Scalping Trading: Everything you need to know

Scalping trading strategy

Generally speaking, cryptocurrency trading comes with lots of volatility in the market pairs. However, it offers traders looking to take risks opportunities to profit from the market. Traders in this scenario prefer trading strategies that allow them to gain from slight changes in time and price movement. The devotion to trading according to price movement is known as scalping. 

Read on to discover everything about scalping strategy, its features, best scalping strategies, and tips to be successful using this strategy to trade. Remember, the ultimate goal of being a successful trader is to always remain in the market long enough to profit and win.

What is scalping?

Scalping involves the trading strategy put in place to profit from small changes in price on smaller chart timeframes, often within a few seconds or minutes. Traders who want to scalp the market usually make trade analyses using smaller timeframes, seeking to take as many quick trades as possible. 

The scalper’s motive is to amass small profits rapidly, especially when trade volume increases and the crypto market is in a fixed shape. Scalpers use 5 to 30 minutes timeframes to form trade opinions, use leverages to open as many positions, and tight stop loss to manage their risks.

To scalp the cryptocurrency market, trades are expected to have strict discipline and a proper trade exit strategy to avoid blowing away their capital and all the profits they get from little gains in previous trades. Possessing the right tools, such as scalping enabling exchange or broker, quality technical and fundamental analysis, and positive trading psychology, is key to profitability using this strategy. Also, consistency and speed are needed to move quickly through the markets before major market moves appear on higher timeframes. 

Features of scalping trading

Below are key elements involved in scalping trading:

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Timeframes

By standards of everyday trading, scalpers move very quickly in the market. More often than not, changes in price movement on smaller timeframes rarely get noticed by many traders. Scalpers make use of such trading opportunities to open a large number of trades over a short period.

Liquidity

A liquid market indicates the availability of many buyers and sellers trading at a comparatively low cost for transaction fees. Limit buy and sell orders fill up quickly due to the high demand from buyers and sellers for the asset, creating liquidity in the market for traders. 

Changes in the demand and supply in the bid and ask spread are small, making room for scalping trading execution. Traders who look to profit from hit-and-run techniques prefer to scalp in these market scenarios, entering and exiting positions very quickly. Both professionals and amateurs are attracted to scalping from liquid markets, making the market a little bit hard to predict its movements.

Volatility

Highly volatile markets are a turn-off for traders who want to scalp. Prices of assets in volatile markets are unstable — prices can go up and down quickly with no end in focus. Traders who like to scalp prefer stable markets where the prices do not shift much up and down. This stability allows them to take quick trades and make a profit. Scalpers can have a field day if the market is stable over a lengthy period.

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Risk management

Given the many trades they make daily, scalpers tend to amass huge losses and profits depending on whether the trade hit stop loss or target profit. Due to this, scalpers must make do with the best risk management and trading psychology tools to be highly successful.

Best scalping strategies that work

Using multiple scalping strategies to trade can work out given the different scenarios that play out in the market. Traders use various techniques and setups before placing trades. It is vital to have ideas of what works. A recommendation on strategies to help you run a successful scalping trading are below.

Moving Average (MA)

Using the moving average to determine what to trade is a great way to start scalping. Scalpers look out for two short-term moving averages on the chart and a longer one that indicates the trend of the asset. 

For instance, if you take a three-minute BTC/USDT chart, you could use five and twenty-period moving averages in the short term and a two-hundred period moving average for the long term. Once the five-period moving average crosses above the twenty-period moving average and the two-hundred-period moving average rises, you can take a buy position. On the other hand, when the two-hundred period moving average is steadily declining, and the five-period moving average crosses below the twenty-period moving average, you can take a sell position.

Remember that the trades you take should blend with the trend and not against it. Make sure to apply proper risk management in case the trend reverses. 

Relative Strength Index (RSI)

The Relative Strength Index is a technical analysis tool that helps in analyzing the financial markets — cryptocurrency, stocks, and forex. RSI is a line graph on a scale of zero to a hundred that measures the speed and changes in an asset’s prices to be either overbought or oversold. Scalpers can use this indicator to tell where to sell and buy: an RSI reading of 30 and below shows the asset has oversold, while 70 and above indicates it is overbought. 

Scalpers can get in on the prevailing trend using the RSI to signal their entry and exit points. When the asset starts to go on a downtrend after it crosses the 70 RSI threshold, scalpers can enter into sell positions for a quick scalp. Also, when it reaches below the 30 RSI threshold and begins an upward movement, scalpers can once again scalp the market by buying the trend.

Range Trading and the Stochastic Oscillator

Using the Stochastic Oscillator as a scalping strategy can be vital to successful scalping. The Stochastic Oscillator measures the point of the current price of a cryptocurrency asset to its range at a much more recent timeframe. Comparing an asset’s price to where it ranges over time can help indicate turning points in the market trend. 

When prices move up-down in a market and continue to range over time, the price of the asset on the chart will usually reach a range before it turns to the downside or upside. A smart scalper can swoop in on these movements and scalp the asset up and down to make considerable profits. Buy and sell orders alongside stop loss, and target points can be set according to the point where the price of the asset ranges. The ideal when an asset’s price ranges are to buy at support and sell at the resistance. 

Bid- Ask Spread

The bid-ask spread implies the difference between an asset’s bid and ask price. Scalpers can open positions at the price of the bid-ask of crypto assets and exit immediately if it is lower or higher, making some profits in the process. There are two scenarios the bid-ask spread could play out in scalping trading:

Wide Bid-Ask Spread

In this scenario, the asking price of an asset is higher, and the bid price is lower than it should be. It indicates that the buyers in the market are more than the sellers, causing prices to surge and scalpers to sell the asset. 

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Narrow Bid-Ask Spread

The Narrow bid-ask spread indicates a market where sellers outnumber the buyers of an asset. The asking price of a cryptocurrency asset will be lower, and the bids on the crypto asset unusually higher. Scalpers can sweep in to buy the crypto asset to even the selling pressure. 

Arbitrage

Arbitrage is made possible because of the market volatility, leading to the price difference in related crypto assets. Scalping for profits is made through buying and selling the same crypto assets on different exchange markets due to slight price differences. The scalper carries out this trade almost simultaneously on these exchanges to make considerable profits over time. 

To use the arbitrage opportunity, a scalper has to compare the price of a given asset in different markets for a price difference. Under normal circumstances, an asset’s price moves in the same direction on different exchanges, but could part ways at some point. It presents an opportunity for arbitrage scalping because the asset will close the gap at some point later. 

Margin Trading

Margin trading involves using a third party’s resources or funds to execute and enhance the realized profits on trades. When traders open trade positions with the higher funds in their possession, the profit margin on each trade increases. Several cryptocurrency exchange markets offer their users margin funds to place trades. Scalpers who start with small funds receive some boost in this area to profit from trades. 

Top tips to consider for a successful scalping trading

With little to no hindrance to entry into trading, the number of persons who have taken to day trading, swing trading, and other strategies has increased. Scalping also attracts its fair share of newcomers, and it is vital to make certain the trader’s personality suits the trading style. Being disciplined as a scalper is highly recommended because a trader would need the ability to spot opportunities, make fast decisions, and have lengthy screen time monitoring trades. Here are some tips that help newbies scalping navigate their way through the trading strategy. 

Education

Learning to master the process and strategies required to be efficient in executing orders is key to being successful as a scalper. Delayed orders can bring about the risk of losing profits that have been accumulated. Trade orders require astuteness and exactness because profit margins on each trade are little. It is important to make use of courses, books, guides, and training to walk through strategies to achieve practical goals.

Side Trading

The buy side is a great way to start scalping. New traders employing scalping strategies can leverage on sticking to the buy side to get proficient in trading before moving to the sell side. It is important to at least take trades on the buy side for a while but to stabilize your expertise on both sides for maximum results.  

Time consciousness

Traders looking to scalp the market need to maintain strictness and discipline as a rule of thumb. It is highly important to close all open trades during the day’s trade and not hold them beyond the short time frame. Scalping entails opening trade for a short moment, and should not be beyond this.

Cost per trade

Scalping involves taking lots of trades daily to maintain significant profits, and as such, trading costs must be considered. Frequently placing buy and sell trades of assets can incur costly commissions, thereby reducing profit margins. Therefore, it is highly vital to trading success to pick out and open an account with an exchange that offers low and competitive fees.

Bid and ask spreads

Successful scalping relies on a tight bid-ask spread because of the frequency of entering trades in the cryptocurrency markets during a day’s trade. Extra efforts should be to target assets offering the largest volume throughout the day. You do not want to trade on cryptocurrency assets that lack lots of liquidity.

Automated Trading

Using trading bots to automate trades can be a productive way to execute a scalping strategy. Several platforms offer free and paid intelligent algorithms that open and exit huge volume trades based on a given order. You can decide to buy scalping robots from well-known platforms like Cryptohopper, Pionex, and Bitsgap, amongst others. Check for reviews of whichever product you want to get, and also make sure to read every detail you can on the product to have some knowledge of its functionality.

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Start simple

Never try to overdo things when you start scalping cryptocurrency assets. Focus on one crypto asset at a time to consistently understand and grind out positive results. After this, you can shift attention to other assets too. Also, you can choose to have a journal where you put in details of the order book of each trade you take. Having a documented journal of your trading activities helps you to track your progress.

Fundamentals and news reports

Fundamentals and news reports can determine the movement of prices of cryptocurrency assets in the short and long term. Always remain conscious of news and events on assets because when they come in, it could increase the volatility and slippage of assets, harming a not-informed scalper. Find out about any upcoming events, good or worse that can help you make the right trade decisions. 

Leverage

Scalping many times during a day of trading with high leverage can allow you to take on more positions with enormous profits. Also, using high leverages in scalping allows the scalper to diversify his portfolio into several positions on crypto assets, all at once. However, it is essential to realize that trading with high leverage increases the possibility of more losses than deposits and other mitigating risks. 

Pros and cons of scalping trading

Every trading strategy has both benefits as well as drawbacks. Once a trader can be disciplined and keep to a strict trading exit strategy, chances are high that substantial profits enter over time. Any attempt to shift away from this strategy can be very disastrous. Here are the key advantages and disadvantages below:

Pros:

  • Trading using this market setup involves low-risk on trades due to the small movements in prices
  • Scalp trading can be automated since it is highly reliant on technical analysis, which is easy to calculate
  • Scalpers can leverage small changes in price to accumulate lots of profits since those small changes are not reflective of the overall market trend
  • It is easy for traders who are new to the market with little to no knowledge to blend and make profits
  • Liquidity in these kinds of trade markets indicates that traders can enter and exit trades with ease
  • Chances of reversals are low since the scalper is only seeking small price movements before closing a trade

Cons:

  • Scalping involves lots of time, focus, and energy to determine which and what transaction to enter or not. It can exhaust an unprepared trader physically and mentally
  • Traders must be ready to act on trade signals promptly, reacting as quickly as possible to every opportunity that shows 
  • Considerable start-up capital is needed because of the low returns from trade
  • Every trade a trader enters and exits incurs trading fees that can hamper long-term profitability, especially if the brokers’ fees are on the high-side 
  • A trader using this strategy needs to take as many trades as possible to generate significant earnings
  • Greater leverage is needed to place trades

Conclusion

The scalping trading strategy involves placing many orders within a day’s trading session to make considerable profits after deducting commissions on trades. There are several strategies for scalping the cryptocurrency market, some riskier than others. It is important to try each of these strategies to see the one that works best for you. Start with an asset pair with a large volume and liquidity to learn the ropes. Also, you might want to do this on a demo account and not with real funds if you are starting.

Finally, using an exchange that offers scalping opportunities, excellent tools and indicators, and comparatively low cost on transaction fees is highly recommended. Pick out the best among several exchange platforms and walk your way to being a successful scalper in the cryptocurrency market.

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