Scalping (Scalp trading) is a trading strategy type in the shortest trade period, even shorter than other day trading types. It got its name from "scalpers", traders who quickly enter and exit the market to get small profits from many deals of a trading day. The purpose of scalpers is to make enough of these small deals to overcover the profit they could have from one day trade.
A scalp trader orders a limit to buy a certain amount of stocks at a set price. The deal is done when the price decreases to the limit order. The trader then tracks positive changes. If the stock price increases after one minute, the trader closes the deal. If a trader would buy 1,000 shares and the price increased $.04 from the initial price, the trader would earn $40.
How does Scalping work
Scalpers claim that it's riskier to profit from large stock price changes, than small ones. Scalping involves tight trading windows in price changes and time range.
Scalping requires trading discipline, because of the lost opportunity to earn more. Scalpers exit trades right after reaching profit target. They don't wait for getting more profit. They also exit trades when their target loss level has been reached. They don't wait for the trade to reverse.
Market conditions change very quickly, so scalp traders need to be very flexible. Any trade can go against plan and it will need to be corrected fast with minimal losses.
Important note: It should be legal scalping, dealing with the legal practice of stock scalping. Scalping shouldn't manipulate investors or influence on prices for profitable selling of the stock secretly.
Types of Scalping
Discretionary scalping is based on quick making each trading decision according to market conditions. It is only a trader's decision to set parameters of each trade (e.g., time range or profit targets). Discretionary scalping has a human factor in the trading process that can cause a risk. Emotions can influence a trader's decision, which can cause a bad trade or fail to act at the right time.
Systematic scalping is not based on instincts. Traders apply artificial intelligence for making deals. They set the criteria using computer programs that automatically scalp. When the program detects a trading opportunity, it acts without the trader permission for that position or trade.
Systematic scalping escapes human mistake factor in trading decisions.