Happy Fourth of July, traders!
I hope you’re all enjoying some BBQ with your friends and family.
God bless America!
Today we’re going to talk about scalping — a subgenre of day trading that involves making many trades per day on the same stock, looking to stack small profits.
While scalping can be a viable strategy for high-frequency traders (HFTs) with a bank of computers in a hedge fund’s basement, it’s a different story for most of us.
Still, I see traders try to scalp like robots. Many newbies fall in love with the idea of scalping because they think it’s “easy money.”
Sound familiar? Well, remember, there’s no such thing as easy money in the stock market.
With that in mind, let’s break down everything you need to know about scalping…
What is Scalping?
Scalping involves making numerous trades within a day to profit from small price changes.
You’ll see stocks like Microsoft Inc. (NASDAQ: MSFT) move up 10 cents, down 10 cents, and think you can just trade the upticks and avoid the downticks.
A thousand trades later, you might hope to make $1,000 by earning a dollar per trade.
It sounds good in theory, and some of you might even be nodding along right now, thinking it’s a brilliant idea.
But here’s the catch: it’s not as easy as it sounds, especially for new traders with small accounts and poor risk management…
The Scalping Fallacy
I see so many new traders fall for the scalping fallacy — thinking they can trade in and out a thousand times a day and make easy money.
But this strategy is riddled with problems. There’s a lot of survivorship bias at play.
You might look at a chart and see all the upticks, but you don’t consider what happens if you’re wrong.
What if you buy at the wrong uptick and the stock sells off? Your losses can quickly magnify.
The biggest issue with scalping is that your gains are typically very small…
You might make $10, $50, or maybe even $100 per trade — but one tiny mistake can wipe out days, weeks, or even months of gains.
All it takes is one poorly planned trade, breaking a stop, or unexpected news, and poof — your hard-earned gains are gone.
(StocksToTrade Breaking News Chat can help keep you up-to-date on the biggest market catalysts BEFORE the news guys hear about it…)
But this is why most people give up on scalping…
After a significant loss, it can take months to get back to where you were, and that’s incredibly demoralizing.
My Experience with Scalping
I’ve been day trading for 18 years and have made every mistake possible hundreds of times.
Back when I was a part-time trader, I, too, fell in love with the idea of scalping.
I was busy running my business and raising my family, and I thought I could just scalp for an hour here and there.
But it doesn’t work over time. Even if it works short-term, the gains are so small that one mistake can set you back significantly.
After struggling to mount significant gains through scalping, I evolved into a better strategy…
A Better Approach: 3-to-1 Risk-Reward
What ultimately led to me to consistent profitability was focusing on trades with a minimum of a 3-to-1 risk-reward ratio.
This means that for every dollar you’re risking, you aim to make three dollars.
This approach allows you to make a few bad trades without giving back all your gains.
By progressively growing your account and catching big moves, you can handle small mistakes without significant setbacks.
Key Concepts to Focus On
- Understand Charts: Learn to read and interpret charts on multiple timeframes.
- Understand Volatility: Know how stocks behave in different market conditions.
- Understand Past Performance: Know your history. Former runners tend to run again.
- Manage Risk: Effective risk management is crucial for consistent profitability.
The best way to become a consistently profitable trader is to learn everything you can … and the best way to educate yourself is to join the Daily Income Trader system.
We offer live webinars multiple times a day, even on weekends. Our system includes algorithms, a trading platform, news feeds, charting tools, scans, educational eBooks, and more…
Look, scalping might seem like an attractive strategy, but it’s really difficult to nail consistently. Plus, you have to babysit these trades very closely.
But if you want access to some setups that don’t require 24/7 monitoring, you’re in luck…
I’m going LIVE This Sunday, July 6 at 6 pm EST to show you how our IRIS AI swing trade analyzer saves you time identifying hot swing trades with a full trade plan, stock report, and trading score in minutes!
Stop scalping and start swinging — Mark your calendar for Sunday’s LIVE EVENT!
Have a great Independence Day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade