TL;DR
Scalping is a trading style for adrenaline junkies. Do you find yourself staring at 1-minute charts? Do you like to get in and out of trades faster than an investor can open an earnings report? Scalping might be the strategy to consider.
Scalp traders aim to harvest profits from small price moves. Their goal isn’t to make a lot of profit with each trade, but small profits over and over again. If they do it well, they’ll grow their trading account over time. Scalp traders often use leverage and tight stop-losses.
Do you want to learn how scalp traders practice their craft? Read on.
Contents
- Introduction
- What is scalping?
- How do scalpers make money?
- Scalping trading strategies
- Should I start scalp trading?
- Closing thoughts
Scalping (or scalp trading) is a commonly used short-term trading strategy. As a matter of fact, it’s one of the most common day trading strategies out there. It involves shorter time horizons, quick decision-making, and a good chunk of technical analysis and charting tools. As a result, many professional day traders allocate a portion of their trading account for scalping.
As scalp trading strategies can work in many different financial markets, scalpers are active in the stock market, Forex trading, and cryptocurrency.
If you’re completely new to trading, make sure to check out A Complete Guide to Cryptocurrency Trading for Beginners. In that article, we explain everything you need to know about trading. Once you’re familiar with the different trading strategies out there, you can come back to this article and learn more about scalping.
Let’s go through what you need to know about scalping cryptocurrency and learn about some of the most common scalping strategies.
Scalping is a trading strategy that involves trying to profit from relatively small price movements. Scalp traders don’t look for massive profit targets. They instead aim to harvest gains from small price changes over and over again.
As such, scalp traders may place many trades over short periods, looking for small price moves and market inefficiencies. The idea is that by stacking and compounding these small gains, the profits will add up over time to a significant amount.
Due to the short time frames involved, scalpers will heavily rely on technical analysis to generate trade ideas. As most fundamental events play out over a longer period of time, scalp traders will rarely concern themselves with fundamental analysis. Still, fundamental narratives can make a big difference when deciding what asset to trade. Stocks or coins with increased interest due to some news or fundamental event will generally have high volume and good liquidity – at least for a period. This is when scalpers can step in and generate profits off the increased volatility.
In summary, scalpers exploit short-term bursts of volatility rather than larger price moves. It’s a strategy that’s probably not ideal for everyone since it requires an advanced understanding of market mechanics and quick decision-making (often under stress).
So, what are the technical factors that scalpers consider? Trading volume, price action, support and resistance levels, candlestick chart patterns are all commonly used to identify trade setups. Some of the most common technical indicators used by scalp traders are moving averages, the Relative Strength Index (RSI), Bollinger Bands, the VWAP, and the Fibonacci retracement tool.
Many scalpers will also use real-time order book analysis, volume profile, open interest, and other complex indicators. In addition, many scalpers will create their custom indicators to give them an edge over the market. As with any other trading strategy, finding a unique advantage over the market is paramount for success.
Scalping is about finding small opportunities in the market and exploiting them. As these strategies can easily become unprofitable once known by the general public, scalp traders can be quite secretive about their individual trading suite. This is why it’s important to create and test your own strategy.
As we’ve discussed, scalpers will typically trade lower time frames. These are intraday charts, which may be the 1-hour, 15-minute, 5-minute, or even the 1-minute chart. Some scalp traders may even look at time frames of less than a minute.
However, with these time frames, we start to enter the realm of high-frequency trading bots, which may not be reasonable for humans to look at. While machines can quickly process a lot of data, most humans aren’t really at their best when staring at 15-second charts.
Here’s something else to consider. We know that high timeframe signals and levels are generally more reliable than lower time frame signals. This is why most scalpers will still look at the high time frame market structure first. Why? They outline the important high time frame levels first and then zoom in to look for the scalp trading setups. This shows that having a high time frame view of the market structure can be very helpful, even when it comes to shorter-term trades.
Even so, trading and investment strategies can differ substantially between different traders. There aren’t strict rules to scalping, but there are guidelines that you can consider when setting your own rules.
We can consider two types of scalp traders – discretionary and systematic scalp traders.
Discretionary traders make trading decisions “on the spot,” as the market unfolds before them. They may or may not have a specific set of requirements for when to enter or exit, but their decisions are based on the conditions at hand. In other words, discretionary traders may consider many different factors, but the rules are less rigid, and they rely more on intuition and gut feeling.
Systematic traders take a different approach. They have a well-defined trading system that essentially triggers entry and exit points for them. If certain conditions of their ruleset are met, they enter or exit a trade. Systematic trading is a much more data-driven approach than discretionary trading. Systematic traders rely less on intuition and more on data and algorithms.
In fact, this classification could apply to other types of traders as well. However, the distinction is more clear when it comes to short-term strategies. After all, discretionary trading may not work as consistently on higher time frames.
Some scalpers will employ a strategy called range trading. They wait for a price range to be established and trade within that range. The idea is that until the range is broken, the bottom of the range will hold as support, and the top of the range will hold as resistance. This is, of course, never a guarantee, but it still can be a successful scalping system. However, good scalp traders will prepare for a breakout from the range by setting a stop-loss.
Another scalping technique involves exploiting the bid-ask spread. If there is a considerable difference between the highest bid and the lowest ask, scalpers can profit off that. With that said, this kind of strategy is more suitable for algorithmic or quantitative trading. Why? Well, humans aren’t as reliable at finding small inefficiencies in the market as machines. As a result, this field is heavily saturated with trading bots. As such, humans who want to adopt this strategy will generally have to compete with algorithms.
Scalping usually involves the use of leverage. As the percentage targets are relatively small, scalpers will typically want to boost their position size with leverage. This is why scalpers often use margin trading platforms, futures contracts, and other types of financial products that offer leveraged trading. However, as scalpers aim to profit off smaller moves with larger positions, they need to be aware of slippage.
That entirely depends on what style of trading works for you. Some traders don’t like to leave any position open when they’re asleep, so they choose short-term strategies. Day traders and other short-term traders may fall into this category.
On the other hand, longer-term traders like to elaborate on decisions for a longer time and don’t mind having positions open for months. They may just set their entry, profit targets, and stop-loss, and monitor the trade occasionally. Swing traders may fall into this category.
So, if you want to decide whether you want to take scalp trades, you need to elaborate on which trading style fits you better. Also, you’ll need to find a trading strategy that matches your personality and risk profile so that you can apply it consistently and profitably.
Scalping is a commonly used short-term trading strategy that involves aiming to profit off small moves in price. It’s a trading technique that requires a lot of discipline, knowledge of the market, and quick decision-making.
Is scalping a good trading strategy for you? If you’re a beginner, you could look for more long-term strategies such as swing trading or buy and hold. If you’re more experienced, scalp trading might be suitable for you. But regardless of what you do in the financial markets, it’s always important to consider risk management principles, like using a stop loss and proper position sizing.
