Based on their deposit, skills, and available time, crypto traders can use various trading strategies. One of the most common, both among beginners and experienced industry participants, is scalping, which allows for quick profit and maximally efficient use of market opportunities.
What is scalping in trading?
Scalping is a widely used trading strategy in the cryptocurrency market characterized by high frequency and short-term trades. A scalper extracts profit from small price fluctuations, multiplying the financial result through the number of positions and high activity.
Positions in this trading style are typically opened for several seconds or minutes, with small profits gradually accumulating to yield a significant result. Additionally, the tail risks of short-term positions related to fundamental market indicators or exceptional events are usually lower.
Basic Principles of Scalping
As an approach to trading, scalping is characterized by a number of features that define its essence and allow it to stand out among other trading strategies.
Small income and short-term nature of the trade
The main idea of scalping is to extract profit even from minimal price movements—enough for the potential income to offset the price spread, as well as the trading fees of the exchange.
Typically, such movements in the crypto market occur every few minutes or even seconds, requiring constant position management and monitoring of price charts.
Volatility of the traded asset
When selecting an asset for trading, the trader focuses on its volatility to obtain sufficient price fluctuations over short time intervals. It is important to find a balance, as excessively volatile tokens may lead to losses due to unpredictable dynamics.
Active price movements are one of the main reasons for the spread of scalping among crypto traders. Not all traditional markets can provide sufficient volatility for manual high-frequency trading.
The Importance of Time
Scalping requires active position management to not miss the most advantageous moment for opening and closing trades. In some cases, even a second can directly affect actual income, so a scalper must be able to analyze and make decisions in the shortest time.
Essentially, it is a continuous and high-intensity intellectual activity that is not suitable for everyone and can be difficult for beginners without trading experience.
Technical Analysis
When evaluating a future trade, traders usually rely on a combination of technical analysis tools, as fundamental factors are less significant over short time frames.
The list of tools for technical analysis includes the order book, moving averages, RSI, and others.
Liquidity
Liquidity is a characteristic of an asset that indicates how quickly it can be bought or sold at market value without significantly affecting the price. In scalping, liquidity is extremely important because it affects the timeliness of trade execution and actual income—short-term trades have minimal profitability, so even a small price slippage can turn them into losing ones.
Comparison of Scalping and Long-Term Strategy
Scalping differs from trading over longer time frames in terms of position opening conditions, holding periods, potential profitability, as well as asset requirements and other characteristics. The main criteria for traders include:
Time Expenditures
Scalping is high-frequency trading that requires constant monitoring of price dynamics to find the optimal entry and exit points. Long-term trading, in general, requires less time for position management but involves more thorough and prolonged preliminary analysis at both technical and fundamental levels.
Profitability
A scalper captures profit much more frequently than a long-term trader, but in smaller volumes. On one hand, this avoids prolonged liquidity blockage and exhausting waiting; on the other hand, it practically excludes the likelihood of a sharp increase in capital from one or several trades. Scalping is about small steps towards a big goal, while successful long-term positions allow for immediate achievement of the desired financial result.
Complexity of Market Analysis
The main tools for market analysis in scalping, as previously mentioned, are order books, oscillators, and indicators. These provide traders with almost all the necessary information to make decisions about opening or closing positions.
When trading over long time periods, many more factors need to be considered, including the macroeconomic situation, trends, potential token unlocks, and other factors. It is precisely because of the relative simplicity and template nature of the analysis that scalping is often used by beginners or traders who resort to automation of trades.
10 Rules of Scalping for Beginners
Below are 10 basic rules that will help beginners understand the features of high-frequency trading and the fundamentals of trading in general.
The Willingness to Learn
Trading is a complex niche activity that requires practical and theoretical training. Beginners should dedicate sufficient time to studying the subject, as well as find quality educational courses.
Stress Resistance and Discipline
Due to the features of short-term trades, a novice scalper is often susceptible to stress, sharp mood changes, and motivation levels, so it is important to initially shield oneself from emotional factors and act according to the established plan.
Using a Demo Account
Before engaging in actual trading, it is advisable to test your knowledge on a demo account, available on many cryptocurrency exchanges. While emotionally it does not compare to real trading, it helps identify mistakes, test the viability of the trading strategy, and avoid losses due to a lack of practical experience.
Clear Trading Strategy
Although scalping is a specialized form of trading, there is no single set of rules for its implementation, so each user must independently develop a strategy for behavior in various situations. This includes defining conditions for opening and closing trades, an individual set of technical analysis tools, and other factors directly affecting the trading process.
Risk Management
Before entering trades, a trader must determine the amount they are willing to lose over a certain time period and on a specific trade. This will help establish risk tolerance and set limits on activity in case of an unsuccessful trading session or loss period.
Correct Asset Selection
Preparing to open a position involves searching for an asset that meets the main criteria for high-frequency trades and the trader's personal strategy. These criteria include volatility, liquidity, price history, and other characteristics, the determination of which requires developed skills in conducting one's own research.
Preliminary Calculations
Each trade requires the trader to conduct basic calculations to determine its potential profitability. The calculation should consider the position size, spreads, platform trading fees, and price levels for taking profit or closing a losing trade.
Considering the News Background
News related to a particular asset can increase its volatility for some time or completely change the price dynamics, which may require closing positions or adapting the trading strategy. In this aspect, scalping intersects with news trading, so it is important to familiarize oneself with its basics.
Experience Analysis
In trading, it is important to analyze not only active trades but also past trades, regardless of whether they were successful or not. Therefore, beginners are recommended to document and analyze exemplary cases to understand their strengths and weaknesses and adjust their trading strategy accordingly.
Skills in Working with Charts
As mentioned above, technical analysis plays a key role in scalping, so it is important for traders to master the tools and skills for conducting it. This primarily involves studying figures and patterns, using indicators, and building auxiliary elements on the price chart such as trend lines, support and resistance levels, and others.
Cons and Risks
The main disadvantage of scalping is the need to constantly monitor price charts and analyze markets to find opportunities. This practically excludes the combination of high-frequency trading with other activities.
High mental load throughout the session creates another feature of this trading strategy—stress. This is especially pronounced in situations where the asset's price moves in an unpredictable trajectory, and the trade becomes unprofitable. Therefore, it is important to study the basics of trading psychology.
Another downside is the small income from trades, which often borders on a zero result or loss. Sometimes a trader can lose money even on technically successful trades due to commissions and slippage. This factor can be partially offset by increasing the position size; however, potential losses also increase with it.
The last drawback is the relatively narrow range of optimal assets for trading. As noted, a key factor for scalping is the volatility of the asset, with price movements needing to be intense enough for profit extraction and relatively predictable to avoid losses. Beginners may find it challenging to identify a comfortable range of price dynamics and to find a corresponding cryptocurrency.
Conclusions
Scalping is a trading strategy that involves opening a large number of short-term trades to extract profit from small price movements. It is widely popular among beginners due to its relatively simple and template-based approach to asset analysis and is generally favored in the volatile cryptocurrency market.
At the same time, scalping requires a deep understanding of market mechanisms, technical analysis skills, and the ability to make quick decisions. Additionally, scalpers are required to have high stress resistance and full engagement in the process, which complicates the combination of trading with other activities.