mostly linked to day trading, which means that investors trade during the day, it goes without saying that news trading can be one of the most used ones among scalpers. Even though new trading is not a strategy made primarily for scalpers, it is a strategy mostly used by them. Those traders who are using new trading strategies are setting new update features, economic calendars, and several news-related notifications that show the changes in the traders’ sentiments.

News trading which is frequently reckoned as the best scalping strategy stocks can be used by almost any type of trader, but here’s why it’s such a good idea for scalpers.

The moment some kind of market news comes out, the stock of a specific company is immediately affected by it. This means that if a scalper is lucky enough to view this influential news right when it is published, they have the advantage of taking immediate action before prices take a hit.

Most scalpers have signal software and newsletters keeping them up to date on every single piece of information that could affect their stock of choice and they’re always ready to act. Usually, these signals are provided by the brokers and traders can get them through the trading platforms. As day trading requires hard work and data analysis during a limited time, signals are quite helpful for those investors that use stocks scalping strategy.

Moreover, in some cases, signals act so fast that it boils down to a 50/50. Some scalpers don’t even look at what the news is, they simply try to guess what’s going to happen the moment they see there’s a new article published about the company. They either sell or buy first, and then they look at the article. There’s a 50/50 chance that they made the right call, putting them in a massive advantage.

Stock Scalping Techniques - Key Takeaways

Scalping stocks strategy is one of the most favored strategies among stock traders. It allows them to speculate on the market movements and make money through the tiniest changes in stock prices.

Usually, scalp trading allows investors to accumulate their profits by adding the smallest profits several times during a day. However, they are able to multiply their income with the help of leverage.

There are various stock scalping techniques that are widely used by experienced traders. Some of the most popular among them are technical analysis and news trading. Each of the mentioned strategies allows traders to make their trading more sophisticated.

Technical analysis is that traders take a look at the charts and try to calculate the most optimal direction that a stock will take based on historical data.

Even though news trading isn’t directly for scalpers, it is commonly used by scalper investors. Traders set news updates signals that report to them the significant changes that occur in the marketplace.

FAQ on Scalping Strategies for Stocks

What stocks are best for scalping?

There is no exact answer to the following question, as long as every stock can be good for scalping strategy. Because the stock market is volatile the changes in prices may occur within a second. However, there are some factors that are worth considering. Firstly, what makes the stock the best to scalp is its volatility. If the stock changes its prices quite frequently during a small period of time, then it can be one of the best choices for scalping.
Secondly, if you want to find the best scalping stock, you should observe the company’s performance in the stock market. If the company’s services and products are highly demanded then it’s more likely to change its prices throughout the seconds. For these reasons, the best scalping stocks can be those companies that are famous and widely known in the marketplace. Also, the stock can be the best if the company is growing over time, as it is one of the indicators of increasing demand for the company’s goods.

Is stock scalping legal?

Yes, stock scalping is legal in most countries. Traders who are interested in scalping stocks can start implementing their strategy from most of the countries. However, it should be said that the exception, in this case, is the US, where scalp trading is illegal unless you have $25,000 in capital. The main reason why it happens is that it pretty much falls under the day trading regulations.
Therefore, if you want to use a scalping strategy in the stock market and you are from the US you need to have accumulated $25,000 to implement this strategy. However, if you are from a country where the regulation system doesn’t prohibit such actions, you are free to start scalp trading. The main thing that you need to consider to get rid of unforeseen circumstances is to research the regulations in your country and find out whether it is legal or illegal to scalp stocks.

Is stock scalping better than day trading?

Not really. Scalping strategy usually requires a lot of capital to begin with, in order to make small gains worth. Scalping is usually oriented towards making a small profit from per trading. With the tiniest payouts, if you have small capital, you won’t be able to make your payouts worthwhile. Furthermore, when you are following scalp trading you need to look at the screens for hours and it usually requires being extremely engaged in trading processes to not miss the chances and opportunities.
Also, scalping needs quite a lot of analysis and observation during a limited period of time as changes may occur quite frequently in the stock market. Because you're always on high alert, always engaged in trading for 8 hours straight, making it seem like a day job more than a side hustle. So, scalping needs quite a lot of time to make money rather than day trading. However, a scalping strategy can minimize the risks of losing your funds, unless you trade with high leverage.

What is the best stock scalping strategy?

There are several scalping strategies in the stock market including stochastic oscillator strategy, moving average strategy, parabolic SAR indicator strategy, RSI strategy, technical analysis,and news trading. However, among them, news trading is reckoned as the best scalping strategy. As scalping strategy requires to be perfectly ready for the changes, news trading is one of the best ways of reacting to the market’s volatility and deciding rationally the next steps you are going to take.
Even though news trading is not a strategy made primarily for scalpers, it is a strategy mostly used by them. The moment some kind of market news comes out, the stock of a specific company is immediately affected by it. This means that if a scalper is lucky enough to view this influential news right when it's published, they have the advantage of taking immediate action before prices take a hit.