Scalping (or scalp trading) is a commonly used short-term trading strategy. In fact, it is one of the most common day trading strategies. This involves shorter time horizons, quick decision making, and a good deal of technical analysis and mapping tools. As a result, many professional day traders allocate part of their trading account to 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 are completely new to trading, be sure to check out a complete guide to cryptocurrency trading for beginners. In this article, we explain everything you need to know about trading. Once you have familiarized yourself with the different trading strategies, you can come back to this article and learn more about scalping.
Let’s go over what you need to know about cryptocurrency scalping and learn about some of the most common scalping strategies.
What is scalping?
Scalping is a trading strategy that involves trying to take advantage of relatively small price movements. Scalp traders are not looking for massive profit targets. Instead, they aim to reap the gains from small price changes over and over again.
As such, scalp traders can make many trades over short periods of time, looking for small price movements and market inefficiencies. The idea is that by stacking and accumulating these small gains, the benefits will add up over time to a significant amount.
Due to the short time frames involved, scalpers will rely heavily on technical analysis to generate business ideas. As most fundamental events take place over a longer time frame, scalping traders will rarely be concerned with fundamental analysis. Yet, fundamental narratives can make a big difference when choosing which asset to trade. Stocks or coins with increased interest due to some news or fundamental event will usually have high volume and good liquidity – at least for a period. This is when scalpers can step in and generate profits through increased volatility.
In summary, scalpers exploit short-term spikes in volatility rather than larger price movements. This is a strategy that is probably not ideal for everyone, as it requires an advanced understanding of market mechanisms and quick decision making (often under pressure).
How do scalpers make money?
So what are the technical factors considered by scalpers? Trade 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, Relative Strength Index (RSI), Bollinger Bands, VWAP, and the Fibonacci Retracement Tool.
Many scalpers will also use real-time order book analysis, volume profile, open interest, and other complex metrics. Additionally, many scalpers will create their custom indicators to give them an edge in the market. As with any other trading strategy, finding a unique edge in the market is essential for success.
Scalping is about finding small opportunities in the market and exploiting them. As these strategies can easily become unprofitable once known to the general public, scalp traders can be quite secretive about their individual trading suite. That’s why it’s important to create and test your own strategy.
As we have seen, scalpers will generally trade shorter time frames. These are intraday charts, which can be the 1 hour, 15 minutes, 5 minutes or even 1 minute chart. Some scalp traders may even consider lead times of less than a minute.
However, with these time frames, we are starting to enter the realm of high frequency trading robots which may not be reasonable for humans. While machines can process a lot of data quickly, most humans don’t really look their best when looking at 15-second charts.
Here’s something else to consider. We know that high time period signals and levels are generally more reliable than lower time period signals. This is why most scalpers will always look at the structure of the market over time first. Why? They first describe significant high delay levels and then zoom in to find the scalp trading setups. This shows that a long-term view of the structure of the market can be very useful, even when it comes to short-term transactions.
Even so, trading and investing strategies can differ considerably between different traders. There are no hard and fast rules for scalping, but there are some rules that you can consider when setting your own rules.
Scalping trading strategies
We can consider two types of scalping traders – discretionary and systematic scalping 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 when to exit, but their decisions are based on the conditions at the time. In other words, there are many different factors that discretionary traders can take into account, but the rules are less rigid, and they rely more on intuition and intuition.
Systematic traders take a different approach. They have a well-defined trading system that basically triggers entry and exit points for them. If certain conditions of their rule set are met, they enter or exit a transaction. Systematic trading is a much more data driven approach than discretionary trading. Systematic traders rely less on intuition than on data and algorithms.
In fact, this classification could also apply to other types of traders. However, the distinction is clearer when it comes to short term strategies. After all, discretionary trading may not work as consistently over longer 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 remain support and the top of the range will remain resistance. This is, of course, never a guarantee, but it can still be a successful scalping system. However, good scalp traders will prepare for a breakout of the range by setting a stop-loss.
Another scalping technique is to exploit the bid-ask spread. If there is a considerable difference between the highest supply and the lowest demand, scalpers can take advantage. That said, this type of strategy is more suited to algorithmic or quantitative trading. Why? Well, humans aren’t as good at finding little inefficiencies in the market as machines are. As a result, this area is heavily saturated with trading robots. As such, humans who wish to adopt this strategy will usually have to compete with algorithms.
Scalping generally involves the use of leverage. Since the percentage goals are relatively small, scalpers will generally want to increase their position size with leverage. This is why scalpers often use margin trading platforms, futures, and other types of financial products that offer leverage trading. However, as scalpers aim to take advantage of smaller moves with larger positions, they should be aware of slippage.
Should I start scalp trading?
It all depends on what style of trading is right for you. Some traders don’t like to leave a position open when they are asleep, so they choose short-term strategies. Day traders and other short term traders can fall into this category.
On the other hand, longer-term traders like to build on decisions for longer and are not afraid of having positions open for months. They can simply set their entry, profit targets and stop loss, and monitor the trade from time to time. Swing traders can fall into this category.
So, if you want to decide if you want to trade on the scalp, you need to define the style of trading that is right for you. You will also need to find a trading strategy that matches your personality and your risk profile so that you can apply it consistently and profitably.
Of course, there are several strategies you can try and see what works and what doesn’t. Paper trading on the Binance Futures testnet could be a great way to test them. This way, you can test scalping strategies without risking real funds.
Scalping is a commonly used short-term trading strategy that involves aiming to profit from small price movements. It is a trading technique that requires a lot of discipline, knowledge of the market, and quick decision making.
Is Scalping the Right Trading Strategy for You? If you are a beginner, you can look for longer-term strategies like swing trading or buy and hold. If you are more experienced, scalp trading might be right for you. But regardless of what you do in the financial markets, it’s always important to consider the principles of risk management, such as using a stop loss and sizing positions appropriately.