When most people think about scalping, they think about people hawking tickets for sports games and other events, often at a substantial mark up. This is one definition of scalping, but in the investing world, the term can take on a whole new and very important meaning. Basically, investing scalpers look to generate profits off of small changes in price in assets. Instead of trying to secure one big gain on a stock or other asset, they will try to secure numerous small gains.
Scalpers watch for opportunities to make money off of small price movements. They invest, and generally hold onto their stocks or other assets for only a short period of time. Once a small gain is locked up, the scalper will generally sell. This might seem odd if you’re used to investing strategies that depend on longer holds. Scalpers don’t like to hold onto assets for a long period of time, however, because it exposes them to too much risk. When it comes to investing, scalpers try to make their money through a large number of small gains. Just one big loss, however, can wipe out a large number of small gains.
Since scalpers don’t like to be exposed to risk, they often won’t hold onto stocks and other assets overnight. Instead, they will seek to liquidate all of their holdings before markets close. Scalping can thus be thought of as a day trading method, but it is certainly not the only day trading strategy out there. There are numerous other strategies day traders can use to make money. So if you’re interested in day trading, don’t limit yourself just to scalping.
Scalpers Profit Off Of Constant Change
As every investor knows, markets change rapidly and frequently. In the investing world, change truly is the only constant. People are always buying and selling assets, and the highly fluid movement of supply and demand means that prices are constantly fluctuating. Often, these fluctuations can be relatively minor in the grand scheme of things, with prices moving only by small amounts. If you’ve been following a few assets closely, you’ve probably come across similar things. “Scalpers” try to make money off of these small fluctuations.
Since scalpers depend on small price movements within short periods of time, it is essential for them to have access to as much data, especially quantitative data, as possible. Scalping in the investing world often relies on technical analysis, or automated trading tools that can be used to uncover insights in price changes. These tools are essential for many scalping investors. Basically, because scalpers constantly monitor markets and must watch for small changes, automated tools become invaluable.
Further, unlike most investors, scalpers have to pay very close attention to bid-ask spreads. If you’re buying stocks to hold on to for a long time, you likely won’t care much if the bid-ask price fluctuates by a few pennies. With scalping, however, a few pennies can be the difference between turning a profit or suffering a loss.
Scalping and Forex Trading
Scalping can be used to generate returns on just about any asset, however forex scalping is particularly popular. Forex is a generally stable market and doesn’t frequently suffer big price swings. Most of the time, currency exchange rates move rather slowly, at least compared to stocks. If a currency rises or drops by a percentage point within a single day, this is usually big news. If a stock rises or drops by one percent, on the other hand, no one really pays attention.
Since forex moves more slowly, scalpers generally are at less risks of suffering big losses. At the same time, scalpers can still generate numerous small gains through currency trading. Since forex markets operate 24 hours a day, 365 days a year, forex scalpers also don’t have to worry about markets shutting down. Demand for currencies is always high, so forex traders also don’t have to worry about finding a buyer or seller for major currencies.
For these reasons and more, forex and scalping are a perfect fit. While you can scalp with stocks, the nature of the forex market makes it a potentially better fit for scalping. That doesn’t mean you can’t and shouldn’t try to formulate scalping strategies for stock markets and other asset markets. However, if scalping is of interest to you, then forex markets are definitely worth a close look.