Scalping stocks is a high – velocity trading strategy. The goal is to profit from tiny price changes that happen within a short time frame, sometimes just minutes or even seconds. To succeed at scalp trading, finding the right stocks is the first and most crucial step. In this article, we’ll walk you through various ways to identify stocks that are ideal for scalping.
Understanding Scalping
What is Scalping?
Scalping is different from long – term investing. Instead of holding stocks for months or years, scalpers aim to make multiple small trades throughout the day. They try to capture small price movements, like a few cents to a dollar per share. Since scalping involves quick decision – making and rapid trading, the stocks you choose must meet specific criteria.
Why is Finding the Right Stocks Important?
Not all stocks are suitable for scalping. Some stocks move very slowly, and any price changes are so small that they aren’t worth the effort. On the other hand, highly volatile stocks can provide plenty of opportunities for scalpers to buy low and sell high quickly. By finding the right stocks, you can increase your chances of making profitable trades.
Characteristics of Scalpable Stocks
High Liquidity
Liquidity refers to how easily a stock can be bought or sold without causing a significant change in its price. Stocks with high liquidity have a large number of buyers and sellers. This means that you can enter and exit trades quickly at a fair price. For example, large – cap stocks like Apple (AAPL) or Amazon (AMZN) are highly liquid. They are traded in large volumes every day, making them good candidates for scalping. You can check a stock’s average daily trading volume on financial websites like Yahoo Finance or Google Finance. A stock with an average daily trading volume in the millions is often a good sign of high liquidity.
High Volatility
Volatility measures how much a stock’s price changes over a given period. Scalpers love volatile stocks because they offer more opportunities to profit. A volatile stock can move up or down several points in a short time. For instance, biotech stocks are known for their volatility. When a biotech company announces positive results from a clinical trial, its stock price may spike. Conversely, negative news can cause the price to plummet. However, high volatility also means higher risk. You need to be careful not to get caught in a sudden price swing that goes against your trade. Look for stocks with a high beta. Beta measures a stock’s volatility relative to the overall market. A stock with a beta greater than 1 is more volatile than the market, which could be a good fit for scalping.
Tight Bid – Ask Spreads
The bid – ask spread is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask). A tight spread means the difference between the bid and ask prices is small. When scalping, every penny counts. If you have to pay a large spread every time you enter and exit a trade, it will eat into your profits. Stocks listed on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ usually have tighter spreads. You can use trading platforms to compare the bid – ask spreads of different stocks. Some platforms even offer tools to help you find stocks with the tightest spreads.
Tools for Finding Scalpable Stocks
Stock Screeners
Stock screeners are powerful tools that can help you filter stocks based on specific criteria. Many online brokers offer stock screeners for free. For example, TD Ameritrade’s thinkorswim platform has an advanced stock screener. You can set filters for liquidity, volatility, price range, and more. To find scalpable stocks, you can set the filter for average daily trading volume to be at least a few million shares. Then, look for stocks with a high beta or a large intraday price range. Another popular stock screener is Finviz. It allows you to screen stocks based on technical and fundamental factors. You can use it to find stocks that are trending up or down, or those that have recently broken out of a trading range.
Charting Software
Charting software is essential for analyzing a stock’s price movement. Platforms like TradingView and MetaStock offer a wide range of charting tools. You can use candlestick charts to see how the stock has performed over time. Look for patterns like triangles, flags, or head and shoulders. These patterns can give you clues about the stock’s future price movement. For example, if a stock is forming an ascending triangle, it could be a sign that the price is about to break out to the upside. Charting software also allows you to add technical indicators like moving averages, relative strength index (RSI), and Bollinger Bands. These indicators can help you identify overbought or oversold conditions, which can be useful for scalping.
Technical Analysis for Finding Scalpable Stocks
Identifying Trends
Trends are the direction in which a stock’s price is moving. There are three types of trends: uptrend, downtrend, and sideways trend. Scalpers often look for stocks in an uptrend or a downtrend because they offer more trading opportunities. To identify a trend, you can use moving averages. A simple moving average (SMA) calculates the average price of a stock over a specific period. For example, a 50 – day SMA shows the average price of the stock over the past 50 days. If the stock’s price is above its 50 – day SMA, it’s in an uptrend. Conversely, if the price is below the 50 – day SMA, it’s in a downtrend. You can also use trendlines. Draw a line connecting the higher lows in an uptrend or the lower highs in a downtrend. A break in the trendline could signal a change in the stock’s direction.
Breakouts
Breakouts occur when a stock’s price moves out of a trading range. A trading range is a period when the stock’s price fluctuates between a support level (the lower price) and a resistance level (the higher price). When the price breaks above the resistance level, it’s a bullish breakout. When it breaks below the support level, it’s a bearish breakout. Scalpers can profit from breakouts by entering a trade in the direction of the breakout. For example, if a stock has been trading between 50 and 55 for a while and then breaks above $55, you could buy the stock, expecting the price to continue rising. However, not all breakouts are genuine. Some breakouts may be false, and the price may quickly reverse. To confirm a breakout, you can look for high trading volume. A breakout with high volume is more likely to be a genuine move.
Fundamental Analysis and Scalpable Stocks
News and Earnings Reports
News and earnings reports can have a significant impact on a stock’s price. Positive news, such as a new product launch or a takeover bid, can cause the stock price to rise. Negative news, like a lawsuit or poor earnings, can make the price fall. Scalpers should stay informed about the latest news and earnings reports of the stocks they are interested in. You can use financial news websites like CNBC, Bloomberg, or Reuters to stay updated. For example, if a company is about to announce its earnings, you can anticipate how the market will react. If the earnings are better than expected, the stock price may spike, presenting a scalping opportunity.
Company Financials
Although scalping is a short – term trading strategy, it’s still important to know the financial health of the company. Look at the company’s revenue, earnings per share (EPS), and debt levels. A company with strong financials is more likely to have stable price movements. You can find this information in the company’s annual report or on financial websites. For example, a company with increasing revenue and EPS over the past few quarters may be a good candidate for scalping. On the other hand, a company with a high debt – to – equity ratio may be more risky.
Strategies for Finding Scalpable Stocks
Morning Gappers
Morning gappers are stocks that open significantly higher or lower than their previous day’s close. This often happens due to overnight news or market sentiment. Scalpers can look for morning gappers and trade in the direction of the gap. For example, if a stock gaps up in the morning, you can buy the stock, expecting the price to continue rising. However, be cautious as some gaps may be filled quickly, and the price may reverse. You can use pre – market scanners to find morning gappers. These scanners can help you identify stocks that are likely to gap up or down before the market opens.
Volume Surges
A volume surge occurs when a stock’s trading volume is much higher than its average volume. This can indicate that something significant is happening with the stock. For example, if a stock’s volume suddenly spikes, it could be due to a news announcement or a large institutional investor entering the market. Scalpers can look for volume surges and trade in the direction of the price movement. You can use stock screeners to find stocks with volume surges. Set the filter for volume to be at least a certain percentage higher than the average volume.
Backtesting and Paper Trading
Backtesting
Backtesting involves testing a trading strategy using historical data. You can use trading software to backtest your scalping strategy. Input the criteria for finding scalpable stocks and see how the strategy would have performed in the past. For example, if you think stocks with a high beta and high liquidity are good for scalping, you can backtest this strategy using historical data. Backtesting can help you identify any flaws in your strategy and make adjustments before trading with real money.
Paper Trading
Paper trading, also known as simulated trading, allows you to trade stocks without using real money. Many online brokers offer paper trading platforms. You can use these platforms to practice finding and trading scalpable stocks. This is a great way to gain experience and confidence without risking your capital. During paper trading, pay attention to how well your stock – selection criteria work. Analyze your trades and see where you can improve.
Risk Management When Finding Scalpable Stocks
Setting Stop – Loss Orders
Stop – loss orders are essential for scalping. A stop – loss order is an order to sell a stock if it reaches a certain price. This helps you limit your losses. When finding scalpable stocks, you should also determine where to set your stop – loss. For example, if you buy a stock at \(50, you may set a stop – loss at \)49.50. This way, if the price goes against your trade, your loss is limited.
Position Sizing
Position sizing refers to how many shares of a stock you should buy. When scalping, it’s important not to over – expose yourself. A common rule of thumb is to risk only a small percentage of your trading capital on each trade, say 1 – 2%. Calculate the number of shares you can buy based on your risk tolerance and the price of the stock.
Conclusion
Finding stocks to scalp requires a combination of knowledge, tools, and strategies. By understanding the characteristics of scalpable stocks, using the right tools, and applying technical and fundamental analysis, you can increase your chances of finding profitable stocks. Remember to practice with paper trading and backtesting before trading with real money. Also, always manage your risks by setting stop – loss orders and sizing your positions appropriately. Scalping can be a rewarding trading strategy, but it takes time and effort to master.
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