Scalping

Scalping is a style of trading in which positions are held for a very short time, from a few seconds to a few minutes, with the aim of capturing small price movements. A scalper may make dozens or hundreds of trades in a session, each targeting a gain of a few ticks. The approach relies on the idea that small moves are more frequent and easier to capture than large ones, and that exposure to the market is limited when positions are closed quickly.

Scalping is the shortest-horizon form of intraday trading. It is practised in shares, futures, currencies and crypto assets by individuals and by professional firms, and in its automated form it shades into high-frequency trading. The word has two other meanings in finance, described below, which should not be confused with the trading style.

Scalpers concentrate on highly liquid instruments with a narrow bid-ask spread, because the spread is paid on every round trip and each profit target is small. Common approaches include the following.

• Spread capture. The trader posts a limit order to buy at the bid and another to sell at the ask, in the manner of a market maker, and earns the difference when both are filled.
• Order book reading. The trader watches the order book and the stream of executed trades for signs of short-lived imbalance between buyers and sellers.
• Momentum bursts. The trader joins a sharp move as it starts, often after a news release or a break of a price level, and exits within moments.

Decisions are based on price and order flow, not on the fundamentals of the asset. Most scalpers use fixed exit rules, with a profit target and a stop-loss order set at the time of entry.

Because each gain is small, results depend on the win rate and on costs. The expected profit per trade is:

• $p$ is the proportion of trades that win.
• $W$ is the average gain on a winning trade and $L$ the average loss on a losing one.
• $c$ is the cost per round trip, including commission, fees and slippage.

Suppose a scalper wins 60 percent of the time, gains $30 on winners, loses $30 on losers and pays $5 per round trip. The expected profit is $0.60 \times 30 - 0.40 \times 30 - 5 = 18 - 12 - 5 = 1$ dollar per trade. The break-even win rate, found by setting $E$ to zero, is $(L + c) / (W + L) = 35 / 60$, or about 58.3 percent. A fall in the win rate of two percentage points, or a rise in costs of one dollar, removes the entire profit. This thin margin is the defining feature of the style.

Every transaction cost weighs heavily when multiplied by hundreds of trades. Scalpers therefore seek low commissions, exchange fee rebates for supplying liquidity, and instruments where the minimum price increment, or tick size, is small relative to typical movement. Fast and reliable execution is essential, since a delay of a fraction of a second can turn a planned gain into a loss.

Electronic markets have changed who can scalp profitably. Automated firms with servers placed next to exchange systems react in microseconds and dominate spread capture in the most liquid markets. Individual traders working by hand through a retail platform compete at a large disadvantage in speed and cost, which is one reason studies of very active retail trading tend to find that most accounts lose money.

• Cost drag. Fees and spreads can exceed gross trading profit even when most trades win.
• Asymmetric losses. A single large loss, caused by a sudden move or a failure to exit, can cancel many small gains.
• Leverage. Scalpers often use leverage to make small moves worthwhile, which magnifies losses equally.
• Execution risk. Orders may fill partially, late or at a worse price in fast markets.
• Overtrading. The pace encourages impulsive trades outside the planned rules.

Some brokers restrict or prohibit scalping on certain account types, and exchanges may penalize very high ratios of orders to trades.

In securities law, scalping refers to a form of misconduct in which a person recommends a security to others while secretly holding it, and then sells into the buying that the recommendation creates. The United States Supreme Court addressed the practice in 1963 in a case concerning an investment adviser, and regulators treat it as fraud or market manipulation.

In options trading, gamma scalping is a separate technique in which the holder of an option position repeatedly adjusts a hedge in the underlying asset. It shares the name but not the method.