Scalping stocks is a very short-term trading strategy where traders are looking to make short-term gains in seconds up to a few minutes. They’re looking to capitalize on short-term momentum and use an account as leverage to make gains.
Example of Scalping Stocks
Scalping stocks is when traders look to make $0.10-$0.20 gains on short-term price movement. Example: If you purchased 5000 shares of a stock and made $0.10 on the trade, your profit would be $500. It’s a great way to make money trading, but you could also lose money within seconds if you’re not careful.
Scalping stocks is the bread and butter of high-volatility day traders. If you’re wondering how to scalp for profits as a day trader, just head to the playground. Have you ever watched kids on a teeter-totter?
It’s a battle between one kid and the other. Or, in the stock trading world, there is a struggle between buyers and sellers. As one kid goes up, the other goes down, which is what stock prices do. Did you know there’s a way that day traders can profit from those movements? It’s not exactly arbitrage; it’s scalping, and I will show you how it works today.
Stocks like $SNAP are great for intraday scalping
Can You Make Money Scalping Stocks?
Traders can make money scalping stocks by applying proper risk management and using a high-execution broker. Scalping is just one of a few intraday trading strategies available to day traders. Scalping stocks means making many small profits on small daily price changes.
Specifically, scalpers look to take advantage of changes in a security’s bid-ask spread and have to move fast when they make many small trades.
A scalper has to work quickly to make many small trades. She may buy at $15.25, sell at $15.50, and buy again at $15.30. She follows this rinse and repeats the process multiple times during the day.
Scalping Stocks - The Charts
Typically, intraday scalping stocks use one and five-minute charts for high-speed trading. Especially on slow days, many intraday traders rely heavily on scalping.
But it’s essential to have low commission costs or your profits can quickly be eaten up by your brokerage firm. Done right, though, it’s a great way to make some steady profits.
Bid vs Ask
Broken down, a bid-ask spread is a difference in price between what the sellers are willing to sell the stock for (bid) and what the buyers are willing to pay for it (ask).
Typically, bid-ask spreads tend to be steady over time because there is a balance between buyers and sellers. We refer to this balance as market efficiency.
In an efficient market, everyone has the same information, so their trading is consistent and allows the broker-dealers to generate a steady profit.
After all, one kid is not typically bigger than the other in the teeter-totter, or it won’t work.
The spread is sometimes a little larger or smaller than normal. In a situation like this, it’s not because of a change in the market information.
We attribute these spreads to short-term imbalances in supply and demand.
A Small Bid Ask-Spread
An Abnormally Wide Bid-Ask Spread
A spread is large when the bid and ask prices are far apart. If the bid and ask prices on ABC, for example, were at 1.35 and 1.75, the spread would be $0.40.
We have a few different scenarios that give us a low spread. Firstly, when a market is not being actively traded on low volume.
Without a lot of demand, the spread creeps wider. Additionally, we can often see active day trading markets with large spreads during lunchtime. Or, when traders are waiting for an economic news release.
No doubt, scalpers make their money on stocks with small bid-ask spreads. In the first place, most want small spreads because these allow their orders to be filled at the prices they want. With this in mind, many day traders will temporarily halt if their stock develops a large spread.
What Is the Problem With a Large Bid-Ask Spread?
In the financial world, we call the difference between a trade’s expected price and the actual price of execution slippage. A large spread results in orders—especially market orders—to be filled at prices you don’t want. We see slippage in high-volatility markets and when buyers are not interested in buying the stock.
Which Time Frame Is Best for Scalping Stocks?
How to Prevent Losses With Scalps
Slippage occurs when a trader uses market orders. A market order is when you immediately buy or sell the stock for you at any price. Yes, at any price.
Aside from being hasty, you have no control over the fill price. Further, a market order buys at the ask (high side) and sells at the bid (low side). Unfortunately, you’re filled on the wrong side of the bid-ask spread, a scenario you don’t want.
Let’s look at a real-life example. Say the bid-ask spread is $12.00-$12.02; a market order should buy immediately at $12.00 for you. Right? Wrong!
On the contrary, when your market order arrives at the Exchange, the stock soars to $12.15. Unfortunately for you, your buy-market order gets filled at $12.15. When you do the math, that’s $0.15 in slippage, which is bad.
So what is the solution? In no uncertain terms, use limit orders instead of market orders. Unlike a market order, a limit order only fills at the price you want or better.
The key word here is limit; a limit order limits the price you will pay for the stock. You tell your broker to buy or sell a specific stock at or better than a specified price.
Certainly, the surest way to prevent slippage is to set a guaranteed stop (limit) order. Note that this is not the stop-loss order but a guaranteed limit order that will always complete trades at the price you set.
Let’s be clear: the important thing is avoiding slippage and controlling your trades. This should be your ultimate goal.
Scalping Stocks Words of Caution
As mentioned, we have slippage in low-volume, thinly traded markets with large bid-ask spreads. To prevent this, ensure sufficient volume and float; I prefer a minimum volume of 300,000 and a tight bid/ask spread.
You can’t totally avoid slippage; think of it as a cost, like commissions. Sometimes, it’s a cost worth paying, but only some of the time. If you want to scalp for profits as a day trader, only place market orders if necessary.
Aspiring traders should realize day trading is not a hobby or a weekend pursuit. You need to study as seriously as a student would in university or trade school.
Frequently Asked Questions
Scalping can be a profitable trading strategy if proper risk management techniques are implemented. Traders also have to factor in short-term capital gains taxes when day trading.
- When scalping stocks, look for a tight bid-ask spread
- Look for a lot of volume
- Look for liquidity
- You want the stock to move
- Look for support and resistance
- If you're near resistance, don't trade
- Determine your price target and if you can reach it
Scalping stocks is a legal trading strategy used by both institutional and individual investors.