Why Scalping Strategies Won't Work For You - Bulls on Wall Street

Why Scalping Strategies Won’t Work For You

Scalping is a trading style that involves buying and selling shares in a very short period of time, usually minutes or seconds, and take very small gains over and over again. I know there are successful traders who scalp, but it shouldn’t be the core of anyone’s trading strategy, especially if you are new. Here’s why you shouldn’t be scalper:

The Scalping Mentality

Almost nothing is better than making $500 in 30 seconds. Most scalpers use large size to capitalize on small market movements. Stocks usually trade back and forth, so it makes sense to them since you don’t want to be in a stock that’s going against you. 

The actual justification for this style of trading is that these traders are scared of being in a losing trade. They are afraid that they could be wrong on a trade and having the trade going against them. To avoid having the pain of trade go against them, they take a small gain as soon as the market goes against them. 

The thought process behind their decision making is that having a trade go against you is less painful than leaving money on the table. But the bigger issue is creating and executing a profitable system in the LONG run. 

The Problem

The issue with scalping isn’t just that it has a low probability of making money in the long run. The issue is that after commissions, taxes, and other trading fees. It is a very stressful trading style, and it can really punish you if your risk management is bad. 

It is so easy to get into the “add, add, add” mentality when you are a scalper. “It will come back”, are most scalpers last words. 9/10 the stock comes back and you get away with it. The one time it doesn’t, weeks and months worth of gains are wiped out. Most successful scalping strategies are executed by computers and speed-wise you don’t stand a chance competing with them. 

Commissions Eat You Alive

This is especially true if you have a smaller account, and you’re day trading at one of the offshore brokers like Suretrader (I can guess at least half of the people reading this are under PDT!). This is what it looks like when scalping goes wrong:

scalping strategy

Who knows what that random person on Twitter made on that trade. But we do know that he paid 1000’s of dollars worth of commissions. Even if he somehow came out green just from his buys and sells, his commissions ate up most, if not all of his profits. 

The issue with scalping is being able to maintain a solid risk vs reward ratio on your trades. Scalping is the type of thing when you’re hot, you’re winning 90% of the time (I’ve been there) and making money with ease as you get in sync with a stock’s rhythm and movement. But when you’re losing, you are overtrading and killing yourself on commissions. The off days when you scalping can become horrific.

Make More Money By Doing Less

When you know how to ride stock trends, you can make more money with way less stress. You might find a scalping strategy that works for you. But know that there are strategies out there that can allow you to capture bigger moves in the market, with much less stress and micromanaging.

I have a quick style of trading where I often scale out of the ⅓ of my positions very quickly. That is similar to a scalp. But I still keep ⅔  of my shares for the bigger move! Scaling allows you to get some profit and green in your account but still stay in the position for a bigger move. That is the best solution I’ve found for scalpers who have trouble maintaining a sound risk vs reward ratio. 

Summary

You can make more money by trading A LOT less. You can scalp occasionally if you want to. But it shouldn’t Even with day trading, holding a trending stock for an hour or two can give you much larger gains, without a lot less stress, commissions, and energy. 

It’s okay to sell part of your positions quickly when you get a move in your favor, but be sure to let the rest of your position ride for the bigger move. This will allow your winning trades to be much larger than your losing trades, and make it much easier to become profitable in the long run!

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