High volatility, high trading volumes, and lots of assets to experiment with — this is a perfect environment for a scalper, a type of trader who enjoys such conditions. If you want to become a scalp trader meaning that you want to actively sell and buy using leverage, you must understand some risks and benefits of a strategy as old as modern financial markets.
So, what’s a scalp trade? It is a buy or sell order executed in a short time frame (usually, 1 or 5 minutes) and closed as quickly as possible to both mitigate risks and make small profits. This method was heavily abused when Forex was like the wild west with millions of traders trying to make a quick buck.
The definition of scalping
More than a hundred years ago, this word referred to a process of removing the skin from the top of a head of an opposing warrior to inflict fear. Widely employed by various Indian tribes in the Americas, it became a scary story for many generations of frontier pioneers in the 19th century. Today, we mean something completely different.
Scalping is a good word for the financial strategy that relies on skimming a small profit from every single order placed within a day of trading. It was used in many financial markets but gained notoriety in the Forex era.
The process of scalping looks like this:
- Using an M5 (or even shorter) time frame, a trader places multiple orders (bid or ask);
- The position is liquidated as quickly as possible when either a small profit is achieved or stop-loss triggered;
- A trader pockets the profit and immediately repeats the process.
While it seems very easy at the first glance, a scalping strategy is often complicated and involves advanced technical analysis. There are several qualities that a good scalper must have:
- Perseverance. To accumulate noticeable gains, a trader must be very resilient and take every tiny profit they can find. It often takes weeks of non-stop trading to double one’s portfolio even if stars align favorably.
- Self-discipline. The strategy relies on quick profits on leveraged positions. Losing any of them significantly reduces overall earnings. It is important to regulate risks and think ahead. Managing stop-loss is also crucial for success.
- Intelligence. Understanding technical analysis and knowing how to apply it practically — these qualities define your potential in the world of Forex or cryptocurrency scalping. Without a proper strategy, you won’t be able to reach reliable profitability.
To reiterate, this strategy was polished in Forex markets and now has many variations and interesting automated forms. However, there are several distinct differences between using to trade fiat currency pairs and crypto.
What is crypto scalping?
In both cases, traders have to use leverage. Since the goal of the method is to take any profit, even minute changes in prices affect the bottom line. To achieve meaningful earnings, you have to leverage all of your positions. It also means increasing risks, but these can be managed with well-placed stop-loss orders.
A crypto scalping strategy usually accounts for several distinct differences between Forex and crypto:
- Volatility is much higher compared to any financial market. One of the reasons why many scalpers moved to coins and tokens is that they carry with bigger amplitude and much more often than fiat pairs.
- Liquidity providers or intermediaries. Most Forex brokers have to use these third parties to participate in international trade. However, crypto exchanges don’t have to employ any intermediaries making all orders cheaper. You don’t even have to think about how many pips you have to make until profitability.
- Availability. Since most international fiat operations are conducted by banks and large financial institutions, the market works only 5 days per week and only within business hours. On the contrary, cryptocurrencies are traded 24/7.
These differences not only define some unique quirks and tricks that a crypto trader employs, but also make it a little bit easier to understand how to scalp crypto. For example, you don’t have to account for pips (price interest points). These are very important in Forex, as brokers charge per pip for executing an order meaning that you have to wait until the price moves beyond the fee range.
Some complications related to pips can be quite hard to grasp for a trader who never engaged with Forex markets.
What is a scalp in crypto trading?
Scalping is often employed as an extension of arbitrage strategies where you monitor prices of specific assets on multiple platforms simultaneously. When there is a discrepancy, you purchase where it is cheaper and sell where it is expensive. On platforms where leveraged shorting and longing are allowed, you can try to identify the spread.
What is a spread? The difference between the bid (buy) and ask (sell) prices is called a spread. It is important to find deals where the discrepancy is either already visible or can be further exploited due to the market movement. Most traders employ a variety of methods to identify the best moments to place an order. However, when scalping is involved, you have to make trades very often to achieve significant profits.
This is where we have to talk about automation. How to scalp bitcoin? You can do it manually or employ bots. The latter option is often superior due to multiple reasons. Humans have their limitations. When the market works around the clock and the amount of information you have to process is simply unbearable, a regular person will never excel.
Bots to the rescue
The best asset for modern scalping trading is cryptocurrency. We outlined the reasons for this earlier. Crypto exchanges not only work 24/7, but they also have hundreds if not thousands of various assets that you can trade. The complexity of the market creates a very difficult environment to navigate successfully. Hence, many traders decide to use bots.
Bots are scripts that follow strict instructions. Since scalping requires tight stop-loss orders to mitigate risks and incredibly quick order placement to outplay the market, experienced traders can simply write the list of instructions for the bot to execute. Machines do everything instantly making them perfect scalpers.
Here are some advantages these bots have:
- Machines do not need to sleep or rest and can work around the clock. It is especially important when you are scalp trading cryptocurrency.
- Bots process information instantly reducing the time between decision-making and placing an order to virtually zero.
- Bots are extremely flexible and can be tuned to follow very detailed instructions. It is an excellent quality since most traders use technical indicators to create signals.
- Many automation vendors have very low prices and trial periods when users can test their strategies without any risks.
Automation is an excellent solution for arbitrage as well. Bots can track prices much better than humans thanks to API which allow bots to interact with an exchange without any delays. When it comes to “traditional” scalping, robots are also very impressive since they can follow instructions very well and never make mistakes further reducing risks that are common for scalpers.
Which is the best time frame?
Choosing a time frame is quite important for successful scalping. You need to place many orders throughout the day so using 30-minute or 1-hour frames significantly reduces your chances to find a good deal. While potential margins will be bigger, the problem is that many of your orders will not be profitable and reduce your overall earnings by a certain percentage on average.
1-minute or even 30-seconds is way too fast for any meaningful technical analysis. You won’t be able to properly predict how an asset will behave within a minute. However, the 5-minute frame seems very promising to many. That is enough time for prices to settle down and traders to make up their minds and decide what they want to do next.
Technical analysis works much better. Many indicators have much more readable outputs and allow traders to create cohesive signals for bots. Less confusion and more correctly placed orders.
Using good technical indicators
Technical analysis is a futile endeavour when you do not have good tools at your disposal. Every trader usually develops their own favourite set of indicators to work with. However, some staples are employed by the vast majority of experienced investors.
- MA or Moving Average is the most used indicator placed as default in TradingView and many other trading terminals. Moving averages show median prices over certain periods allowing for simpler identification of trends. Using three moving averages with different periods leads to a better understanding of long-term trends.
- Relative Strength Index or RSI can indicate when the direction of the price movement will alter. Again, it is an additional tool to identify strong trends and make decisions based on the probability of the price staying on or diverging from the current course.
- Support and resistance are graphical lines that can be drawn using three or more lowest or highest prices during a chosen period. These levels often indicate thresholds where bearish or bullish trends start. Using them alongside other indicators is a good way to further increase the probability of predicting the future correctly.
Should you try scalp trading cryptocurrency?
Scalping is a style of trading that requires patience and resilience. Without much time and effort dedicated to trading along, you won’t feel that you have progress. It is a job. You can automate the process, but the strategy must be reliable. Otherwise, using bots will not be a secondary income channel. They will start losing money.