While investors hold stocks for years, and even position traders hold them for months, scalpers would have a position on a stock for just minutes or seconds.
A stock scalper might buy a large volume of stocks, wait for a tick upwards – or short a stock and wait for a small tick downward – and unload the trade as soon as it hits a profit.
For example, you put an entry limit order to buy 1000 shares of Company A when it hits $500 per share, a known level of support. Company A’s shares do fall to $500 and your trade is executed. You start to monitor the market and are ready to close your trade should the market move in your favour or against you.
The market rises to £501 and your trade is closed, regardless of whether the price looks like it will continue to rise. From this small position, the potential profit would be £1000.
However, if the market turned quickly losses could’ve stacked up. That’s why risk management is equally important, and most scalpers use stop-losses.
Liquidity is also vital when scalping shares, as without it, moving a large number of shares at once would be difficult. This creates a number of issues when scalping, the most obvious being you might be forced to hold your position for longer than you want. It could also result in a larger spread.
Every single cost incurred on a scalp trade is important as they can stack up due to the number of trades being entered every day.