Trading Toolkits: Scalping Explained

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Many trading strategies are available for the traders in the market. A few noted ones are quite popular with the trading community; this includes day trading, position trading, swing trading, and scalping. Although different traders employ these different strategies, the goal here is to achieve profit at the end of the trading activities. Unlike the other listed methods, scalping is meant only for the sophisticated, knowledgeable trader who can maintain the trading volatility without being under any pressure.

What is Scalping?

If living the fast life is for you, you’re fluid and flexible and can take decisions on your feet; then you should consider taking on the scalping trading method. Scalping is a trading activity that involves trading within a shorter time frame compared to other trading patterns. In scalping, traders trade intra-day, i.e., trade setup is achieved within few minutes, 5 mins, 10mins, 1 hour (the highest time frame for scalping). Entry and exits are dependent firmly on Technical Analysis - a type of market chart analysis that uses price action, candlestick patterns, trading volume, and a combination of various trading indicators.

Because of its concise time frame, scalpers rarely rely upon Fundamental Analysis - trading analysis that deals with fundamentals of a project, news, or rumors. The News is the only type of Fundamental Analysis scalpers can use as it provides high volatility and volume in the market.

Scalping Execution

Scalpers don’t hold for the long term; the goal is to hold for the shortest time possible to maximize profits quickly. Taking advantage of smaller profits allows for consistent compounding, which is the safest route possible for the scalper. Although scalping generally depends on the lower timeframes, scalpers take advantage of the volatility in the extensive trading timeframe. Scalpers zoom out to check for market trends and direction and then zoom in to pick their entry and exit points.

Leverage

Because the price movement is relatively small, which could mean smaller profits than other trading types, scalping involves leveraging to boost profit. This method is usually associated with Futures and Margin trading. However, it should be noted that although leverage could mean huge profit when trades go in favor of the scalper, it could mean significant loss when the trade goes against his setup. For example, if a scalper picks a position with a 100X leverage, he makes 100X in profit if the trade goes his way and invariably losses 100X  if it goes the other way.

Risk Management

Because scalping involves swift movements, risk management is the paramount principle for a successful scalping system. This trading method isn’t for newbies in trading or for the indisciplined as blowing your account is highly likely with this trading method. Stop-losses are an integral part of scalp trading. Setting stop-loss below the support region of the trade setup when going long(buy) and above the resistance region when going short(sell) acts as a protection against sharp losses due to resulting breakouts.

Correct position sizing is another crucial skill adopted by successful scalpers. Risking appropriately, minding your position size, and placing a stop loss will guarantee your continued trading existence in the long term. Picking a position that fits your capital allocation is a skill necessary in scalping else; you’re not far away from a liquidation email.

Significance of Scalping

When a scalper successfully employs trading indicators, engages the right discipline, and approaches scalping professionally, they can be rewarded by making small gains pretty fast. This quickly compounds and resulting in very significant gains. In a ranging market, a type of market that almost looks like there is no significant price movement - scalping activities could mean immense profit when correct leverages are applied. Scalping is not done by a human only; in these days of high volatility and advanced tools (bots and algorithmic trading) are becoming common in the market. For the human side of scalp trading, there exist two kinds of scalpers that define the scalping method, the discretionary and systemic scalpers.

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Discretionary and Systemic Scalping Strategy

Discretionary scalpers make trading decisions on the spot; he depends on his intuition or gut feelings, many times, fueled by news or market sentiments. For example, if X coin has achieved its ATH (All-Time High) and Y coin seems to be ranging, he takes on a position in Y coin, waiting for a breakout of price. The discretionary scalpers do not have a strict set of rules before taking on positions.

For a Systemic scalper, there are rigid rules he must follow. He is data-driven and uses a combination of tools to pick his position. Unlike discretionary traders, he doesn’t depend on his gut feelings or intuitions. He uses indicators that are common with scalping events.

Indicators used

A combination of different trading indicators could improve on a high success point of a scalping trade.

• Relative Strenght Index (RSI): is the most famous tool used. It indicates an oversold and overbought position of trade. When a market is above 70 RSI, it is said to be Overbought; below 30 is the Oversold region.
• Support and Resistance: The first step for a technical analyst is to plot the Support and Resistance zones of a trade setup. The zones indicate a region where the market is likely to change its direction. The Support zones are usually above the current market price while Resistance is above.
• Moving Averages: Typical Moving Averages like the Small Moving Average and the Exponential Moving Average show the market trend. It indicates a bull, ranging or a bear market, from which scalpers can pick their positions.

Other trading tools like the Elliot waves, Finobaccci, and Bolinger tools are also adopted for a successful scalping activity. Is this type of scalping style suitable for me? A vital question anyone considering scalping should ask.

Should You Consider Scalping Trading

Absolutely No! If you’re a newbie, reconsider other trading strategies, particularly one that deals with a more extensive timeframe, like position and swing trading. Reasoning? As a newbie trader, the tendency for allowing your emotion to come in the way is relatively high as things happen fast in real-time.

As an experienced trader with expertise, you should develop proper risk management, spare funds (money you can afford to lose comfortably), and disciplined position size.

In Closing

Although scalping may mean fast profits that compound in the long run, it’s perilous and discouraged for new market entrants. Those who can’t think on their feet or are easily irritated are not too fit for this type of trading. You shouldn’t consider the gains first but instead, the potential risk involved. 

A gained $200 is better than a lost $2000. Therefore, this trading strategy is meant for experienced traders with enough spare funds to trade. As a newbie, for your peace of mind, go for longer trade setups.