What is Scalping?
When it comes to investing, have you ever heard the term “scalping” and thought to yourself, “What the heck does that mean?”. We are going to cover exactly what scalping is and how it works in this article. We will also discuss whether it is possible to do scalping with Robinhood.
Scalping is a fancy term for a simple trading strategy that involves buying and selling stocks very quickly for small profits. Even though scalping is a fairly simple trading strategy, it is definitely not easy. There are different variations of scalping, but they all have the same goal of making small profits over dozens or hundreds of trades, so those small profits add up in the end. The size of the profits that traders could be looking for with scalping could be as low as a penny per share or a few pennies per share depending on the size of their trades.
The nature of scalping requires you to be a day-trader because you can’t be one without the other. Therefore, it’s important to understand upfront that you need to have at least $25,000 and a margin account with Robinhood in order to have any chance of being a successful scalp trader.
Can You Scalp On Robinhood?
The short answer is technically, yes, you can scalp on Robinhood. The more likely answer is
probably not. Scalping usually involves buying and holding, or shorting and holding, for only seconds
or minutes at a time. When you are trading this quickly, you need specific tools to be able to execute
your trades successfully. Not only do you need specific tools for successful scalping, but ideally,
you need to be trading through a specific type of broker.
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Robinhood Tools for Scalping
Two of the essential tools needed for successful scalping are charts and
level 2 quotes. Robinhood does offer level 2 quotes and charts on both their app and their website. However, their level 2 quotes feature on both their app and website is much more difficult to use for quickly getting a good picture of the entire bid/ask overview of a stock compared to other brokers. For scalping, you need to have a very clear view of all the bid/asks at all times because the entire strategy revolves around a stock’s price moving up and down within seconds and catching those moves.
Their charts do allow you to view candlestick patterns which is great. However, on the app you can’t see any details of the timeframes or prices of the candles, you can’t customize or add anything to the chart, and you can’t expand or zoom in on the chart. The charts on Robinhood’s website are much better than the app because they show details of timeframes and prices and allow you to add a few customizations and technical indicators. Yet, the charts on their website are still missing critical information needed for scalping such as the fact that the shortest timeframe you can view is only 5 minutes on the daily chart.
A perfect charting tool for scalping will allow you to perform actions such as adding technical indicators, drawing your own lines, zooming in and out, viewing timeframes as short as 1 minute and even 10 seconds, and placing trades within the chart itself. A perfect level 2 quotes tool for scalping will allow you to do things such as placing trades with hotkeys or by clicking on the quotes, customizing the colors for the bid and ask levels, and changing to a horizontal layout. Unfortunately, Robinhood does not come even close to having the perfect charting or level 2 quotes tools for successful scalping.
Robinhood Hotkeys
Robinhood does not offer hotkeys at this time.
Robinhood vs. Direct-Access Brokers
Robinhood is considered a Retail Broker meaning; they are suitable for most retail (regular)
investors who want to trade every few days or just buy and hold long-term. Robinhood focuses
mainly on giving regular investors the best user experience and the lowest commissions.
The type of broker that is best for scalping is called a
Direct-Access Broker. This type of
broker is a firm that specializes in the fastest execution of trades, best order quality, and the
best tools for fast trading.
Difference Between Scalping and Long-Term Investing
With long-term investing, you are using your subjective decision-making to decide whether a
company is a good investment based on fundamental analysis and/or other factors. You are
considering things such as earnings, P/E ratios, and analyst opinions.
With scalping, you literally don’t care if a company is a good or bad investment. All you care about is whether or not the stock is good for performing quick trades to profit on. You are considering things such as liquidity, spreads, and volatility. You are looking for stocks that have a high daily share volume and a tight bid/ask spread so that you can enter and exit efficiently without having to wait a long time for the price to move.
Brokers For Scalping
One of the main reasons scalping is so difficult to be successful at is because of the competition
you are going up against. When scalping, you are competing against market-makers and high-frequency
traders. Scalping is basically what market-makers and HFT’s jobs are, except on a much more complex
basis.
These competitors have sophisticated algorithms that buy and sell stocks thousands of times every single day, literally within nanoseconds. If you understand how fast that is, it’s staggering. Using Robinhood, your trades may get executed within hundreds of a second, which is lightyears behind the speed of market-makers and HFT’s. So, these competitors are already doing what you are trying to do except on a mind-blowingly faster basis.
Robinhood Scalping Conclusion
Scalping is possible using Robinhood as your broker, but you probably won’t find too many successful
people doing it. Robinhood is excellent at what they do but they just don’t specialize in catering to
scalp traders. If you are seriously interested in scalping, search for a
Direct-Access Broker instead.
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Paul Johnson is a Licensed Stockbroker with 7+ years of experience in the financial services industry. Paul enjoys teaching about investing and writing about financial topics. He is a husband and father of twin boys.
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