Scalping Trading Strategy: A Quick Guide to High-Frequency Trading

Each trader or investor in the trading world has some rules by which they live. These rules or strategies help them stay true to their financial goals and adjust their tactics according to their experience. Some of these strategies are more widely used among traders and are backed by technology and science. The use of each strategy depends on the market’s current situation and each trader’s financial goal. For example, if a trader’s goal is to invest in a company, watch it grow, and reap the rewards, a long-term investing strategy will be the way for them to go, but if the goal is quick profits, they might want to explore other ways of trading. 

One of the most important and exciting short-term trading strategies is scalping. In this strategy, the trader benefits from selling assets quickly and capitalises on small price movements. This technique requires a keen eye, strong trading expertise, and a quick wit. Its main goal is to profit through the fast reselling of shares. It is most commonly used in day trading and a volatile market with fluctuating prices. The most crucial metric of scalping trading is having a strict exit strategy because a simple loss can wipe out the whole day’s earnings. 

Traders can use this technique to trade asset classes like stocks, forex, commodities, etc. However, the trading asset classes should be in a volatile market for the prices to fluctuate. As scalping traders profit from slight price differences, an asset in a stable market with the fewest fluctuations will not generate profit. This is why it is essential to choose volatile assets. 

Scalping is considered high-frequency trading, where quick reselling and profits are the primary goals. However, both these techniques have some subtle differences. There is also a scalping high-frequency trading strategy, which is a step ahead of either strategy alone. This article will cover everything you need to know about scalping, high-frequency trading strategies, their combinations, and more. 

What Is Scalping in Trading?

Scalping in trading is buying and selling assets within seconds or minutes to capitalise on minute price movements in a fluctuating market. This technique is extremely risky and is mainly used in day trading by traders looking to make quick profits. The execution and strategising of this technique solely depend on the trader and his experience. Prior information about the market, how it works, the asset’s trading history, and knowledge about the current world economy is very useful when scalping. 

The most crucial part of executing a scalping trading strategy is having a strict exit point and using various risk mitigation techniques. As traders capitalise on minute price fluctuations, the profit is built bit by bit, but a single loss can erase those profits in one swipe in a fluctuating market. This is why traders put a lot of time into perfecting their exit strategies and using risk mitigation techniques to minimise losses. Additionally, scalping trading is very time-consuming as the traders must constantly enter the trades and cannot leave them on auto-pilot. 

High-Frequency Trading: An Overview

High-frequency trading is a type of automated trading that works by deploying advanced algorithms and hardware. It minimises human touch in trades and is capable of executing a large number of orders within seconds or less. This algorithmic trading is capable of executing orders based on fractional changes in the prices of any assets. It is, therefore, very robust in performance. Here are some of the key factors of high-frequency trading:

• High-frequency trading combines three main components: exceptional trading market knowledge, advanced computing, and high-end hardware. Together, they form this revolutionary type of trading that works beyond human capacity. 
• Banks, trading firms, and institutional investors mostly use high-frequency trading. This is because a single trader cannot execute this type of trading, and simple trading parties cannot meet their requirements, even with significant capital. 
• HFT executes tasks at unparalleled speed and thus has ultra-low latency. This means that orders are set up and executed within milliseconds. This is only possible if the internet connection is stable and high-speed. The orders are usually executed quickly because HFT can access trading venues directly. 
• HFT is capable of executing a large number of buy or sell orders multiple times within seconds. The final profit is an additive effect of all these orders. 
• HFT holds the position for a very short period of time, which may be milliseconds. It always supports high turnover. 
• HFT algorithms are highly intricate but sophisticated. They are designed to detect and act on the most minor price fluctuations in the market so they can perform tasks that may take humans a long time to comprehend. 

High-frequency trading slowly developed to its now-known glory after NASDAQ introduced electronic trading back in 1983. Since then, the execution time has gone down from minute to seconds to mili seconds. With the rapid progression today, we might even hear that the HFT can execute orders within nano-seconds, but it will take some time and a new era of high-end technology. Currently, HTFs use the following technology:

High-Speed Hardware 

HFT traders use specially produced hardware that is highly reliable and ensures rapid data processing. This hardware then ensures no latency between different device components when executing tasks.  

Sophisticated Algorithms 

Algorithms are the centrepiece of HFT, and their accurate development is key to making a profit. Algorithms are mathematical models that undergo much testing before they are used in actual settings. They are designed to detect even the smallest price fluctuations and patterns and predict price movements when possible. Due to these algorithms and their predictive abilities, high-frequency trading is closely related to speculative trading. However, speculative trading is just a part of HFT, which offers many features. 

Direct Market Access (DMA)

Most HFT work on direct market access, which means that to reduce any delays in connections between them and trading platforms, they directly connect their systems to stock exchanges or trading platforms via physical fires and connections. This allows them to work at incredibly high speeds and finish the job. 

Specially Optimised Networks

Finally, this is possible only if HFT have highly optimised network systems between different devices. This is done by using fibre optic cables and high-speed data transmission. 

Scalping vs. Other Popular Trading Styles

There are many popular trading styles in the market today, and a few of the most famous ones include the scalping trading strategy, position trading, and swing trading. Each technique is unique and quite popular among traders for profit-making. Here, we explain each of them in comparison. 

Implementation for Private Traders

Scalping is a famous trading strategy that is carefully implemented in many trades. It requires the sole trader to act on their experience and knowledge of the market to gain profits in a volatile market. Here are a few of the implementations that the traders implement to be successful scalping traders:

Disciplined Risk Management

Scalping trading is all about managing positions and implementing strict exit points. Even if the trends are looking great and going in consistent uptrends, traders should stick to their strategies because the biggest goal is to minimise losses after making profits. 

Quick Market Analysis

Scalping traders should be able to conduct quick market analyses and implement their slightly adjusted strategies quickly, which is crucial for quickly buying and selling assets to make a profit. 

Constant and Keen Monitoring 

Finally, as scalping requires quick buying and selling by the sole trader, there is a constant need to monitor and adjust trades. Scalping trades can not be left to automation and require face-to-face time between the screen and the trader. 

Challenges and Risk Management

The scalping trading strategy is risky. Even though it is exciting and requires less capital, traders may still experience losses. This is why traders should always have a strict exit strategy and point in mind. Additionally, different risk mitigation techniques should be in place, such as stop-loss order, position sizing, and real-time trend notifications. All of these metrics will be put in place after considering your personal strategy and financial goals. 

Sudden market swings and unprecedented trends can hit traders and their profits. This is why it is always important to gain as much information as possible about the asset and its associated market before jumping into scalping trading. Always ensure that your stop-loss order is in place, your exit strategy is devised, you are up to date with the latest trends, and you are monitoring your trades closely. This will help you minimise your losses in the short and long term. 

Frequently Asked Questions

How Does High-Frequency Trading Work?

High-frequency trading strategies use fast-paced algorithms and technology to buy and sell assets in record time and capitalise on minute price changes. This type of strategy is more complex than scalping as it depends on technology, whereas scalping depends on the trader’s expertise and knowledge. 

What Does a Typical Scalping Strategy Involve? 

A typical scalping strategy involves buying and selling assets quickly and capitalising on subtle price differences. This technique requires an experienced trader with a keen eye for quickly anticipating and acting on price changes. Scalping trading can be very risky, so the trader needs to have strict exit strategies and risk mitigation techniques in place. 

How To Become a Market Participant in Scalping?

For beginner traders looking to get into scalping, we recommend first trying their hand at a demo account. Most trading platforms offer demo accounts, which are mimicked environments. This means that the trader will experience all the thrill and excitement of a real market, execute strategies, and experience gains and losses without actual capital. These demo accounts are an excellent way for traders to learn scalping and perfect their strategy before entering the real world. 

What Is the Difference Between Institutional HFT and Retail Scalping?

Institutional HFT and retail scalping share a few basics but differ in scale and resources. In Institutional HFT, several algorithms are used to move many assets. This means the profit will be considerable when they capitalise on those minor fluctuations. Meanwhile, in retail scalping, traders use their experience and knowledge to buy and sell assets and capitalise on those small price fluctuations, making small profits. Both techniques use price fluctuations as the motive behind trading but differ slightly in the number of trading assets and the source of trade direction. 

A scalping trading strategy is an interesting strategy that can help traders gain profits while capitalising on minor price fluctuations in a volatile market. Many of its features resemble those of High-frequency trading, but they are two different strategies. Scalping is used mainly by sole traders while day trading, whereas HFT is used by giant financial corporations and institutions that can afford the technological and algorithmic expenses of HFT. In both cases, the main goal is to capitalise on an asset’s price fluctuations. 

For a successful scalping trade, the trader should have prior information about the market, how it works, the trading history of the asset, and knowledge of the current world economy. Scalping is only effective when conducted in many trades in a day. Another important thing to remember here is that a single loss can wipe the profits of a whole day, so placing risk mitigation techniques of dire importance in the scaling strategy.