What Is a Scalper?
Scalpers enter and exit the financial markets quickly, usually within seconds, using higher levels of leverage to place larger-sized trades in the hopes of achieving greater profits from minuscule price changes.
A scalper, in the context of market supply-demand theory, also refers to a person who buys large quantities of in-demand items, such as new electronics or event tickets, at regular price, hoping that the items sell out. The scalper then resells the items at a higher price. For example, a scalper may buy 10 tickets to the Super Bowl and attempt to sell them on eBay several days before the game at an inflated price. This type of scalping is illegal under certain conditions and such transactions often occur on the black market.
- Scalpers buy and sell securities quickly, usually within seconds, with the aim of achieving profits from minuscule price changes from large trade volumes.
- Scalper also refers to someone who buys up in-demand merchandise or event tickets to resell at a higher price.
- Scalpers buy and sell securities many times in a day with the objective of making consistent net profits from the aggregate of all these transactions.
- Scalpers must be highly disciplined, combative by nature, and astute decision makers in order to succeed.
Understanding a Scalper
Scalpers buy and sell many times in a day with the objective of making consistent profits from incremental movements in the traded security's price. A scalper attempts to profit from the bid-ask spread in addition to exploiting short-term price moves. They may trade manually or automate their strategies using trading software.
High-frequency trading (HFT) has made a scalper’s job more competitive. Programs can scour thousands of securities at once and take advantage of discrepancies between the bid and ask in milliseconds. Black box algorithms also monitor Level 2 data, analyzing price and liquidity information to make short-term trades.
Scalpers typically use short duration—such as one- and five-minute—charts to make their trading decisions. They may also purchase intraday scanning software to find new opportunities. Most scalpers engage in high volume trading and use online brokers that offer competitive commissions to keep their trading costs to a minimum.
Traits of a Scalper
- Disciplined: Scalpers must be highly disciplined. They must strictly follow their trading plan if they are to succeed. Most scalpers set a daily loss limit and stop trading if that amount is breached. A daily loss limit prevents scalpers from chasing their losses.
- Combative: Scalpers are often combative by nature. They view the market as a battle zone and see other traders as the enemy. Many scalpers who trade manually have an “us versus them” mentality toward black box trading programs. They look for repetitive patterns and try and exploit them for a profit.
- Decision Maker: There is often little time to react when making short-term trades. Scalpers often have to make trading decisions in a matter of seconds, or they miss the opportunity. They also need to make quick decisions if an error is made. For example, do they close an erroneous trade immediately, or do they close half now and half on the market close? Being a good decision maker helps prevent a scalper from panicking. In other words, they have to be able to be calm in the midst of chaos.
What Is Scalp Trading?
Scalp trading is a form of day trading. This investment strategy involves buying and selling securities many times throughout the day with aim of profiting from the total of all these trades.
Is Scalping Legal?
In the context of finance, scalping is legal. It is a legitimate trading strategy used by both individual and institutional investors.
Is Scalping a Good Trading Strategy?
While it can be profitable, scalping isn't for everyone. Successful scalpers typically have knowledge of the markets, well-honed analytical capabilities, the ability to make quick decisions, and are highly disciplined, among other traits.
The Bottom Line
Scalping requires buying and selling securities throughout the day at a fast pace. Analytical capabilities, making trading decisions quickly and sticking to an exit strategy are some of the skills needed. If you are an investor with a long-term time horizon, it’s likely that this investment strategy isn't a good fit.