Scalping is an investment strategy that involves speed. It is about going back and forth on the stock markets to make purchases and sales, thus taking advantage of price fluctuations. Each action is only a few seconds apart
Scalping: an aggressive trading technique
Scalping is a particularly aggressive trading strategy used mainly on highly liquid assets such as CFDs or futures. The trader multiplies orders and positions, but does not keep them for long. The repurchase or resale is done very quickly (after a few minutes or even a few seconds). This method is based on the principle that predicting small fluctuations is easier than large variations.
The trader then carries out a very high number of transactions, taking advantage of the slightest variation in the market each time. To further boost transactions, most scalping investors use leverage to increase their capital and, at the same time, their earnings.
A maximum of trades in a minimum of time
With scalping, the trader (nicknamed “scalper” at the time) carries out a maximum number of transactions in a minimum of time: up to 200 per day intraday. In all cases, an order is opened at a given price. This is closed after only a small fluctuation (in the order of a few cents). The capital gain thus realized is therefore quite minimal, but the trader expects several profits over one day, slowly but surely inflating his profit.
A strategy dedicated to the “professionals
This aggressive technique is more suitable for those who are used to trading. First of all, because you need to know the market perfectly in order to be able to make the best decisions quickly. It is therefore essential to be very reactive, which also requires being in control of your emotions. Especially since a position can become deficient in a fraction of a second. To optimize the chances of success, it is essential to be available and keep a constant eye on the positions. The slightest inattention to the heart of the scalping could cause a significant loss.
An example of scalping: high frequency trading
There are different ways to practice scalping. High frequency trading or THF is one version. Here, the positions are opened by robots based on advanced algorithms. They are able to make a thousand round trips to the markets in just one second.
Advantages and disadvantages of scalping
The first advantage of scalping is in terms of earnings: the trader makes profits quite quickly. In addition, the latter can limit its losses by using stop orders. It should be noted, however, that profits are rather low since we are based on a small market variation. It is necessary to carry out a large number of transactions to obtain substantial profits. It should be noted that it is possible to use leverage with your forex broker to boost returns, but this also implies a higher risk.
Scalping is not really suitable for binary options except for brokers offering early closing of positions but it remains to be seen if the additional costs do not take too much of your profits. On the other hand, short-term positions such as 60 seconds to 15 minutes may be as close as possible to what we call scalping.