Any trader, no matter which financial instrument he is using, understands he needs to have a plan in place before approaching the market. A large part of that plan includes choosing the time frame that best fits the trader's personality and risk tolerance. Scalp trading is a method of trading which focuses on quick entry and exit, banking small profits. The other benefit of using this method is exposure to market forces is greatly reduced since a position is held for a very short period of time.
Stock trading veterans have scalped stocks in the equity markets for years with excellent results. Index futures traders using emini contracts on the S&P, Dow and NASDAQ utilize scalping techniques everyday in these highly fluid markets. With the recent explosion and popularity of Forex and currency trading, many participants have also adopted this methodology to increase profits and minimize risk.
Whether trading socks or currency pairs, this short term trading method requires obedience to the rules set by your trading system. Since scalp trading is designed to get the trader in and out of the market quickly, rules must be followed. Most importantly, stops must be obeyed. Stop losses are there to minimize the loss if a trade does not materialize as planned, which is often the case in the financial markets.
Scalp trading can be used exclusively or it can be employed whenever the trader determines market conditions are ideal. Some traders may use traditional day trading methods, holding a position all day or for an hour or so. However, he may decide market action is not showing favorable conditions for executing a day trade and switch his method over to scalping, rapidly entering and exiting with a small profit. Choppy, tight and range bound days are perfect for scalping the markets.
Scalp traders usually execute many more trades throughout the daily session for smaller profits than a traditional day trader. Although they are seeking minimal profits from each trade, this does not mean however, the day trader will end the day with larger gains. The scalp trader will pay more in commissions than the day trader since he will execute far more trades in the course of the day. However, new traders should be aware commissions can quickly eat into profits so be sure to use a broker that has a reasonably priced commission schedule.
It is important to remember, if scalp trading is chosen as your approach to the market, discipline and a commitment to following your trading system rules is necessary. This kind of trading can yield excellent results when employed by a well-organized and disciplined trader.