What is a Scalper
A scalper is a person who holds a position in a security for a short period of time in an attempt to make a profit. Scalpers buy and sell many times in a day with the objective of taking small consistent profits out of the market. They may trade manually or automate their strategies using trading software. A scalper attempts to profit from the bid-ask spread as well as exploit short-term price moves.
A scalper 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. Such transactions often occur on the black market. This type of scalping is illegal under certain conditions.
BREAKING DOWN Scalper
High-frequency trading 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 the one- and five-minute charts to make their trading decisions. They may also purchase intraday scanning software to find new opportunities. Most scalpers trade a large number of shares a day and use online brokers that offer competitive commissions to keep their trading costs to a minimum. (To learn more, see: How can I Prevent Commissions and Fees from Eating up my Trading Profits?)
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 in 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.
(For further reading, see: Scalping: Small Quick Profits Can Add Up.)