What Are Scalpers?
Scalpers are financial traders who enter and exit the financial markets swiftly and repeatedly. Their goal is to make many small-profit trades rather than a few large-profit trades. Scalpers employ a trading style with the shortest trading cycle—even shorter than other forms of day trading. They are called scalpers because traders who adopt the style quickly enter and exit the market. Their strategy is to skim or scalp small profits off many transactions throughout a trading day. As a result, scalpers enter and exit the financial markets quickly, usually within seconds. Often they use higher levels of leverage to place larger-sized trades to achieve greater profits from minuscule price changes. These small trades can add up to the profit they might have realized from one higher-profit day trade.
In the context of market supply-demand theory, scalpers are opportunists who buy large amounts of in-demand items. For example, new electronics or event tickets. They make their purchases at ordinary prices in the hopes that the items will sell out. When that occurs, scalpers resell the items at a higher price – often, much higher. For instance, a scalper may purchase ten World Series tickets at the list price. Then, the scalper attempts to sell them at an inflated price on eBay several days before the game. Under some conditions, this type of scalping is unlawful. However, such transactions frequently take place on the black market and the dark web.
Financial Scalpers – A Closer Look
Scalpers buy and sell often throughout the day attempting to profit on incremental price moves in the traded security. A scalper seeks to profit from the bid-ask spread as well as short-term price movements. They may trade manually or use trading tools to automate their techniques.
High-frequency trading (HFT) has made scalping more difficult. Automated programs can examine thousands of securities at once and take advantage of bid-ask spreads in milliseconds. Data is also monitored to use price and liquidity information to conduct short-term transactions. Scalpers often make trading decisions using short-term charts, such as one- and five-minute charts. They might also buy intraday scanning software to look for new chances. Most scalpers trade in huge volumes and use online brokers with low commissions to keep their trading costs to a minimum.
In foreign exchange markets (Forex or FX) smaller moves happen more frequently than larger ones. This tends to be the case even in relatively calm markets. This means that a scalper can profit from a variety of tiny movements. Forex scalpers can place hundreds of trades in a single day, looking for modest profits. In general, scalpers close all positions at the end of the trading day. This trading strategy requires it is best suited for people who can devote several hours to their trading. This is because traders must essentially be hooked to the charts and trading programs. To be effective, you must have great focus and make rapid decisions. Such quick and intense trading is not for everyone.
The appeal to scalping is that a series of tiny wins can eventually add up to enormous profits. These minor victories are obtained by attempting to profit from brief fluctuations in the bid-ask spread. Scalping focuses on taking larger positions for lesser earnings in the shortest amount of time. Often, these transactions occur in a few seconds to minutes. The premise is that price will complete the initial stage of a movement in a short period of time. This allows scalpers to capitalize on market volatility. The primary strategy is to open a position at the ask or bid price. Then, swiftly close the position for a profit a few points higher or lower. It is not for individuals who want to win big all the time. Rather, it suits those who prefer to generate tiny profits over time in order to accumulate a larger profit.
Types of Scalp Trading
Scalpers can employ discretionary or systematic trading strategies.
- Discretionary scalpers make trading decisions fast based on market conditions. The trader relies on experience and instinct to determine the timing and profit targets of each trade. Discretionary scalping adds an element of risk to the trading process through personal bias. Emotions might lead a trader to make a wrong decision or cause them to fail to act at the right time
- Systematic scalpers do not rely on intuition. Instead, they utilize computer algorithms and artificial intelligence to automate scalping. As a result, they perform trades based on the parameters they establish in advance. When the program detects a trading opportunity, it acts immediately. This is as opposed to waiting for the trader to evaluate the position or transaction. Systematic scalping removes human control from trading decisions, resulting in unbiased trades.
Financial Scalpers versus Illegal Stock Scalpers
Stock scalping is different than scalp trading. Stock scalping refers to the illegal and misleading activity of advising people to buy a stock or security while surreptitiously selling the same security. The Securities and Exchange Commission (the “SEC”) and the Department of Justice have filed an increasing number of charges. This is in response to increasing securities violations for stock scalping activities in recent years. Stock scalping is most commonly associated with stock promotion or penny stock investor relations activity.
Stock scalping schemes often involve expert advisors who are compensated to promote a particular stock or security. Insiders may also pay or hire investor relations providers to raise the price and volume of a penny stock issuer’s shares. Ultimately, the goal is to pump up the value in order to sell their holdings during investor relations campaigns discreetly. The scalpers then recommend that investors buy stock while surreptitiously selling their own shares. This is a major aspect of criminal prosecutions involving stock scalping schemes.
Illegal stock scalping Example
For example, the Securities and Exchange Commission (SEC) filed charges against promoter Michael Beck. Mr. Beck is accused of recommending a stock without disclosing his intent to sell the stock and then selling it at inflated prices to generate profits. Michael M. Beck went by the Twitter handle @BigMoneyMike6. He was charged with duping investors into buying penny stocks he advised. This is despite the fact that he secretly planned to sell those stocks. In some cases, he was in the process of selling them when he made the recommendations. Beck’s tweets encouraged people to sign up for “TeamBillionaire” in order to receive the advice through email. According to the complaint, Beck often emailed TeamBillionaire members or had third parties post good feedback about the stock on investor message boards a few days before publicly tweeting a recommendation.
The SEC’s complaint alleges that Beck engaged in scalping of eight different penny stocks – recommending a stock without disclosing his intent to sell the stock, and then selling it at inflated prices to generate profits. According to the complaint, Beck repeatedly purchased blocks of penny stock shares and then tweeted that he would soon be issuing a new stock recommendation to his millions of followers and the public at large. Beck then typically began to sell his shares, and shares owned by his mother, relief defendant Helen Robinson, before tweeting the recommendation publicly and typically sold additional shares after tweeting positively about the stock. The complaint alleges that Beck failed to disclose his plans to sell, or his ongoing selling, of shares in any of the tweets, emails, or message board posts, and that he obtained approximately $870,000 in total proceeds from his scalping activities. (Source: sec.gov)
Up Next: What Is Book Value Per Share (BVPS)?
The book value per share (BVPS) is a ratio of the total asset value of a firm minus its liabilities divided by the number of outstanding common shares of stock. This metric shows the minimum value of a company’s equity and gauges a company’s value as compared to its market value per share. The book value of a firm is the difference between its entire assets and total liabilities. In other words, the book value is not its market share price. If the company goes bankrupt, the book value per common share is the dollar value left for common shareholders. This is after all assets are liquidated and all debts are paid.
The book value per share (BVPS) is derived by dividing the equity available to common stockholders by the number of outstanding shares. The book value per share is meaningful when contrasted with the current market value per share. It can provide insight into how a company’s stock is valued compared to its assets. If the BVPS exceeds the market value per share, the company’s stock is considered undervalued. The book value can help indicate the market direction and potential share price of an undervalued company.