Explained: Scalp Trading (Scalping) in crypto

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Scalp trading or scalping is a short-term crypto trading strategy that can help traders earn small profits adding up over time.

A cryptocurrency market can be highly volatile at times. However, this volatility can often pave the way for some profit-building strategies. Scalp trading or scalping is one such strategy that can benefit traders from small price moves.

What is scalp trading (scalping)?

Scalping allows crypto traders to benefit from relatively small price movements without targeting massive profits. Instead, scalp traders place as many trades as possible over short periods. The idea is to combine small gains, eventually adding to a considerable profit.

As we mentioned before, scalping is a short-term trading strategy. Meaning, traders need to act fast without spending too much time on decision-making. Scalpers step in when there is increased interest in a particular asset with high volume and good liquidity. Unlike events that play out over a more extended period, scalp traders rely heavily on short-term events that drive increased interest in assets due to some news. Scalp trading strategy is not for everyone and requires an in-depth understanding of how the market operates.

How do scalp traders make profits?

In this section, we will focus on how scalp trading works. Those involved in scalp trading generate trade ideas using technical analysis (TA). It’s a type of analysis that allows traders to predict future market behavior based on previous price movements and volume data. Technical analysis is also referred to as charting. More on that later.

Another factor is speed. Scalpers need to act fast and benefit from short-term volatility measured in minutes or even seconds. This way, scalpers can consistently reap gains over periods.

That said, scalp trading revolves around three major elements that make scalping possible:

  • Charting
  • Speed
  • Consistency.

As a scalp trader, all you need to do is choose currency pairs exhibiting higher volatility to benefit from small price movements. By using relatively minor price differentials between token pairs to your advantage, you can minimize risks and reap immediate rewards.

Technical Analysis (TA) vs Fundamental Analysis (FA)

There are two general approaches to study cryptocurrency markets:

  1. Technical Analysis (TA)
  2. Fundamental Analysis (FA).

Technical analysis (TA) analyzes market price action and volume data over time. With the help of patterns deciphered by reading charts and mathematical indicators, insights on future market behavior can be gathered, enhancing trade entry and exit precision.

On the other hand, fundamental analysis involves studying a country, industry sector, or future earnings prospects based on macroeconomic, sector, and company-specific conditions. Most successful traders apply both types of analyses. For a detailed comparison between technical analysis and fundamental analysis, read this article.

Different scalp trading techniques

Following are some of the strategies employed by scalp traders:

Range trading

Range trading is where scalp traders wait for the trade to execute within an established price range. Some scalpers also use a Stop-Limit order where the trade is executed at future market prices when the asset reaches a minimum or at the exact price specified in the order. Check out different crypto trading order types.

Bid-ask spread

Another trading strategy employed by scalpers is leveraging the bid-ask spread. Using this technique, scalpers benefit from a considerable price difference between the highest bid and the lowest ask.

Leverage

Leverage refers to the amount traders amplify their margin (the amount traders put up from their pocket). Some scalers use this technique to boost their position size.

Difference to Day trading

In the past, we have discussed another short-term crypto trading strategy called day trading. Compared to long-term trading, day trading wants the trader to focus on small price movements. So, the question arises: How does scalp trading differ from day trading? If we have to point out one significant difference between day trading and scalp trading, it has to be the time frame.

Although both day trading and scalp trading fall under the broader umbrella of intra-day trading occurring within a single day, many retail traders rely heavily on short-term price action measured in minutes and seconds to make profits. That is where scalping trading is preferred more than day trading.

Conclusion

The key to becoming a successful crypto scalper is to enhance your chart reading skills and knowledge of different crypto trading strategies.