A Scalping In trading, it refers to the act of quickly opening and then closing a position in the hope of profiting from small price fluctuations.
Traders who adopt this strategy are called scalpers, and they tend to make a lot of scalpers every day.
The theory behind scalping is that trading small price movements is more predictable than larger price movements.
Scalping profits are often small, but if strict rules are followed, losses can be kept to a minimum.
Scalping involves making large volumes of trades throughout the trading day.
Scalpers will buy (or short) a security and then sell (or buy to cover) when the price moves slightly in the direction they predict.
The profit on any single trade is usually very small. However, the goal is to add up these small profits by executing a large number of trades.
Forex scalpers start their trading day by looking at major currency pairs such as EUR/USD. They specifically look for currency pairs with tight spreads, as these offer the best chance of making small, quick profits.
Assuming the EUR/USD currency pair is trading at 1.1200/1.1201 (bid/ask), the scalper expects the price to increase. They might buy a large quantity, say $100,000, at an asking price of 1.1201.
Scalpers aim for small price movements. Therefore, if the price rises to 1.1202/1.1203, scalpers can sell at the new bid price of 1.1202.
This difference (called a point) is very small, in this case 0.0001. However, when trading volumes are high, even small amounts can translate into substantial profits. In our example, not including any transaction costs, the profit would be $10 ($100,000 * 0.0001).
The entire process can happen in a very short time, sometimes just a few minutes or even less. The scalper then repeats this process, perhaps hundreds of times throughout the trading day, with the goal of amassing large amounts of small profits.
A scalper who trades stocks might buy 1,000 shares of a stock after a big move, anticipating that the first few dips will be followed by smaller gains once the upward momentum pauses.
The scalper would sell those 1,000 shares at the first sign of a smaller uptick, aiming to make a small profit from the difference between the buy and sell prices.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
