Scalping, when used in reference to trading in securities, commodities and foreign exchange, may refer to
(i) a fraudulent form of market manipulation or
(ii) a legitimate method of arbitrage of small price gaps created by the bid-ask spread.
Scalpers attempt to act like traditional market makers or specialists. To make the spread means to buy at the Bid price and sell at the Ask price, to gain the bid/ask difference. This procedure allows for profit even when the bid and ask don’t move at all, as long as there are traders who are willing to take market prices. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.
Factors affecting scalping
Liquidity
Liquidity of a market affects the performance of scalping. Each product within the market receives different spread, due to popularity differentials. The more liquid the markets and the products are, the tighter the spreads are. Scalpers like to trade in a more liquid market since they can make thousands of trades a day to add up their small profits offered on each trade.
If they are to trade in less liquid markets, they will try to cover their risks by widening their bid and ask prices.
Volatility
Unlike momentum traders, scalpers like stable or silent products. Imagine if its price does not move all day, scalpers can profit all day simply by placing their orders on the same bid and ask, making hundreds or thousands of trades. They do not need to worry about sudden price changes.
Time frame
Scalpers operate on a very short time frame, looking to profit from market waves that are sometimes too small to be seen even on the one minute chart. This maximizes the number of moves during the day that the scalper can use to make a profit.
Risk management
Rather than looking for one big trade, the way a swing trader might, the scalper looks for hundreds of small profits throughout the day. In this process the scalper might also take hundreds of small losses during the same time period. For this reason a scalper must have very strict risk management never allowing a loss to accumulate against him.