Scalping is a common trading strategy among traders worldwide, not only because it has proven profitable for those who have developed a working system from it, but also because it is useful in many financial markets, including stock and forex markets.
What is scalping in crypto trading?
Scalping or scalp trading is a strategy in which a trader takes advantage of small price differences to generate profits. Traders using this trading strategy are not aiming for massive profits right away; rather, they try to make profits from small price movements again and again.
For example, a trader buys coins at a lower price and makes quick profits by reselling them at a higher price. The trader then repeats this process to profit from smaller price movements.
The basic idea behind this trading strategy is that the small wins add up to a significant sum over time. Scalpers, traders who engage in scalp trading, also believe that small moves are easier to get from the market and that less exposure to the market reduces the likelihood of adverse losses.
How does a scalping strategy work?
Below are some of the characteristics of scalping strategies.
Short timing and quick decisions
Scalpers don’t stay in one trade for long. A typical trade can last anywhere from a few seconds to 15 minutes. However, you open many positions within a day and try to profit from it.
Since the trades are very short, the strategy also requires quick decisions as trading opportunities can present themselves at any time.
More technical analysis
Scalpers typically do more technical analysis than fundamental analysis. They use technical analysis tools to get information about what is happening in the market as most fundamental analysis metrics affect the market over the longer term. Therefore, fundamental analysis is more suitable for long-term strategies.
This is also not to downplay the role of fundamental analysis in scalping. Due to news or events, a crypto price may suddenly attract more traders or have a higher trading volume. Such a market could well be scalped.
Using leverage to increase profits
Because price and profit targets are typically small, some scalpers prefer to use leverage to do far more than they can normally do with their bankroll or stake. For this reason, many short-term traders prefer to trade the crypto futures markets and other markets that offer leveraged trading.
However, remember that leveraged positions amplify losses just as much as gains.
3 Crypto Scalping Strategies You Can Use
Below are three scalping strategies that could work to your advantage
1. Area trading
A ranged market, as the name suggests, is a market in which prices move between a specific high and low for a specific period of time. The range forms both resistance and support for the price. The high price is resistance, while the low price is support.
The ranging market usually shows a sideways trend and scalpers try to profit from the restricted movement. In this market, traders try to buy support and sell resistance. They can also choose to have multiple entries at different points using limit orders since they know the range the market is trading in.
2. Bid and Ask Trading
This strategy allows traders to open a position at either the ask or bid price and close it at a higher or lower price within a short period of time in order to make a profit.
The bid-ask trading strategy attempts to profit from any significant difference between the ask and bid prices. This strategy is more suitable for traders who trade with trading bots as it makes finding those gaps easier.
3. Arbitrage trading
We can also classify arbitrage trading as a scalping strategy, since arbitrage traders also try to make money in the market with small price differences within a very short time.
This trading strategy allows investors to benefit from slight price differences between cryptocurrencies traded on different markets or exchanges. This allows you to buy crypto on one exchange or market and sell it on another at a higher price.
Advantages of the Crypto Scalp strategy
- Easy automation: Scalping strategies are easy to automate, removing the physical and mental stress of using them.
- Low Risk Trading: Since the trade size and position are very short, they can be considered as a low-risk trading method. Most scalpers lock in their profits within minutes.
- Volatile Market: Traders who are knowledgeable about scalping strategies may be better able to take advantage of price fluctuations in the crypto market that arise from some crypto news than those who trade with long-term strategies.
- Leverage Advantage: Scalpers also tend to make more with leverage. A small price movement can result in a large profit if leverage is used correctly.
- Fast win: Scalpers do not have to worry about long-term market movements. They are more concerned about what is happening and what will happen in a few minutes than what will happen in a few hours or days.
Risks of Crypto Scalp Strategy
Scalping is not without its risks. Below are some of the downsides of a crypto scalping strategy
- transaction fee: Since you make many trades every day, it also means that you often have to pay transaction costs, which can affect your profits in the long run. However, long-term traders pay one-time transaction fees or commissions and can benefit significantly from a single trade.
- Lengthy process: Scalping is a lengthy process that can lead to physical exhaustion. Many scalpers monitor the price for hours and are usually alert to make quick decisions. Having small profits per trade can also make it quite difficult to reach your financial goals.
- Technical problems: Issues like slippage, platform errors, and order execution delays can result in huge losses. Since every second is important, any delay or error in the trading system or in the trader’s path can result in losses.
- Leverage risk: Scalping often involves the use of leverage to trade. This allows you to earn more with little market movement. However, this can also increase your loss. A big loss can affect the small wins you’ve been able to make over time, and it can even wipe out your entire account balance.
Determining if scalping is right for you
Scalping takes a lot of time. In addition, scalping strategies represent possible entry points that often require quick reactions from scalpers as they can also disappear quickly. Because of this, many crypto scalpers get stuck on their trading platforms for a long time.
The time requirement has been reduced with the introduction of trading bots. Trading bots have grown in popularity over the last few years and have proven to be reliable to a certain extent. If you are familiar with trading bots and can automate your trading strategies properly, you can always use scalping strategies. The main problem with trading bots is that they are usually not sensitive to changing markets and price volatility can cause them to provide incorrect results.
Scalping strategies may not be ideal for those with full-time jobs and activities. Rather, long-term strategies that require observing the market multiple times and mostly at favorable times may be a better option for such people.
When deciding whether a scalping strategy is right for you, you need to consider your approach. For example, scalping requires quick reactions, and you may need to make spontaneous decisions. On the other hand, if you prefer to take decisions slowly or don’t have a good handle on your emotions, you can also consider longer-term strategies.
Is scalping more profitable than other strategies?
The simple answer is no. No strategy can be said to be more profitable than another. What wins trades is not trading style but the trader’s ability to build a strong strategy and be disciplined enough to stick to it. Scalpers make money faster, but don’t forget that they usually make little profit. A long-term trader can earn in a single trade what a scalper earns in ten trades.
The information on this website does not constitute financial advice, investment advice or trading advice and should not be relied upon as such. MakeUseOf does not provide trading or investment advice and does not recommend buying or selling any particular cryptocurrency. Always conduct your own due diligence and consult a licensed financial advisor for investment advice.