Scalping is a form of trading where traders open a position with the full intention of closing it for a profit during the same trading session. With some forms of day trading, investors can enter a limited number of positions, say, as few as five, and be satisfied with their work for the day. Scalping is an extreme brand of day trading that sometimes sees traders perform a high-wire act of opening hundreds of positions at the same time. It is an intense and concentrated type of trading that involves trying to make the most of small gaps between the bid-ask price of assets.
Day traders deal in analysis charts that cover price trends ranging from five minutes to 30 minutes. However, some scalpers would find those intervals too long as they have been known to use 15-second or half-minute charts to make decisions. To succeed, scalpers must be attuned to the news. The crypto market is highly sensitive to economic releases and breaking market news, especially those directly involving crypto. If an influential figure has a negative opinion of crypto, even this can sway the price. It is during those miniscule price oscillations that scalpers pounce.
To maximize their earnings, crypto scalpers make the most of leverage. Even if they are not well capitalized, they can vastly increase their position sizes through leverage. While there is risk of losing more money this way, the attraction has always been that you can trade outside of your capital bracket if you have access to generous leverage.
Scalpers employ a combination of manual or automatic strategies. For those traders who prefer the old school approach of watching the markets themselves, part of this manual approach sees them hovering over a computer screen for hours to spot the changes of which they are looking to take advantage. Automated strategies largely remove the need to hover over the markets so intensely as traders can carefully insert parameters inside which their trades will operate, thus removing the need for constant management.
At times, the crypto market is gripped in a cycle of volatility. In early 2023, the price of bitcoin nearly halved in value in the space of a month. The average scalper would have quickly spotted the early trends and would have drastically reduced their position sizes and their number of trades. By contrast, a swing trader, who often keeps positions open for weeks and months, would have waited out the volatility.
Scalpers are looking to buy crypto coins at low prices and sell them for a profit. They are content to take profits as small as a few basis points (one basis point is equal to 0.01%) because they deal in high volumes.
Trading and investment strategies can differ markedly among traders. There are no strict rules about how you can achieve profit while scalping. Before they start, every trader needs to formulate their own strategy. There are two main approaches to scalping – manual and automated.
Manual trading involves the trader carefully focusing on the market as closely as they can in order to continuously monitor the movements in the market. A few scalpers have gained so much experience that they can trade manually and work off informed guesses. In some instances, a scalper is so seasoned and experienced, they can make calls on trades from instinct and memory. This is known as intuitive scalping.
These traders are few and their experience affords them the luxury of working with limited technical insights. You are not advised to start out your scalping career in this manner as it will probably not last very long. For most scalpers, having access to quality real-time technical analysis is crucial. Here, the trader checks graphs and indicators to keep in step with what is happening in the markets. Despite using technical analysis as a guide, many scalpers spend significant amounts of time in front of the computer. This way, they can remain in positions for as little as a few minutes at a time.
Automated trading sees scalpers guided by algorithmic programs to support their chosen strategies. By using a program, traders can be closely aligned to their chosen plans without having to worry about not closing a trade on time or having to think about what to do when a position enters a certain range. Traders in this space can even step away from their desks for a time and let the algorithms do the work.
You might wonder what sort of technical analysis scalpers undertake? They are mainly concerned with information like moving averages, trading volume, price action, and the oscillation between the low and high bands of an asset’s value, known as support and resistance levels.
The best brokers and crypto exchanges have developed advanced technology that can generate insightful graphical representations of how prices are trending over a specified time period. More advanced traders would be interested in technical indicators, such as Relative Strength Index (RSI), Bollinger Bands, and the Fibonacci retracement tool.
As far technical analysis goes, this is where brokers and crypto exchanges set themselves apart. Using these technical tools, traders can create their own flavor of analysis, with an emphasis on the data they feel is important to their strategies. These custom indicators require that a trader has a full range of tools from which to work. Many scalpers will use a combination of tools from real-time order book analysis, volume profile, open interest, and other advanced indicators.
A little-known fact about the scalping world is that successful traders can often be quite secretive. Even in the age of social copy trading, some successful traders would not trade their most important secrets for a commission based on who is copying their trades. First, scalping is too frenetic a trading style to easily deploy copy trading, and, second, the successful scalpers themselves feel that the more people know about a successful strategy, the smaller their chances are of profiting.
Crypto scalping comes with risks. As a high-frequency intraday trading style, profits can rack up quickly. Of course, the other side of the coin is always that losses can also accumulate just as fast. Successful crypto scalping, especially that based on technical analysis, depends in large part on the quality of the indicators and the recency of the information on which a scalper bases their choices.
Leverage, of course, is another big risk to traders. As much as it is a boost to the amount of profit a trader can make, scaling up position sizes also comes with risk.
Another risk is slippage. Even if you put in place stop-loss orders, if the market moves faster than your broker can execute a stop-loss, you can end up losing more than you thought. Around the time of important financial releases like earnings reports, slippage is common, and these scenarios can deplete an account quickly.
Another risk, albeit a manageable one, is fees. Traders need to be aware that if they are making hundreds of trades every day, they can accumulate high fee obligations quickly. Of course, this is part of the cost of doing business. Most of the time, responsible traders understand how to price fees into their strategies. The key is to understand what fees you are paying so you can factor them in. It is fair to say that those who don’t have a handle on fees can get a nasty surprise.
When scalpers trade, they want to profit off the changes in the bid-ask spread of an asset. It is a fundamental practice to seek an advantageous difference between the price a broker or crypto exchange will buy a security from a scalper (the bid price) and the price the broker will sell it (the ask price). In simple terms, you want to buy low and sell high, in the context of scalping of course.
Scalpers are looking to take advantage of trendlines. When a price starts to trend in a certain direction, a trader will look to buy the asset and sell it for a profit before the trend changes direction. This is called “catching the wave.” If the trend is going up, you want to buy on the upswing and offload before the trend starts to come back down.
This type of trading involves trying to anticipate what is known as a “pullback.” Price cycles bounce back and forth between the lower support and the and higher resistance levels of an asset’s value, and countertrend trading is when investors try to take up a position in the opposite direction of a trend. In practical terms, they try to anticipate a price coming down or going up so they can adopt a position that takes advantage of the change in direction.
With range trading, the trader seeks to carefully identify the support and resistance levels of an asset. These are the lower and higher bands in which the price has been trending, and their efforts are geared toward buying at the lower end and selling at the higher end. This type of trading relies heavily on technical analysis pinpointing the exact pricing levels so traders can stay within the anticipated range.
These traders are looking for the slightest market inefficiencies or quirks. For example, they could do most of their trading on the morning of a Tuesday, a day that traditionally sees some of the biggest volumes, as opposed to a Friday. They are looking for anomalies that only highly sensitive and detailed statistical charts can uncover. It could be based on the time, price, or day of the week.
Scalping has a high emphasis on capable technology. You cannot afford to be let down by your tools. Some of the key requirements for a trading platform include a stable Web interface and reliable stop-loss execution. If your stop-loss fails you, you can find yourself losing money.
This is an important part of scalping. You could have the best strategy and nominally be making a profit, but if you do not execute orders accurately and on time, any delay could wipe out your profits because the time windows are so small.
Fee research should be one of the first things you do before taking on a broker. The average scalper can enter hundreds of trades in a day. The commissions can rack up, meaning that traders need to carefully watch the fees they pay.
Scalping is not a form of trading to be taken on without strong research. Learning how to implement strategies like range trading and countertrend trading takes practice and a certain amount of finesse.
Beginners are usually more comfortable with buying long trades before they get enough experience. Buying long means they own the asset and expect it to appreciate. It is the fundamental act of buying at a certain price and selling it later at a higher price. However, there is also the short side, which is when scalpers buy an asset at a future price that is expected to fall. Shorting takes confidence and experience, and scalpers must be able to balance both styles.
Technical analysis teaches newbies not only about what the market is about, but also how to get ahead. There is fierce competition in the world of high-frequency trading. Trends rise and fall quickly, and you must always be switched on.
Technical analysis sets you apart, be it moving average ribbon entry strategy or relative strength/weakness exit strategy. Understanding these concepts gives you the information you need to make the best decision.
There is no point being a scalper and entering a small number of trades. The premise of the trading form is that you need to trade in high volumes and with high frequency. Liquidity is important, as are good platforms and tools with informative technical indicators.
This is a requirement of all traders, but for scalpers especially. You do not have time to overthink decisions and so you make your strategic decisions early and work from there.
This is always good advice that cannot be stressed enough. Working with a demo account allows you to practice in a simulated environment. This is where you can brush up on your skills and gain crucial experience without the risk of losing money. It allows you to embed your strategies and test them as close to real market conditions as possible.
Again, as a trader, you should always go into the trading world with as much information as you can. Scalping is a rewarding-but-complex area that demands thorough research and practical experience