Introduction To Trading: Scalpers

By Glenn Curtis AAA

Generally speaking investors make their money by buying a security and then selling it for a profit at some point down the road. It's not unusual for investors to maintain their positions anywhere from a couple of months to many years. On the other side of the coin there are traders. The typical trader holds a stock no more than a few days, and often trades in and out of stocks several times per day. "Scalpers" are a specific type of short-term trader. Here we'll take a look at this type of trading, how it works and how scalpers profit. (For background reading on what day traders do, see Day Trading: An Introduction.)

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Scalpers: Who They Are and What They Do
A scalper is a type of trader that may dart in and out of a stock or other asset class dozens, or in some cases even hundreds, of times a day. The reason these individuals are so active is that they hope to reap a small profit on each trade and that these small profits will add up to big dough at the end of the day. A scalper's goal and job description is fairly similar to that of a market maker.

The Costs
There are several issues that make being a scalper difficult. First off, maintaining such a large number of positions can be very time consuming. In fact, it is somewhat safe to say that the scalper will be glued to his or her monitor all day waiting for the slightest moves in order to get in and out of positions. Being a scalper can also be costly (both in terms of dollars and opportunity cost). That is because the scalper must often keep cash at the ready so that he or she has the ability to pounce on opportunities at a moment's notice. And don't forget about the commissions. In fact, commissions can be a big killer. Just think about all of the ticket charges a scalper might run up in a day, and how that could eat into their hard-earned profits. For that reason, scalpers working on their own should attempt to obtain the lowest commission rates possible through negotiations with a broker-dealer. (For more insight, read How can I prevent commission and fees from eating up my trading profits?)

Tools of the Trade
Scalpers need some special equipment if they want to be successful. This might include having access to Level II quotes to track bids and asks throughout the trading session. Having access to charting information and a phone line is also essential.
Would-be scalpers should also be aware of how decimalization can affect trading and therefore their profits. More specifically, in the past traders and investors used to buy and sell stock using a fraction system; trades were usually done in fractions of 1/16th (or the equivalent of $0.0625) or greater. Nowadays, spreads are often a couple of cents apart, and trades are done in pennies. This is an issue because it may make it harder for the scalper to reap a profit. For example, using fractions, if a scalper bought a stock at $10 and sold it at $10 at 1/16 decimalization, he would reap a profit of $62.50 on 1,000 shares (not counting commissions). However, if that same scalper purchased a stock at $10 a share and sold it at $10.01, his profit would be just $10, which probably may not even cover the commission. Again, the point is that this can be a stumbling block for would-be scalpers and should be considered. (For more insight, see The Basics Of The Bid-Ask Spread.)

Getting Into the Game

So how does one become a scalper and take part in this exciting and potentially lucrative field? To be clear, scalping isn't for everyone. By nature scalpers must be willing to accept risk and be able to deal with the tension that is sure to accompany this frenetic trading style.

With that in mind, there are no formal education requirements for one to become a scalper on their own. In fact, technically it's something that just about anyone can do if they have the time and the means. Of course, it probably makes good sense for a scalper to first get their feet wet trading only a few stocks at a time, and to thoroughly learn the markets. In fact, for this reason many would argue that scalping should most likely be left to professionals or well-seasoned day traders. (For more insight, see Would You Profit As A Day Trader?)
Bottom Line
Scalpers are a unique set of traders who are known to conduct dozens or even hundreds of transactions throughout the trading day. Again, scalpers by their nature are often high-energy individuals who thrive during times of stress and who have the means and temperament to handle the high volume of trades. Finally, while just about anyone with ample time, money and knowledge (among other traits) can become a scalper, it often makes sense to leave this type of trading to the most seasoned of day traders.

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