Scalp trading is a fast-paced and increasingly more popular trading strategy, especially popular in the cryptocurrency circles. It focuses on quick, short-term trades and aims to capitalize on minor price changes in the volatile crypto environment.
This method differs from other strategies due to its intensity, high trade frequency, and reliance on technical analysis. The strategy should really only be employed by experienced traders who now how to navigate the intricacies of the crypto market.
In this article, we will explain what scalp trading in crypto is, how it works, its risks and benefits, as well as some basics about different crypto scalping strategies.
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What is Scalping in Crypto?
Scalp trading in crypto, also known as "crypto scalping," is a short-term strategy where traders aim to profit from temporary market price fluctuations. Traders employing this strategy usually execute multiple trades throughout the day, opening and closing their positions in a matter from a few seconds to a few minutes. Ideally, each trade yields a small profit. However, these small gains can accumulate over time, allowing a successful “scalper” to earn a significant amount by the end of the day.
A candle-bar chart depicting the entry and exit points of each scalp trade. You can see that each position was open only for a few minutes and netted only a relatively small profit. Nevertheless, by conducting five scalp trades in a matter of less than 3 hours, this trader managed to outperform a passive holder in this scenario.
Below, we list two characteristics that define the scalp trading strategy:
Quick Trades: Scalpers seek to swiftly enter and exit positions, taking advantage of even smaller volume surges or brief price imbalances. The ideal duration for scalp trades usually falls between 5 and 30 minutes. In fact, the most popular crypto scalping methods include the 1-minute and 5-minute scalping strategies, which pertain to the timeframes of charts used to identify price movements.
Small Profit Margins: Each scalp trade yields a rather low profit as this strategy prioritizes the quantity of trades over large individual gains. The average profit per trade of experienced scalpers ranges from just 0.1% and practically never exceeds 2%.
How Scalping in Crypto Works?
Everyone knows that to generate a profit, one should buy cryptocurrency at a lower price and sell it at a higher price. While this sounds simple in theory, achieving it in practice is much more difficult. This is why scalp traders rely on a comprehensive set of guidelines that make up a successful scalp trading strategy. The crucial elements are:
Reliance on market analysis, especially the technical market analysis and technical indicators: Scalpers heavily rely on technical analysis. Using indicators like various Moving Averages, order book depth, Relative Strength Index (RSI), Bollinger Bands, Volume Profilesm, and a slew of crypto tools for research and anaylsis they can more accurately identify short-term patterns and predict future price movements.
The set-up of entry and exit points: Using technical market analysis, the scalp trader predetermines the entry and exit points of each trade and then puts them into action by placing an order. Swing traders usually utilize limit orders or market orders if they want to execute a trade immediately and avoid missing out on potential profit opportunities.
The use of stop loss function: In order to mitigate the risk, every order should be equipped with a relatively tight stop loss, which minimizes losses in case the market moves in the opposite direction as you assumed. It is better to end one trade with a minor loss than end deep in the red because a sudden market dip/pump surprised you with an open position.
Focus on the volume of trades and satisfaction with a very low profit per trade: A scalp trader should abide by the basic concept of scalp trading.
The use of leverage is optional: Utilizing leverage can amplify potential returns (and losses), transforming small price swings into highly profitable investment opportunities. Remember, however, that leverage works both ways and could also amplify your losses if the market moves in the other direction.
The use of Automated Trading Systems: Given the swift nature of scalping, many traders employ automated systems or trading bots. These tools can execute trades more efficiently and rapidly than human traders ever will be able to.
Advantages of Crypto Scalp Trading
Scalping offers several clear advantages compared to swing trading or long-term holding. Firstly, scalp trading provides instant outcomes (whether positive or negative), which may appeal to more impatient traders. Another advantage is that scalp trading can carry relatively low exposure to risk if proper risk management procedures are strictly followed.
Furthermore, most analysts agree that it is usually much easier to identify price movements in a liquid cryptocurrency market over the next 5 minutes than over the next 5 hours. Consequently, scalp traders often achieve a high degree of accuracy, which can boost their self-confidence. Some traders are also more comfortable using leverage when scalp trading, as the money is borrowed for a shorter period.
Almost all scalp traders gravitate towards higher market cap coins, which offer more liquidity and, thus, more opportunities for quickly getting into and out of positions. These coins are often referred to as the best coins for day trading.
Disadvantages of Crypto Scalp Trading
It should be noted that scalp trading is not a path to immediate riches. In fact, scalping requires a particular mindset and a lot of perseverance, making it unsuitable for everyone. While jumping in and out of positions might seem exciting, scalpers must constantly focus on market data. You'll also need to make the same kinds of trades repeatedly, trying to build wins and minimize losses. Quite frankly, not everyone has the nerve to endure it. Some claim that scalpers need a level of emotional detachment that borders on robotic.
One reason AI bot systems are so successful at scalping is that they don’t feel regret (or any other emotion). Imagine you bought BTC at $63,500 and sold it a few minutes later at $63,750, only for the largest crypto to continue surging to $68,000 an hour later. You would have felt at least a little regret, if not slight anger, while the AI bot would have simply moved on to another trading opportunity.
Apart from the mental and psychological factors, the biggest disadvantage of scalp trading is that trading fees can eat away a large chunk of your profits. This is why it is of utmost importance to pick a reliable but inexpensive cryptocurrency exchange for your scalping endeavor.
Top 5 Crypto Scalping Strategies
As already mentioned, successful scalp trading requires a clear strategy and disciplined execution to avoid impulsive decisions and emotional pitfalls. Below, we outline the fundamental principles of five highly popular scalp trading approaches, which are all based on popular candlestick patterns:
1. Range Trading
Range trading involves identifying price ranges or consolidation patterns in the crypto market. Traders buy at support levels and sell at resistance levels within the identified price range. Monitoring trends and using trend lines are crucial for experienced traders seeking optimal entry and exit points.
An example of a candle bar price chart of an asset trading within a defined price range limited by a support line (bottom) and resistance line (top). Ideal entry and exit points are also depicted. Source: Ifcmarkets Corp.
2. Moving Average Crossover
Utilizing two moving averages—short-term (SMA) and long-term (LMA)—this strategy identifies trend changes. A bullish crossover (SMA above LMA) signals a potential uptrend, while a bearish crossover (SMA below LMA) suggests a downtrend, guiding traders on entry and exit points.
Candle bar price chart depicting how the crossover of SMA (light blue line) and LMA (dark blue line) usually affects the price movement. (Source: Blueberry Markets)
3. Price Action
Price action trading analyses short-term factors influencing crypto prices, akin to traditional investing but within a shorter timeframe suitable for scalping. Technical analysis, especially indicators like RSI and SMA, plays a pivotal role in identifying rapid trading opportunities.
4. Arbitrage
Arbitrage exploits price differences between markets. Geographic arbitrage involves buying and selling in different regions, while pairing arbitrage trades between different cryptocurrency pairs like BTC/USDC and BTC/ETH. Reacting swiftly to arbitrage opportunities requires constant market monitoring and, very often, special bots that can post both (or more) trades in an instant.
5. Bid-Ask Spread Strategy
This strategy capitalizes on the gap between bid (buy) and ask (sell) prices. Traders aim to buy at the lowest bid price and sell at the highest ask price, focusing on cryptocurrencies with volatile market movements.
Conclusion
We have learned that cryptocurrency scalping demands thorough analysis, quick decision-making, and precise execution to profit from small price fluctuations. Another crucial element that sets a successful scalping trader apart from others is choosing a cryptocurrency exchange with the lowest possible trading.
The 24/7 nature of the cryptocurrency markets ensures that opportunities for scalping are always available. Last but not least, the inherent volatility of the cryptocurrency markets makes them ideal for scalping. Considering all these factors, it is safe to say that crypto markets are among the best in the world for implementing the scalp trading strategy.
If you want to explore tools that are finely tuned to take advantage of scalping opportunities that arise in crypto markets, you can check out the best crypto arbitrage scanners. While the name implies a focus on arbitrage, most of these tools can be used for scalping strategies as well.