Scalp trading is a trading strategy that seeks to make money from very small, instantaneous price movements, which can take up to an hour, 15 minutes, 5 minutes, or even less than a minute. Among the commonly used trading strategies, scalp trading constitutes the shortest-duration strategy. Due to that, it requires a lot of adrenaline and a good management of your nerves.
How Does Scalp Trading Work?
Scalp traders look for very small profit targets. Small profits off the changes in a cryptocurrency’s price add up over and over again, which grows a trader’s capital as time passes. To do that, scalp traders need to execute a large number of trades over short periods, which often involve exploiting bid-ask price spreads in the order books of assets. Due to that, scalp trading typically involves the smallest trade positions among all trading strategies.
Due to the very short time frames involved, scalp traders need to rely solely on technical analysis to determine trade positions, instead of fundamental analysis, because fundamental events and developments would take way longer than an hour to play out.
However, fundamental analysis can still be useful in deciding which cryptocurrency to scalp trade, if not where to buy and sell it, because coins with increased interest due to some news or event will have high volume and liquidity during those times. Scalp traders can take advantage of this increased volatility and make profits by opening and closing a number of trade positions.
In cryptocurrency markets, profits in scalp trading are usually only a few percentage points (up to 2-3%), so scalping should only be conducted with highly liquid cryptocurrencies, where the bid–ask spread is narrow. Spreads tend to widen out in low volume, less liquid tokens, due to which your trade position may end up with a loss although you actually made a profit while buying and selling.
How To Make Money From Scalp Trading?
Scalp trading is a numbers game and to become a successful “scalper”, you need to select a set of technical analysis criteria, along with a set of thresholds to execute that criteria. Technical indicators that scalpers use in their trades include moving averages, the Relative Strength Index (RSI), Stochastic RSI, MACD, Bollinger bands, the Volume-Weighted Average Price (VWAP), and Fibonacci retracements.
As an example, a scalp trader can buy a coin when its momentum indicators, such as the RSI, are oversold in the five or one minute timeframes, and then sell the coin when it becomes overbought at the same timeframes. Similarly, you can scalp with short-term moving averages, where you would buy at every five minute or one minute moving average support levels and then sell at the next moving average line that acts as resistance.
Scalpers alternatively utilize bid-ask spreads by buying at the bid price and selling at the ask price to profit from the bid and ask difference. They can profit even when the bid and ask prices in the order books do not move at all, as long as there are market taking traders, who execute trades at market prices. Scalping based on bid-ask spreads normally involves opening and closing a position very quickly, usually less than a minute.
Pros and Cons of Scalp Trading
Pros
- Low exposure per trade – Small trade sizes reduce the probability of substantial losses. In addition, scalpers are exposed to their trade positions for a very short time, since they typically do not hold positions more than a few hours.
- Small but consistent moves – During a given day, prices generally keep moving inside a tight price range because large price actions would require a bigger imbalance between supply and demand, which does not happen every day. For example, it is much easier to move a cryptocurrency by $0.01, compared to moving it by $1. In that sense, small but consistent price moves are what scalpers exactly look for to perform their trades.
- Add up profits with small capital – Since profit per trade is typically very small due to short timeframes and narrow bid-ask spreads, traders need to realize large numbers of trades in order to add up their small profits. Although in theory, large amounts of capital is required to profit from those small basis points, in practice scalping is not all that suitable for large-capital traders seeking to move large volumes at once, but better suited for small-capital traders seeking to move smaller volumes more often.
Cons
- Missing the trends – Since you are focused on small profits in scalp trading, you have to sacrifice the larger profits you would earn by holding your positions longer. Regardless, you have to choose between the two trading strategies; you will likely end up losing money consistently, if you attempt to benefit from both strategies.
- Trading fees – Depending on your average position size, scalp trading may generate the highest trading fees and commissions, since you would be executing the highest frequency of trades. To avoid that, you need to monitor the balance between your average profit per trade and the average fee you pay per transaction.
- The most tedious strategy – Scalp trading requires the largest effort, so much that it can be extremely stressful and take a significant toll on your psychology. In fact, in today’s bot-heavy trading environment, it may not be possible for you anymore to perform scalp trading manually with conventional trading tools. You may need to build your own algorithmic trading software that would scalp trade for you.
Some Additional Thoughts
Scalp trading is all about the consistency in making small profits and growing your portfolio over time. In that shell, you should always refrain from trading based on your short-term impulses and emotions.
However, since scalping continuously requires making very quick decisions under stress, this trading strategy may not be suitable for many people.
Liquidity is of paramount importance in scalp trading so it is advised that you only scalp trade coins that have the highest liquidity in the market. Otherwise, it will be quite difficult to buy and sell at the spreads you like, adding further salt to injury.
Finally, regardless of the trading strategy you adopt, you should always stick to the principles of your particular strategy. You may start trading by practicing a number of different strategies to see which one matches your individual personality, but once you make your decision, you need to adhere to its principles patiently and diligently.
In trading, the worst losses are known to be made by a lack of patience and self-discipline, and by consequently trying out different alternatives that derail you from your original trading strategy.
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
