Introduction to Trading: Scalpers

Generally speaking, investors make their money by buying a security and then selling it for a profit at some point down the road. It's not unusual for investors to maintain their positions anywhere from a couple of months to many years.

On the other side of the coin, there are traders. The typical trader holds a stock for no more than a few days and often trades in and out of stocks several times per day. Scalpers are a specific type of short-term trader that may dart in and out of a stock or other asset class dozens, or in some cases even hundreds, of times a day.

The reason these individuals are so active is that they hope to reap a small profit on each trade, adding up to big dough at the end of the day. A scalper's goal and job description are similar to a market maker's.

Understanding Scalpers

Scalpers are often high-energy individuals who thrive during times of stress and have the means and temperament to handle the high trading volume.

While just about anyone with ample time, money, and knowledge (among other traits) can become a scalper, it often makes sense to leave this type of trading to the most seasoned day traders. This is because scalping requires high-speed trading, where slight miscalculations and hesitations can result in losses that quickly add up.

Additionally, seasoned day traders have the specialized tools, experience, and emotional resilience needed to manage the high-stress scalping environment. Because scalping requires quick decision-making, deep market knowledge, and the ability to manage rapid trades without letting stress or emotional impulses interfere, it is best suited for those with significant day-trading experience.

If you feel you are in a position to successfully begin scalping, below are important points of consideration.

The Costs

Several issues make being a scalper difficult. First off, maintaining such a large number of positions can be very time-consuming. In fact, it is somewhat safe to say that the scalper will be glued to their monitor all day waiting for the slightest moves to get in and out of positions.

Being a scalper can also be costly (both in terms of dollars and opportunity cost). That is because the scalper must often keep cash at the ready so that they can pounce on opportunities at a moment's notice. And don't forget about the commissions.

In fact, commissions can be a big killer. Just think about all of the ticket charges a scalper might run up in a day, and how that could eat into their hard-earned profits. For that reason, scalpers working on their own should attempt to obtain the lowest commission rates possible through negotiations with a broker-dealer.

Tools of the Trade

Scalpers need some special equipment if they want to be successful. This might include having access to Level II quotes to track bids and asks throughout the trading session. Having access to charting information and a phone line is also essential. Would-be scalpers should also be aware of how decimalization can affect trading and therefore their profits.

More specifically, in the past, traders and investors used to buy and sell stocks using a fraction system; trades were usually done in fractions of 1/16th (or the equivalent of $0.0625) or greater. Today, spreads are often a couple of cents apart, and trades are done in pennies. This is an issue because it may make it harder for the scalper to reap a profit.

For example, using fractions, if a scalper bought a stock at $10 and sold it at $10 at 1/16 decimalization, they would reap a profit of $62.50 on 1,000 shares (not counting commissions). However, if that same scalper purchased a stock at $10 a share and sold it at $10.01, their profit would be just $10, which probably may not even cover the commission.

Again, the point is that this can be a stumbling block for would-be scalpers and should be considered.

Getting Into the Game

So how does one become a scalper and take part in this exciting and potentially lucrative field? To be clear, scalping isn't for everyone. By nature, scalpers must be willing to accept risk and be able to deal with the tension that is sure to accompany this frenetic trading style.

With that in mind, there are no formal education requirements for one to become a scalper on their own. In fact, technically it's something that just about anyone can do if they have the time and the means.

Of course, it probably makes good sense for a scalper to first get their feet wet trading only a few stocks at a time, and to thoroughly learn the markets.

The Bottom Line

Scalping is a high-frequency trading strategy focused on quick profits from small price movements, which demands close monitoring, rapid decision-making, and a strong tolerance for risk. Though theoretically open to anyone with the right tools and capital, the significant costs in time, commissions, and specialized equipment make it a challenging path.

Typically best suited to experienced traders, scalping's profit potential depends on careful market insight, low commission rates, and familiarity with the trading system's intricacies.