What is Scalping Strategy?

It is a technique of trading and profiting in stock market. It is a day trading strategy and focuses on taking very small profits from hundreds of trades.

It involves taking quick and small profits, using the ask and bid differences. When there is bigger differences, as happens during increased volatility, such situations are used to chip off small profits. These trades typically lasts from a few seconds to a few minutes and minimizes the risk.

It is usually done by exchange appointed professionals like Market Makers and Spot Brokers in Foreign Exchanges. They provide liquidity in the market by continuously providing ask and bid spread for the traders and trade millions of shares in a single day in thousands of trades. Brokerage does not affect them as it does for us.

How scalping is done?

There are of course individual scalpers who have mastered the art of scalping small profits in the ask and bid difference. They choose low liquidity scrips so that the ask and bid difference is wide enough to pay for the brokerage and other expenses and still give them some profit.

When there is increased volatility the spread between ask and bid prices also increases.

They always place limit orders, a buy order at the ask price and sell order at the bid price. They keep buying and selling same small quantity of shares through the day. They always keep same number of shares for delivery, in case at the end of the day, they end up having a short position. They buy back on the next day.

Other technical ideas like, over bought and over sold, support and resistance areas, trend line breakouts, breakout of different chart formations, range trading are all used to take trades at pivotal points, to profit from quick, small moves.

Who supply trades to them?

All those Momentum Traders who trade on technical analysis and Momentum Day Traders who trade on news place market orders which match the best ask price for market sell order and best bid price for market buy order. Those run after trades and those panic because they are on the wrong side of the trend also place market orders.

What it takes?

The trades are taken only in highly liquid stocks. Sophisticated trading systems and software, high speed internet, good multiple computers, real time tick data, a thorough knowledge of technical analysis, familiarity of chart patterns, habituated quick decision making, are all the prerequisites for this type of trading.

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Similar quick profits are made in other forms of day trading like Arbitrage.

Some major stock investment advisers, accumulate a share, in their own trading accounts, before recommending a stock for long term investing. After recommendation, when the demand increases, the shares are sold at a higher price, to make small but quick profit. The Supreme Court of the United States has ruled that such a scalping done by an investment adviser is considered as a fraud or deceit upon any client or prospective client and is a violation of the Investment Advisers Act of 1940. It is also ruled that scalping is also a violation of Rule 10b-5 under the Securities Exchange Act of 1934 if the scalper has a relationship of trust and confidence with the persons to whom the recommendation is made.

This differs from pumping and dumping which does not involve a relationship of trust and confidence between the fraudster and his victims.

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