Scalping stocks is a style of trading that relies on an accumulation of small profits to make money for the investor. A trader engaged in scalping stocks will keep ownership of the stock for a very short time, selling it as soon as it shows a small amount of profit or the value drops below a predetermined point. The basic philosophy is that a stock value won't rise forever. The scalper would rather take the small profit than risk a big loss.
Most traders take a long-range view of profit. They will hold on to a stock for months or even years hoping to gain a large profit over time. By contrast, traders who engage in scalping stocks will only keep a stock for a very short time, sometimes only a few seconds. The goal is not to make a large profit from any one stock but to make a number of small profits that add up.
There are several methods of scalping stocks. Sometimes a trader will purchase hundreds or thousands of shares in a stock and then sell them almost immediately. The profits on each individual stock are no more than a few cents, but they add up to thousands of dollars. A trader may also buy a number of shares and then sell out when the profit reaches a one-to-one risk and reward ratio. This means that the trader will sell as soon as the price falls or rises a predetermined amount.
A more difficult method of scalping stocks is known as market making. The trader puts forth a buy price and a sell price at the same time. He or she buys any stock for sale at the set price and sells to anyone who will buy at the set price. The profit comes from the difference between the two prices.
To be successful at scalping stocks, a trader has to rely on technology. The trader must monitor a live feed minute to minute in order to find the ideal opportunities for trading. Since change happens so quickly on the stock exchange, the trader must also have direct access to trading rather than working through a broker. Direct access trading can often be done with computers.
Though some traders rely exclusively on scalping stocks to make their profits, others use scalping as just one strategy in their overall investment plan. When stock prices are shifting up and down moment to moment but their average price overall is not changing, this is known as a choppy market. In this case, scalping stocks may be the only way to make money until the market starts changing more drastically.