What Is a Scalper? How It Works in Trading, Legality, and Example

What Is a Scalper in Finance and Trading?

Scalpers enter and exit the financial markets quickly, usually within seconds, using higher levels of leverage to place larger-sized trades in the hopes of achieving greater profits from minuscule price changes.

A scalper, in the context of market supply-demand theory, also refers to a person who buys large quantities of in-demand items, such as new electronics or event tickets, at regular prices, hoping that the items sell out. The scalper then resells the items at a higher price. For example, a scalper may buy 10 tickets to the Super Bowl and attempt to sell them on eBay several days before the game at an inflated price. This type of scalping is illegal under certain conditions, and such transactions often occur on the black market.

What a Scalper Does

Scalpers buy and sell many times in a day with the objective of making consistent profits from incremental movements in the traded security’s price. A scalper attempts to profit from the bid-ask spread in addition to exploiting short-term price moves. They may trade manually or automate their strategies using trading software.

High-frequency trading (HFT) has made a scalper’s job more competitive. Programs can scour thousands of securities at once and take advantage of discrepancies between the bid and the ask in milliseconds. Black box algorithms also monitor Level 2 data, analyzing price and liquidity information to make short-term trades.

Scalpers typically use short duration—such as one- and five-minute—charts to make their trading decisions. They may also purchase intraday scanning software to find new opportunities. Most scalpers engage in high-volume trading and use online brokers that offer competitive commissions to keep their trading costs minimal.

Traits of a Scalper

• Disciplined: Scalpers must be highly disciplined. They must strictly follow their trading plan if they are to succeed. Most scalpers set a daily loss limit and stop trading if that amount is breached. A daily loss limit prevents scalpers from chasing their losses.
• Combative: Scalpers are often combative by nature. They view the market as a battle zone and see other traders as the enemy. Many scalpers who trade manually have an “us vs. them” mentality toward black box trading programs. They look for repetitive patterns and try to exploit them for a profit.
• Decision Maker: There is often little time to react when making short-term trades. Scalpers often have to make trading decisions in seconds, or they miss the opportunity. They also need to make quick decisions if an error is made. For example, do they close an erroneous trade immediately, or do they close half now and half on the market close? Being a good decision maker helps prevent a scalper from panicking. In other words, they have to be calm amid chaos.

The Bottom Line

Scalping requires buying and selling securities throughout the day at a fast pace. Analytical capabilities, making trading decisions quickly, and sticking to an exit strategy are some of the skills needed. If you’re an investor with a long-term time horizon, it’s likely that this investment strategy isn’t a good fit.