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Author: Larry Potter Article source: http://tinystidbits.blogspot.com/. Used with author's permission.
This term should be familiar to anyone who has bought prime tickets to a big game or concert at the last minute by making a deal with a guy who yells "Got two here!" in the stadium parking lot. The guy in the lot bought the tickets earlier at the lowest possible price. He has no desire to attend the event. His goal is to negotiate a deal at a higher price from a desperate fan and to pocket the difference as profit. It is a common practice despite local laws that can send the seller, and sometimes the buyer, to the pokey.
That is the essence of the "scalp." The same thing happens in the markets, more or less, and the scalper doesn't have to worry about a cop slapping handcuffs on him. Traders scalp by jumping in and out of positions throughout the session in hopes of making a series of small profits. They aren't interested in owning the particular stock, futures contract or commodity. They're interested in timing and momentum. It's the quintessential "buy low, sell high" tactic.
Say, for example, company ABC announces good news before the open. The best scalpers will get into ABC when the news hits and before floor trading begins. When the stock pops in the opening minutes, the scalper will quickly sell for a profit of a point or two.
Later in the morning the momentum usually reverses on the news-driven stock as other traders take their profits. That's when the scalper sells ABC short, watches it decline by perhaps a point and then covers the short for another winning trade. If the news is strong enough, ABC will start moving higher again and the scalper will go long for another quick gain. This can continue all day long.
If the momentum in ABC tails off, the scalper will look for another target of opportunity.
There is another, similar term, "scalping," which refers to the practice of getting shares of stock for an Initial Public Offering, or IPO, at a low price before they are released to the market. If the IPO is well received by the market, the price will jump. That's when this variety of scalper takes his money and runs. For more FREE trading tips, enter your email address at:
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