TL;DR
Scalping is a trading style for those who like adrenaline. Do you usually follow 1-minute charts? Do you like to enter and exit trades faster than an investor can open an earnings report? Scalping may be the right strategy for you.
Traders who scalp (scalpers) profit from small price changes. Their goal is not to make a lot of profit with each trade, but small profits repeatedly. Good scalpers are able to accumulate a good amount of profit over time. They often use small leverage and stop-loss margins.
Want to learn how scalpers work? Continue reading.
Content
Introduction
What is Scalping?
How scalpers make money?
scalping trading strategies
Should I start scalping trading?
Final considerations
Introduction
Scalping (or scalp trading) is a very common short-term trading strategy. In fact, it is one of the most common day trading strategies. It involves shorter periods, quick decision making, a good dose of technical analysis and charting tools. As such, many professional day traders allocate a portion of their trading assets to scalping.
Because scalp trading strategies can work in many different financial markets, scalpers are active in the stock markets, Forex trading, and cryptocurrencies.
If trading is completely new to you, check out our Complete Guide to Cryptocurrency Trading for Beginners. In this guide, we explain everything you need to know about trading. Once you are familiar with the different trading strategies, you can come back to this article and learn more about scalping.
We will discuss what cryptocurrency scalping is and some of the most common strategies.
What is Scalping?
Scalping is a trading strategy that involves attempting to profit from relatively small price movements. Scalp traders do not look for big profits on every trade. They profit through small price changes, over and over again.
In other words, scalp traders make many trades in short periods, looking for small price movements and market inefficiencies. By combining multiple small wins, profits accumulate over time and can reach significant amounts.
Due to the short time frame, scalpers rely heavily on technical analysis to define trading strategies. Since most fundamental events involve long periods of time, scalpers rarely use fundamental analysis. Still, fundamental analysis can have great influence on the decision of which asset to trade. Stocks or currencies with increased interest due to news or some fundamental event will generally have high volume and good liquidity – at least for a period. This is where scalpers can act, making profits from increased volatility.
In short, scalpers exploit short-term volatility variations more than large price movements. This strategy is probably not ideal for everyone, as it requires advanced knowledge of market mechanics and quick decision making (often under stress).
How scalpers make money?
What technical factors do scalpers consider? Trading volume, price action, resistance and support levels, and candlestick chart patterns are factors considered to identify possible trading strategies. Some of the most commonly used technical indicators by scalp traders are moving averages, Relative Strength Index (RSI), Bollinger Bands, VWAP, and Fibonacci retracement.
Many scalpers also use real-time analysis of the order book, volume profile, open interest, and other complex indicators. Many scalpers also create their own custom indicators to gain an advantage over the market. As with any other trading strategy, finding advantages over the rest of the market is critical to success.
The scalping strategy is precisely to find small opportunities in the market and exploit them. Once known to the general public, these strategies can quickly stop being profitable. Therefore, some scalp traders are quite secretive about their trading plans. Therefore, it is important to create and test your own strategy.
As we mentioned, scalpers tend to trade shorter time frames. They use charts with periods of 1 hour, 15 minutes, 5 minutes or even 1 minute. Some scalp traders even observe intervals of less than a minute.
However, in very short intervals we enter the realm of high-frequency trading bots, which may not be a good idea for humans. Machines can quickly process large amounts of data. 15-second charts, for example, are not the best for human analysis.
We have one more factor to consider. We know that signals and levels over long periods are generally more reliable than signals generated in the short term. This is why most scalpers first analyze long-term market behavior. Why? First, they plot important levels over long periods and then zoom in on the chart to define possible scalp trading setups. This shows that having a long-term view of the market structure can be very useful, even when it comes to short-term trades.
Either way, trading and investment strategies can vary greatly for each trader. There are no well-defined rules regarding scalping trading, but there are guidelines you can consider when setting your own rules.
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scalping trading strategies
We can consider the existence of two types of scalp traders – discretionary and systematic.
Discretionary traders make trading decisions “on the fly” as the market unfolds before them. They may or may not have a specific set of requirements defined for entering and exiting positions, but their decisions are based on the conditions at hand. In other words, discretionary traders may consider many different factors, but they use less rigid rules and rely more on intuition and gut feeling.
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 from their ruleset are met, they enter or exit a trade position. Systematic trading uses a much more data-driven approach than discretionary trading. Systematic traders rely less on intuition and more on data and algorithms.
In reality, this classification can also be used for other types of traders. However, this distinction is clearer when it comes to short-term strategies. After all, discretionary trading may not work as consistently for longer periods.
Some scalpers use a strategy called range trading. They wait for a price range to be established and then trade within that range. The idea is that until the price range is breached, the bottom of the range will continue to act as support and the top of the range as resistance. Of course, this is never a guarantee, but this may be a scalping system that works. However, good scalp traders will prepare for the breakout of the range by setting a stop-loss.
Another scalping technique involves exploiting the spread between the buy and sell price (bid-ask spread). If there is a considerable difference between the highest bid and the lowest ask price, scalpers can profit from it. Therefore, this type of strategy is more suitable for algorithmic trading or quantitative trading. Why? Well, humans are not as good as machines at finding small inefficiencies in the market. Therefore, the sector is already saturated with trading bots. Therefore, people who adopt this strategy often compete with algorithms.
Scalping often involves the use of leverage. Because percentage targets are relatively small, scalpers typically choose to increase their position size through 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 seek profits from smaller moves and larger positions, they need to be aware of slippage.
Should I start scalping trading?
This totally depends on which trading style works for you. Some traders don't like to leave any positions open when they are sleeping, so they choose short-term strategies. Day traders and other short-term traders may fall into this category.
On the other hand, long-term traders like to make decisions over a longer period of time and don't mind having positions open for months. They usually set their entry, profit and stop-loss targets and monitor their trades occasionally. Swing traders may fall into this category.
Therefore, to decide between scalp trading and another strategy, you need to identify which trading style is best suited for you. It's important to find a trading strategy that matches your personality and risk profile so you can apply it consistently and profitably.
Of course, you can try out various strategies and see what works and what doesn't. Paper trading (simulation) on the Binance Futures testnet can be a great option to test some of your strategies. This way, you can test your scalping skills without risking real money.
Final considerations
Scalping is a common short-term trading strategy that involves profiting from small price movements. It is a technique that requires a lot of discipline, market knowledge and quick decision making.
Is scalping a good trading strategy for you? If you are a beginner, you may want to look into longer-term strategies such as swing trading or buy and hold. If you are more experienced, scalp trading may be right for you. But, regardless of your performance in the financial markets, it is always important to consider the principles of risk management, such as the appropriate definition of stop-loss and position size.
