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What is a scalping strategy in the stock market and how does it work?

“Tickets. Tickets. Who needs tickets?” That's the siren call of many scalpers. For those looking for a last-minute chance to catch a game or concert, it might be the sound of relief; for the ticket scalpers themselves, it’s an opportunity to make a quick buck. But scalpers aren’t limited to entertainment venues. You can also find them looking to turn a quick profit on the stock market too — except there, the strategy involves buying and selling securities at lightning-fast speeds.

Scalping can be a demanding, highly detail-oriented way to invest. Here’s what it entails.

What is a scalper?

Scalpers are a type of day trader, but instead of holding a security for hours, they seek to enter and exit positions in minutes — or even seconds. They often trade in large volumes and profit off minuscule price changes. A successful scalper may share one or more of these five common characteristics:

  1. Able to maintain a laser focus on the markets for multiple hours at a time.

  2. Comfortable exiting a trade with only a small profit.

  3. OK with making potentially high-risk trades.

  4. Able to think quickly and adapt to new information.

  5. Most interested in quick or near-instant results.

What is scalp trading?

Scalp trading, or stock scalping, is a hyper-short-term trading strategy that requires investors to buy and sell securities quickly. People do this at high volumes, multiple times per trading day (often with the aid of powerful computer processors) spotting opportunities to make a quick profit from small price changes.

How does stock scalping work?

Stock scalping works on the assumption that a recognizable event — such as an earnings report or announcement — will affect the price of a stock in a certain way. But because no one knows what might happen to that stock beyond the initial reaction, scalpers focus on that first move. Rather than finding companies that can deliver a big win, they aim to increase their investment in stocks that are likely to make smaller, incremental gains. 

What are the popular scalping indicators and strategies? 

Scalp trades rely on careful technical analysis, a practice that involves looking for price trends and patterns as a way to select securities. Here are five popular strategies:

  1. Stochastic Oscillator Strategy: This is a momentum indicator that tries to identify securities that have either been overbought or oversold, by comparing the most recent closing price of a stock to its highs and lows over a prescribed period of time, as well as the rate of volume it's currently trading at on the market. There is no guarantee an investment will return to a more reasonable price, but scalpers can use this as one possible indication.

  2. Moving Average Strategy: Moving averages can provide scalpers with a meaningful data set. For example, a five-day Simple Moving Average (SMA) adds up the five most recent daily closing prices and divides the figure by five to create a new average each day. Exponential Moving Averages place greater emphasis on recent prices. Both can be useful guides.

  3. Parabolic Stop and Reverse (SAR) indicator strategy: This indicator spots possible reversal points in a price trend. The indicator plots dotted lines on a stock chart to help spot these shifts. When the lines reverse, it can help indicate what kind of stop-loss order to place on a trade.

  4. Relative Strength Index (RSI) strategy: This is a momentum indicator that measures the speed and magnitude of recent price movements for a given security. It can help traders evaluate whether a security may be overbought or oversold, given the conditions, and could indicate whether the security may be primed for a corrective pullback.

  5. Moving Average Convergence Divergence (MACD) indicator strategy: This measures the difference between a security’s exponential moving averages over different time periods. These comparisons can help identify an upcoming change to a security’s price trend.

Scalping trading styles

Scalp traders generally fall into one of two categories: those who use the strategy as their primary investing strategy and those who supplement their broader portfolio management with scalping tactics.

Scalping as a primary style

Sometimes referred to as pure scalpers, these investors rely on scalping as their primary style and place multiple trades throughout the day — sometimes hundreds. They rely on tick charts, also known as one-minute charts, so that they can track their positions as frequently as their strategy demands. For these scalp traders, it's all about real-time data and quick decision-making.

Scalping as a supplementary style

Some traders depend less on scalping strategies, and merely use them to supplement other tactics. For example, when markets are choppy or they’re trading in a narrow range, traders might look at short-term trends to help identify buying or selling opportunities.

Another way scalping might be used by longer-term traders is with an Umbrella trade, in which an investor sets up a trade with a longer-term position but continues to set up shorter-term trades in the same security, entering and exiting their position according to the principles of scalping. This strategy can be used to manage risk, allowing the trader to take small profits within that timeframe as the security rises or falls in value.

What are the benefits and risks of scalping as a trading strategy?

Advantages of stock scalping:

  • Over time, even small profits can add up. Scalp traders operate on the principle that you don’t have to swing for the fences or find companies with a strong business model to make money.
  • Lower chance of running into a major loss. By entering and exiting the market quickly, scalpers limit their exposure to the market and lower the chance that one of their holdings will run into a negative event that could trigger a significant loss.
  • Smaller gains may be easier to find. It may take less to move a stock price by a few cents than it does to move it by a $1 or more (outside of penny stocks, that is), making these types of gains more common — even when markets are quiet.
  • It’s a rules-based system. Scalpers follow trends, so they may not need to do as much in-depth research to make trades. And because followers of this practice adhere to a strict set of rules on when to buy and exit a position, some elements of trading can be automated.

Disadvantages of stock scalping:

  • Fees. Buying and selling stocks frequently at high volumes can drive up costs. Successful traders may make dozens, if not hundreds, of trades per day.
  • Betting big money on small gains. To turn a profit, some scalp traders use leverage — or borrow money — to ensure they’re able to manufacture meaningful gains. If the gains don’t materialize as expected, the loss can be a hit.
  • It’s time-consuming. Scalping takes a lot of time and concentration. Since the gains can be recorded in minutes or seconds, investors don’t have the luxury of looking away from their trades.
  • Not suitable for TFSA accounts. There’s nothing illegal about stock scalping, but the Canada Revenue Agency uses frequency of transactions and period of ownership, among other conditions, to determine whether Canadians may be day trading inside a Tax-Free Savings Account (TFSA). Doing so could get you an unwelcome tax bill.

Key considerations prior to embarking on a scalping journey  

Here are a few things investors can consider when applying this strategy to a portfolio:

  • Focus on the buy side. Scalping can be complex. Throwing short positions into the mix could make it more complicated.
  • Know your strengths. If you don't feel confident with your technical analysis skills, you may wish to consider adopting a simpler strategy until you feel more comfortable with scalping.
  • Trust the process. You may see trends that look attractive and, because you're moving quickly, you might consider jumping in before doing your research. Discipline and consistency are often cited as part of well-defined scalp trading plan.

Scalping in financial markets

Scalping in the stock market

Volume is your friend when you’re scalping stocks. Heavily traded equities are much easier to buy and sell at the prices you’ve targeted. Typically, this is a relatively risky way to make money in the stock market. However, sophisticated investors sometimes use scalping as a way to manage risk.

 

Scalping in the forex market

Trading currencies from countries you don’t have a solid feel for can be a bad idea, no matter how far along you are in your scalping journey. It may be wise to stick to what you know. However, scalping can be well suited to the foreign exchange market. Moving average and RSI measures are particularly popular among forex traders.

Scalping in the futures and options market

Futures and options are derivative investments that can be scalped like any other security. A futures contract commits the buyer to purchase an asset at a future date. An option gives the purchaser the right to buy or sell a security, at a predetermined price, at any point during the length of the contract. There is no obligation to buy or sell, however scalpers in this market tend to rely most on Exponential Moving Averages.

 

How to select suitable stocks for scalping

No matter how long you plan to hold an equity, stock selection matters. You may wish to focus on equities that are heavily traded. Stocks issued by high-profile companies may trade more heavily. If there aren’t enough investors tracking an equity, it can be difficult to identify a reliable price trend. A good exercise as you’re getting ready to start scalping may be to develop a list of stocks that suit scalping.

FAQs related to Scalping

 

Is stock scalping illegal?

No, it isn’t. But as is the case with most other strategies, it comes with risks. It can pay to know the rules and stick to them.

 

Can you make money scalping stocks?

How much you may potentially make — or lose — can depend on how many trades you place and how much you invest.

 

How much time does scalping require? 

A lot. Even though you’re in and out of individual trades in minutes or even seconds, you’ll need to place multiple trades over the course of a day for potential gains. You’ll also have to research each trade and track its progress in real time.

 

What are the tax implications for scalping?

As is the case for all day trading, the Canada Revenue Agency treats investment profits and losses as business income, rather than capital, which makes it ineligible to be held in a TFSA. It also means you can’t use the 50% capital gains rate on profits. All of your profits will be taxed at whatever your marginal tax rate is.

 

How does scalping differ from day trading?

Scalpers move in and out of trades more quickly than many day traders do. Where day traders think in terms of hours, scalpers can exit a position after a period of minutes or even seconds.

 

How do I identify scalping opportunities?

The most common, simple technical analysis involves moving averages and a study of how a security is performing relative to other investments within the asset class.

On a final note

Scalp trading is both risky and demanding, but for the right investor, it may be a rewarding strategy. If you’re comfortable with analytics, disciplined enough to stick to the parameters you set for each of your trades and have the time and energy to properly execute multiple trades over the course of a day, your profits may add up.


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  • Your guide to day trading – the practice of buying and selling a security multiple times within the same day. See how day traders use short-term volatility to their advantage.

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