A scalp in trading is the act of opening and then closing a position very quickly, in the hope of profiting from small price movements.
Traders who practice this tactic are referred to as scalpers and will tend to make many scalps each day.
The theory behind scalping is trading small price movements is easier to predict than large ones.
Profits on scalps tend to be small, but losses can be kept to a minimum if strict rules are followed.
Scalping involves making numerous trades throughout the trading day.
The scalper will buy (or short sell) a security and then sell (or buy to cover) once the price has changed slightly in the direction they predicted.
The profits on any individual trade are typically very small. However, the aim is that those small profits will add up by executing a large number of trades.
A forex scalper starts their trading day by looking at the major currency pairs, such as the EUR/USD. They are specifically looking for currency pairs with tight spreads, as these offer the best opportunities for small, quick profits.
Let’s say the EUR/USD pair is trading at 1.1200/1.1201 (bid/ask), and the scalper expects the price to rise. They might buy a large volume, for example, $100,000, at the asking price of 1.1201.
The scalper aims for a small move in the price. So, if the price ticks up to 1.1202/1.1203, the scalper could then sell at the new bid price of 1.1202.
The difference, called the pip, is very small—in this case, it’s 0.0001. However, when trading large volumes, even this small amount can translate into a decent profit. In our example, the profit would be $10 ($100,000 * 0.0001) excluding any trading costs.
This whole process might happen over a very short time frame, sometimes just a few minutes or even less. The scalper would then repeat this process, perhaps hundreds of times throughout the trading day, aiming to accumulate a large number of small profits.
A scalper trading stocks may buy 1,000 shares of a stock after it makes a significant move to the upside, with the expectation that the first few ticks downward once the upward momentum pauses will be followed by a smaller upward move.
The scalper would sell those 1,000 shares at the first sign of the smaller upward move, aiming to make a small profit from the difference in the buy and sell prices.