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.)

Technical Analysis

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.

Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Stock Analysis

    Investing in Lumber Liquidators? Read This First

    Find out what investors should know before buying Lumber Liquidators shares. Learn about Lumber Liquidators' financial performance and operational outlook.
  3. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  4. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  5. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  6. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  7. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  8. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  9. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  10. Investing News

    6 Signs You Are Addicted To Investing

    An addiction to trading can ruin your life and relationships. Not to mention the monetary costs. There are telltale signs that you've gone too far.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!