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What is scalping trading and how does it work?

Scalping trading is a strategy that involves a large number of short-term trades, to capitalise on small market price movements, providing large volumes of incremental profits.

By LLM Reporters  |  May 5, 2022
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Whether you’re a beginner to trading, or a seasoned professional looking to expand your knowledge, it’s always good to explore new trading strategies. There are so many advantages that come with diversifying your trade strategies, as certain markets will respond better to certain strategies, and you can increase your chance of profit whilst minimising risk simultaneously.

It’s likely that in your search for new, effective strategies, you’ve come across scalping trading. This strategy is used among millions of traders across the globe, and when used right, can yield some highly profitable returns on your trades.

Read on to learn more about what scalping trading is, how it works, and what tips you can apply to your strategy.

What is scalping trading?

Scalping trading is a strategy that involves a large number of short-term trades, to capitalise on small market price movements, providing large volumes of incremental profits.

Markets prices are everchanging, which means in a matter of sometimes minutes, there has been a movement in an asset price – whether positive or negative – that would warrant a trade. Therefore, scalping trading requires fast, accurate trades that take advantage of these many movements occurring constantly throughout the market on a daily basis.

Most commonly, trading contracts for difference (CFDs) is the best opportunity to apply your scalping trading strategy, due to the ability to execute trades on upward and downward price movements.

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Scalping trading is a strategy that involves a large number of short-term trades, to capitalise on small market price movements, providing large volumes of incremental profits

How does scalping trading work?

To best understand the process of scalping trading, let’s take the use of CFDs on the stock market as an example.

As you may be well aware, CFDs require you to deposit only a small amount of capital to gain exposure on assets of more value, and these positions can be either sell or buy.

Scalping trading is all about rapid, short-term trades that take advantage of incremental movements.
For instance, you might find your analysis of the market shows a sudden increase in certain asset prices, sometimes over the next few seconds, or minutes. In response, you can open a long buy CFD, which enables profit on price increases. You should hold the position for no longer than a few minutes, and then sell at a slightly higher price than you opened at.

This is scalping trading applied to one asset. The idea is that you conduct the same strategy for multiple assets throughout the day, whether simultaneously or consecutively. This strategy helps you achieve many small profits throughout the day, to amount to a substantial overall profit. It also allows you to minimise trade risk, as you’re not opening yourself up to long periods of trading, where any losses could increase to detrimental levels.

Tips for scalping trading

Here are a few simple tips to take into account when using scalping trading, for a more successful experience, and better chances of profit:

Most commonly, trading contracts for difference (CFDs) is the best opportunity to apply your scalping trading strategy, due to the ability to execute trades on upward and downward price movements

Have a disciplined strategy

You must devise an effective scalping strategy, and ensure you don’t stray from it, otherwise your strategy will fall through. You will be executing large volumes of trades, so you need a trusted process to apply to each one, to know that every trade is formed on the best plan for success.

Manage your risk

The main risk benefit of scalping, is that you’re not prolonging your positions enough for substantial losses to occur. Have an accurate method of identifying when these conditions for loss might be arising, so you can exit your trade before your strategy becomes damaging.

Choose the right platform

Scalping trading is possibly the most rapid form of trading strategy, so time and access is everything. Ensure you’re using a trading platform that allows you direct access to your chosen markets, that can accurately open and close your trades as quickly as possible, to increase the strategy’s effectiveness.

Be consistent

In order for the strategy to provide you with profitable returns, you must be consistent with your trades throughout the day. With each single trade profit being incremental, you’ll need large volumes of trades every day, to make the profits worth it. Don’t abandon the strategy after a few small profits. Be consistent, and you might slowly see the bigger overall profit coming together.

Disclaimer: Investing money carries risk, do so at your own risk and we advise people to never invest more money than they can afford to lose and to seek professional advice before doing so.