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Scalping Stocks

Written By

Royston Wild

Written By

Royston Wild

Royston is an experienced investor and writer. His expertise includes stock recommendations through to commodities, forex, and macroeconomic news. Royston's background includes roles as a stocks and commodities reporter, and editor of forex coverage at Shares Magazine.

» Royston Wild Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Updated

Feb 29, 2024

Scalping stocks is a fast-paced, high-volume trading strategy that is popular with short-term speculators. By executing a huge number of deals, equities traders seek to accumulate large profits by capitalizing on the tiniest of share price movements.

In this guide, we explain what stock scalping is, talk through the advantages and disadvantages of this day trading strategy, and explain how to get started.

Quick Introduction

• Stock scalping is a strategy where traders try to exploit small changes in the share prices of listed companies.
• Traders will enter and then exit positions within a very short timescale, often seconds or minutes.
• Unlike forex scalping, stock scalpers need to be excellent at technical analysis and fundamental analysis.
• Risk management is also essential to make stock scalping profitable.

More Scalping Brokers

Understanding Stock Scalping

Scalping stocks is an ultra-short-term trading system which sees traders target a small profit for each transaction they make. Over the course of the day, these tiny gains can build up and lead to significant profits.

Stock scalpers typically target companies with large market capitalizations, such as those listed on the FTSE 100 in the UK. Trading these stocks tends to be simpler and quicker thanks to high trading volumes, while deep liquidity can also make trading cheaper due to tighter bid and ask spreads.

Scalping is a strategy that is best used in highly liquid markets, such as stocks, where buy and sell orders can be concluded quickly and easily.

Royston Wild

Author

A Scalp Trade In Action

To help you understand how scalping stocks works, here’s a personal example…

I’ve been monitoring shares of coffee chain Claire’s Cappuccinos. After carefully poring over price charts and technical indicators, I’ve identified an exciting opportunity to potentially profit from a price breakout.

The coffee chain has been trading in a tight $5.45 to $5.50 per share range for most of the morning. However, an uptick in trading volumes has pushed the stock up to the $5.50 resistance level.

At this point, I place a limit order to buy 1,000 Claire’s Cappuccinos shares for $5.51 apiece on the expectation of further price gains. I set a target profit of $0.02 per share and look to exit the trade at $5.53.

I also establish a stop-loss order at $5.49 to limit any losses should the share price move in an unfavorable direction. I know how unpredictable and frustrating it can be when the stock market quickly moves against you.

Next up I eagerly watch the stock’s performance closely for the breakout and for signs of resistance.

Very pleasingly for me, Claire’s Cappuccinos hits the magic $5.53 level within a couple of minutes. At this point I execute a sell order to close the position, booking a $20 profit (excluding trading costs) in the process (1,000 shares x $0.02).

What You Need To Know To Scalp Stocks

Market Analysis

The short-term nature of scalping means you need a good understanding of technical analysis.

You will often spend time pouring over one- and five-minute charts to identify, and then exploit, stock trading opportunities. This can include identifying support and resistance levels; breaking below or above these thresholds can often prompt severe price volatility.

Stock scalpers will also look for technical indicators based on price data and share trading volumes to help them make decisions. Moving Averages and Bollinger Bands are two of the notable phenomena in the technical analyst’s toolbox.

Unlike forex scalpers, short-term share traders will also need to consider fundamental data and understand its influence on price movements.

You will need to keep an eye on company-specific information such as earnings releases and off-diary news, as well as broader developments within the industry in which said stock operates.

Key economic datasets, notably unemployment numbers and interest rate decisions, as well as political news like election results, can also substantially impact stock prices.

One of the great things is that stock scalpers can make money regardless of the market’s direction. It can be equally effective in bull and bear markets.

Royston Wild

Author

Risk Management

As a stock scalper, I will typically look to achieve a high ratio of winning trades versus losing trades. This differs from strategies that are built upon holding positions over longer timeframes, such as swing trading and position trading, where profits can be booked even if most trades are loss-making.

Once a stock scalp trade becomes profitable I’ll look to close out my position and lock in any gains I’ve made.

Critically, the rapid nature of scalping stocks means I’ll need risk management. Small profit margins can be erased in a matter of moments, and a gain can easily swing into a loss in the blink of an eye, making for an extremely frustrating trading experience.

Some of the tactics you can turn to mitigate risk while scalping stocks include:

• Stop-loss orders. These are instructions for your broker to sell the share automatically when it drops to a pre-determined price level.
• Executing profit target orders. These work like stop-loss instructions, though they close out a position when the stock rises to a pre-selected price, thus allowing profits to be booked.
• Establishing appropriate position sizes. For example, a stock trader can decide not to risk too much of their cash by limiting the value of a single trade to 1% of their trading capital.
• Monitoring the stock market. Scalpers should keep a very close eye on market volatility, and be prepared to adapt their scalping strategy according to conditions.

How To Start Scalping Stocks

Here are the 3 key steps to start scalp trading stocks, along with the main considerations:

1. Choose a broker
2. Open an account
3. Start scalping

Choose A Broker

We’ve found that not all brokerages allow clients to use stock scalping strategies, including big names like eToro and Plus500. This is because super-high trading volumes can put huge pressure on technology systems and result in service outages.

Having said that, scalpers still have a wide range of brokers to choose from today. Some of the important things to look for when selecting a provider include:

• Trading fees, as elevated costs per trade can decimate the profits of high-volume traders like stock scalpers.
• Execution speed and reliability, as a slow and unstable network can result in lost trading opportunities.
• Advanced tools and resources, like sophisticated charting software, real-time market data, stock screeners, and educational guides, which can help you discover opportunities.
• Regulatory status, to ensure that your funds are protected against events like bankruptcy and that the company is acting in your interest.
• Leverage, as the use of borrowed money from a broker can magnify your profits scalping stocks. That said, leverage should be treated carefully, as it can also exacerbate losses when the stock market moves in an adverse direction.

Open An Account

Once you’ve picked a stock scalping broker, you’ll need to provide them with information in order to create an account.

You’ll normally need to furnish them with basic details like name and national insurance number; copies of ID documents, such as a passport or driving licence; information on your employment and financial situation; and details on your financial objectives.

Once this is completed, you can deposit money in your trading account using of one several methods. You can make a bank transfer, for instance, or make a debit or credit card transaction.

It can be a good idea for novice stock scalpers to begin dealing using a demo account. These simulators allow you to hone your craft without putting your hard cash on the line.

Start Scalping

Once these steps are completed, you’ll be ready to start carrying out scalp stock trades. But before you place your first order you should have drawn up a scalping strategy and carried out in-depth technical and fundamental analysis.

I also recommend starting a trading journal. Record your scalp trades, including details on entry points and exits, trade size, and reasons for placing an order. These can help you evaluate the effectiveness of your stock scalping trading strategy and identify areas for improvement.

Pros And Cons Of Scalping Stocks

Pros

Cons

Bottom Line

For the committed and knowledgeable trader, scalping stocks can be a great way to rack up profits quickly. It can be a particularly good strategy for individuals who prefer an active trading approach and don’t like to cling to open positions.

However, stock scalpers need to pay extremely close attention to market movements to make a consistent profit. The fast-paced nature of this strategy also means that strict risk management tools are a must.

To get started, use our list of the best brokers for scalping stocks.

FAQ

Is The Stock Market Good For Scalping?

Scalping is a trading strategy designed to profit from small price changes that can be applied to stocks in the same way as other markets, such as forex and crypto. That said, the higher commission fees associated with stocks means it can be more difficult to make a profit by scalping.

Is Scalping Stocks Legal?

Scalping stocks is legal in many countries, however some brokers, such as eToro, don’t permit it on their platform. This is often because they don’t have a no-dealing desk model and are therefore not able to execute trades quickly enough.

Is Scalping Stocks The Same As Day Trading?

Mostly. Stock scalpers open and close trades on the same day, however their timescales of seconds or minutes are generally shorter than than the several hours many day trading positions can be open. Stock scalping strategies also tend to rely on higher volumes and leverage than other day trading systems, to make a profit from such short-term positions.