In today’s article we will analyze the most popular trading strategy — scalping. The most successful scalpers manage to demonstrate double-digit profit figures during the day, which is much more effective than many strategies. How to make money on scalping, a description of all the nuances and crucial points will be discussed further.
What is scalping in crypto trading?
The volatile nature of the crypto market opened up a lot of earning opportunities for traders. Scalping is one of the hottest strategies of intraday speculative trading, when a trader places a large number of low-profit trades, as a result of which he receives a high total income.
Overview of scalping strategy
When scalping cryptocurrencies, a trader manually opens hundreds of positions per day, and their retention period ranges from a few seconds to several tens of minutes. Often the profit is fixed after the first price impulse. This type of high-frequency trading requires a good reaction from the trader and the ability to make decisions instantly. The scalper can rely on price action analysis, market reaction to news, technical analysis, and intuition.
Scalping has become a very popular strategy in the crypto market precisely because of its high volatility. The higher the volatility of an asset, the more a trader can earn. You should not trade a cryptocurrency whose price fluctuates within 1-2% per day. Scalping works well on altcoins, the price of which can vary up to 20% per day and up to 1% per hour.
Why should I use scalp?
Scalping, although it cannot be called the simplest strategy, is quite easy to master. Personally, as a beginner in this deal, I managed to increase my portfolio by 3.7% in just a few hours on the exchange. At first, I even experimented and practically did not delve into technical analysis, keeping only one rule in my head: “If several descending candles appeared on the chart in a row, then this is a signal that soon the quotes will move in the opposite direction and begin to grow (and vice versa)”. Maybe I was lucky, but still. However, the more I scalped, the more experience I gained and realized that if I correctly use technical indicators, as well as correctly setting stop losses and take profits, my capital grows.
Despite some difficulties, scalping is well suited for newbies. If you have mastered this strategy, then you have passed the tough school of trading impromptu. To become a scalp trader, you do not need to have deep knowledge of fundamental analysis. Some manage to trade without having knowledge of technical analysis (pipsing), but this is extremely risky. Scalping with technical analysis allows a beginner to: quickly obtain basic knowledge, master analysis tools, quickly begin to navigate the market, adapt to the market, learn reaction speed, develop their own algorithm of actions, and learn how to make decisions in a matter of seconds.
Mode of analysis
In general, scalping modes can be roughly divided into three groups:
- Conservative scalping
Here, a trader can wait a long time for the optimal entry point. Various technical analysis tools are used for the conservative intraday strategy: moving averages, graphical patterns, technical indicators and oscillators, support and resistance levels, etc.
- “Moderate” scalping
A scalper makes several dozen trades within an hour. There is little time left for market analysis here, we have to rely more on reaction and intuition. The trader monitors order books, the market reaction to the news, the dynamics of bull’ and bears’ behavior.
- Aggressive scalping (Pipsing)
In this particular case, the position is closed instantly a few seconds after opening. Such strategies on cryptocurrencies involve taking a profit of several pips. Due to the high fees on crypto exchanges, it is not recommended to use pipsing.
How to identify the trend?
Every time you look at the chart you have to ask yourself the main question: “Who controls the price now?”. There are two types of trend: bullish and bearish. The correct answer to this question allows you to remain a successful trader. Bullish (uptrend) can be determined by looking at the chart: if you observe more than three points incrementally, when each subsequent higher top (HT) and higher bottom (HB) are higher than the previous one on the chart. In this case, the trader opens buy positions.
And vice versa, bearish (downtrend) when each subsequent lower top (LT) and lower bottom (LB) are below the previous one. In this case, positions for sale are opened.
Scalp with technical indicators
Indicators are tools for technical analysis (TA) that help traders predict the price movement with varying degrees of accuracy. It uses historical price data that was a few minutes/days/months/years ago, turning them into easy-to-read indicators. Indicators are created using mathematical methods. The data from the formulas are transformed into graphical images that are superimposed on the price charts or placed next to them. Based on personal experience, I can say that the most useful indicators for a scalp trader are RSI, MA, and Fibo retracement.
- Relative Strength Index is one of the simplest indicators that indicates an overbought or oversold asset. The RSI uses historical data to determine the total demand for an asset, and then calculates whether people are buying such a volume of an asset that may lead to a downward correction in the price, or the opposite may happen. The RSI indicator has two main lines — one at the level of 30%, the other at the level of 70%. When the indicator value is above 70%, the price should probably fall; when the value is below 30%, the price is likely to rise.
- When prices fluctuate in the direction of growth or decline, it is possible to misinterpret its movements as a reversal or continuation of the trend. Moving average calculates the average price over a time period, and recalculates it over time. Moreover, with MA you can easily determine the support and resistance levels. By itself, MA is not such a useful indicator, but it can be successfully used to determine bearish or bullish crossover signals. The strategy is to react at the moment of intersection of MAs. When the short-term MA crosses the long-term MA from bottom to top, this signals a golden cross, that is, an entry into the market. If the short-term MA crosses the long-term MA in the opposite direction (from top to bottom), then this signal is about the cross of death, that is, to close the position.
- The Fibonacci retracement tool is another useful tool for predicting price dynamics. Fibo retracement does not represent complex and interdependent calculations, but they are still included in the list of indicators for a trader due to their usefulness. This indicator allows you to operate with standard levels 0; 23,6; 38,2; 50,0; 61,8; 78,6; 100%. Fibo retracement allows you to determine trend reversal points based on the current market position, places to set stop losses and take profits. One of my favorite strategies, which works perfectly on any timeframes and trading instruments, is to rebound (buy) from the 38% level and make a profit at the 23% Fibonacci levels.
Identifying the timing
Now when you have a basic understanding of how scalping works, let’s dive deeper into the mechanics of scalping. Scalp traders tend to gravitate towards time frames such as 1, 3, 5, and 15 minutes. The smaller the timeframe, the more potential moments for opening and closing positions, however, there are more risks.
1-minute time frame is of interest to experienced traders. It displays the live reaction of the market to the changes taking place. However, on the 1-minute time frame, traders are often confused and led to false signals. In turn, larger time frames are more stable, but fewer signals fall, respectively, there are fewer opportunities for making deals.
From personal experience, I can say that a strategy with two time frames works best. Its essence lies in analyzing a larger time frame, for example, 15-minutes, and then switching to a smaller one, for example, 5-minutes.
Since the essence of the scalping strategy is to place a large number of orders in short periods of time, the trader needs to choose a reliable trading platform that will work stably even with high demand for the asset. 7b is perfectly suited for this task, as the platform provides an opportunity to make a large number of transactions instantly and without delay.
The news background has a significant impact on the price movement. Therefore, it is crucial for a trader to be aware of all the news of the industry. Only by being interested in what is happening, you will be able to independently investigate the mood of the crypto community and predict the further short-term direction of the trend. When others suffer losses, an experienced trader who constantly monitors current and upcoming news remains afloat.
The cryptocurrency exchange rate reacts to the news one way or another, you just have to open and close a position in time. Earlier we said that it would be challenging for novice traders to work on a M1 time frame. However, from personal experience I can say that in this particular case, the M1 time frame is as relevant as possible. Larger time frames may simply not reflect the market’s reaction to this or that news. To track the news, I use the CoinMarketCal platform. The platform allows you to conveniently study information about upcoming news by filtering them by various categories: coins, exchanges, forks, airdrop, and much more. In addition, you can completely exclude news about coins that you are not interested in. I also use the “Newsletter” function, thanks to this, I can also keep track of some coins that have the potential to shoot.
Using scalping strategy in crypto
As already noted, the scalping strategy shows itself perfectly in the crypto market. The main advises for profitable scalping are as follows:
- Choose a suitable trading platform. You should carefully study the fees amount, they must be taken into account for the development of a profitable trading strategy. From personal experience, I can say that 7b remains the most reliable, secure, and cost-effective exchange.
- Choose an asset. I would not advise choosing a little-known cryptocurrency, as this is a rather risky venture. At the first stage, it is necessary to choose a coin that is in the TOP 100 by capitalization, according to the following criteria: a drop in the last 7 trading days by more than 20%, while the dynamics for the last day and the last hour should be positive, but not exceed 5%. The optimal choice will be a coin that has run into a powerful level of support, and its reversal is highly possible.
- Competent use of technical indicators. After all, scalping without indicators is a so-so idea. Anyway, at least you have to learn how to determine the support and resistance levels. This is also significant to use take profit and stop loss orders. Since the scalper rather rigidly limits the loss and is content with a small profit, the take profit is set only a few points above the entry point, while the stop loss is set below the support level.
What about risks?
Despite the advantages, cryptocurrency scalping has a number of disadvantages:
- The high fee charged on the cryptocurrency exchange. Each transaction, regardless of its outcome, is subject to a fee, which must be taken into account when developing a trading strategy.
- The risk of losing funds due to a technical failure of the exchange. It is associated with the complexity of the operations carried out and insufficient software equipment of some cryptocurrency exchanges.
- A high emotional load on the trader’s psyche due to the active formation of transactions in manual mode and the need for constant presence to monitor the situation on the exchange. Due to the constant mental stress, traders often enter the tilt and lose all their funds, making chaotic trades in the hope of recapturing at least some of the money.
Tips for novice scalpers
Scalpers make the same mistakes as positional traders, but they cost more. After analyzing the following mistakes, you can significantly save your nerves and wallet:
- “Sitting out” losses. A trader does not close a losing trade in time in the expectation that it will become profitable. This is the most common mistake among beginners. In scalping, there is not always time to set stop losses, and the ability to quickly close a position manually is the key to success. The inability to fix losses most often leads to the destruction of the account.
- Averaging. Aggravation of the previous mistake, when a trader adds another one to a losing position. On the one hand, this shortens the path to the break-even point, and on the other hand, it increases the risks, since the continuation of the movement leads to a doubled loss. Building such a pyramid leads to a quick loss of the deposit.
- Tilt. This term refers to a stressful state when a trader loses control of himself and begins to make chaotic trades that are not foreseen by the strategy. Scalpers who have received losses and are seeking to recoup often find themselves in the tilt.
- Early profit-taking. Although scalping involves a quick profit taking, only powerful movements provide a big profit.
- Non-compliance with the money management system. Using a large leverage or incorrectly calculated position volume can throw the scalper out of the game.
Such a topic as scalping on crypto exchanges requires a cautious approach. This trading strategy allows you to quickly fathom the principles of pricing in the market, master the technique of placing orders, etc. The main thing is not to immediately scalp in large amounts. It is optimal to allocate a small part of trading capital to this strategy, and use more conservative trading styles to manage the main part.
Scalping requires a high reaction speed and great psychological stability. Some traders who started with scalping move on to algorithmic trading based on their acquired experience. Most often, success is achieved by traders who combine various methods and techniques, adapting them to the market situation.