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Scalping is a trading style for adrenaline junkies. Have you ever studied minute charts? Do you like to get in and out of trades faster than an investor can open a profit report? If yes, then scalping is for you.
Scalpers seek to profit from small price fluctuations. Their goal is not to make a big profit on every trade, but to make a small profit all the time. If they do this successfully, they increase their trading account over time. In addition, scalpers often use leverage and tight stop losses.
Want to know how scalp traders work? Read on.
Content
Introduction
What is scalping?
How do scalpers make money?
Scalping Strategies
Should you try scalping?
Summary
Introduction
Scalping (or scalp trading) is a popular short-term trading strategy. In fact, it is one of the most common day trading strategies. It involves short time horizons, quick decision making, good technical analysis skills, and proficiency with chart analysis tools. Many professional day traders dedicate a portion of their trading account to scalping.
Since scalping strategies are applicable to various financial markets, scalpers are active in the stock market, Forex and cryptocurrency markets.
If you're new to this space, be sure to check out our ultimate guide to cryptocurrency trading for beginners. This article has everything you need to know about trading. Having become familiar with various trading strategies, you can then return to this article and study scalping in more detail.
So, let's look at everything you need to know about cryptocurrency scalping and some of the most common strategies.
What is scalping?
Scalping is a trading strategy that involves making profit from relatively small price fluctuations. Scalpers do not have the goal of making big profits right away. Instead, they seek to generate consistent income from small price changes.
Thus, scalpers make many trades in a short period in search of small price movements and inefficiencies in the market. The idea is that by adding up the small gains from each trade, the resulting return will be quite significant.
Since trading is conducted on short time frames, scalpers rely primarily on technical analysis to generate trading ideas. And this is understandable. Most global significant events occur over a long period of time, which means fundamental analysis is unlikely to be useful. However, fundamental analysis is important when deciding which asset to trade. Stocks or coins with increased interest due to any news or fundamental events will typically have high trading volume and good liquidity, at least for a certain period. During these periods, scalpers come in and profit from the increased volatility.
Thus, scalpers take advantage of short-term spikes in volatility rather than larger price movements. Scalping cannot be considered a universal strategy, since it requires a deep understanding of market mechanics and quick decision making (often under stress).
How do scalpers make money?
What technical factors do scalpers take into account? The most commonly used characteristics to determine trading positions are trading volume, price action, support and resistance levels, and candlestick chart patterns. The most common technical indicators are moving averages, relative strength index (RSI), Bollinger Bands, VWAP and Fibonacci retracements.
Many scalpers also analyze real-time order book, volume profile, open interest and other complex indicators. Some people create their own indicators to give them an edge in the market. As with any other trading strategy, finding a unique edge in the market plays a major role in achieving success.
Scalping is the ability to find small opportunities in the market and exploit them. Any strategy can easily become unprofitable as soon as it becomes known to the general public. This is why scalping traders prefer not to talk about their individual trading instruments. And that is why it is important to create and test your own trading strategy.
As we have already said, scalpers usually trade on small time frames. These are intraday charts - hourly, fifteen-minute, five-minute or even minute. Some scalp traders may study timeframes that are even less than a minute long.
However, with such a time frame, we are entering the territory of high-frequency trading bots, where it is useless for a human to compete with them. Computers can process large amounts of data quickly, while most people will have a hard time looking at fifteen-second charts for long.
There are some other factors worth considering. We know that high time frame signals and levels are usually more reliable than low time frame signals. This is why most scalpers still pay attention primarily to market structure on larger time frames. Why is that? They first outline important levels with large time frames and then zoom in to find scalping positions. Thus, looking at market structure on a longer time frame can be useful even when dealing with short-term trades.
And even taking into account the above, trading and investment strategies among traders can differ significantly. There are no strict rules in scalping, but there are guidelines that you can follow by setting your own rules.
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Scalping Strategies
There are two types of scalpers – discretionary and systemic.
Discretionary traders make trading decisions on the spot as the market changes. Their decisions are based on known conditions: they may not have specific requirements regarding when to enter and exit. In other words, discretionary traders can take many different factors into account, but their rules are less rigid and they rely more on intuition and gut feelings.
System traders have a different approach. They have a clearly defined trading system that defines entry and exit triggers. If certain conditions of their set of rules are met, they enter or exit the trade. Systematic trading is more data-driven than discretionary trading. System traders rely less on intuition and more on data and algorithms.
This classification can be applied to other types of traders as well. However, in relation to short-term strategies of this kind, the division is clearer. Thus, on longer time frames, discretionary trading may be less effective.
Some scalpers use a strategy known as range trading. They wait for the price to fix within the established price range and trade within it. The idea is that until the range is broken, the bottom of the range will be the support line and the top will be the resistance line. Range trading is not a guarantee of success, but it can still be a successful scalping system. At the same time, good scalpers are always ready for a breakout of the range by setting stop losses.
Another scalping technique is the use of a bid-ask spread. If there is a significant difference between the highest purchase price (bid) and the lowest sale price (ask), scalpers can profit from it. With that said, this strategy is more suitable for algorithmic or quantitative trading. Why? Humans are not as good at finding small market inefficiencies as computers. As a result, this field is crowded with trading bots. Thus, traders who want to use this strategy have to compete with algorithms.
Typically, scalping involves the use of leverage. Since interest targets are relatively small, scalpers can increase their position size using leverage. This is why scalpers often use margin trading platforms, futures contracts, and other types of leveraged financial products. However, because scalpers seek to profit from small price movements while holding large positions, they must be mindful of slippage.
Should you try scalping?
It all depends on which trading style you are more comfortable with. Some traders don't like to leave open positions when they go to bed, so they choose short-term strategies. Day traders and other short-term traders may fall into this category.
At the same time, long-term traders like to develop solutions over a longer period of time and are willing to take long-term open positions. They can set the entry point, target income and stop loss, and check the order from time to time. Swing traders fall into this category.
So, if you are wondering whether to take scalper trades, then you need to determine the most suitable trading style. It is also necessary to find a trading strategy that suits your personality and risk profile so that you can follow it systematically and generate income.
You can try several strategies and see which ones work and which ones don't. A good way to test them would be paper trading on the Binance Futures test network. In it you can test your scalping strategy without risking real money.
Summary
Scalping is a widely used short-term trading strategy that involves profiting from small price fluctuations. This trading technique requires a lot of discipline, market knowledge and quick decision making.
Is scalping right for you as a trading strategy? If you are a beginner, you may want to consider longer-term strategies first, such as swing trading and buy and hold. If you already have some experience, then scalping may be suitable for you. But no matter what you do in the financial markets, it is always important to pay attention to risk management, which includes using stop losses and calculating reasonable position sizes.
Want to learn more about scalping? Visit our Q&A platform, Ask Academy, where the Binance community will answer your questions.