What is Scalp? Scalping trading techniques in Crypto

What is Scalp?

Scalp is a trading strategy that focuses on making profits from small short-term fluctuations in asset prices. Traders will make multiple trades throughout the day with the goal of profiting from small price differences, which often last just a few seconds to a few minutes.

Scalping traders are often called scalpers.

Features of Scalp trading:

• Short transaction time
• High transaction frequency: Scalp traders will place many orders in a day, sometimes dozens or hundreds of orders.
• Low risk per trade: Each transaction usually does not have much risk if managed well. However, the total risk can be high if the trading frequency is too great or losses cannot be controlled.

Who is suitable for the scalp trading strategy:

• People have time Monitor the market continuously: Scalping requires extreme concentration and quick reaction to price fluctuations.
• People come out Quick and decisive decisions: Success depends on quick decision making when entering and exiting trades.
• People have good risk management ability: Scalper must strictly control the Stop Loss level to avoid big losses.
• People have relatively large capital: Large capital helps to leverage small profits from each trade more effectively.
• People have Technical analysis experience: Understanding technical indicators is an important factor in determining the correct entry point.
• People good emotional control: Scalpers need patience and not let emotions dominate the trading process.

How Scalping trading works

Scalping is based on taking advantage of small price fluctuations. To effectively scalp trade, traders often use technical analysis tools to identify precise entry and exit points, while also focusing on closely monitoring market signals.

Technical analysis in Scalp

Scalpers use mainly technical analysis in scalp trading, with the use of indicators such as moving averages, Bollinger Bands, relative strength index (RSI), MACD lines , trading volume, Stochastic Oscillator indicator, Pivot Points….

Moving Average: Used to determine the short-term trend of an asset. Scalpers often use short-term average lines such as MA5, MA10, MA20 to detect price reversals.

When a short-term average (e.g. MA10) crosses above a long-term average (e.g. MA20), it can be a buy signal. When the short-term MA crosses below the long-term MA, it can be a sell signal.

Bollinger Bands: Used to determine price fluctuations. When the price touches the lower band of the Bollinger Bands, scalpers can look for buying opportunities, expecting that the price will return to the middle of the band or move towards the upper band. Conversely, when the price touches the upper band, it can be a sell signal.

RSI indicator (Relative Strength Index): Used to measure the overbought or oversoldness of an asset.

If RSI is above 70, the asset may be overbought, meaning the price could fall. If RSI is below 30, the asset may be oversold and the price may increase. Scalpers can use these signals to execute counter-trend trades when the asset turns around.

When RSI and price do not move in the same direction, it is a reversal warning signal. For example, if the price is making a new high but the RSI is not making a new high, it could be a sign that the market is about to reverse to the downside.

MACD indicator (Moving Average Convergence Divergence): When the MACD line crosses above the signal line, it is a buy signal. When the MACD line crosses below the signal line, it is a sell signal.

When the price creates a new peak but MACD does not confirm it, it shows that the trend may reverse, this is an opportunity for scalpers to enter a sell order.

Large trading volume with small profits

One of the core principles of scalping is to profit from small price fluctuations but with high frequency. The profit per trade is usually not large, but when the orders are added up, the overall profit can become significant.

• Small profits: Each order usually only brings profit from 0.1% to 0.5% of total trading capital.
• High frequency: To compensate for small profits, scalpers have to make a lot of trades throughout the day. A scalper can make dozens to hundreds of trading orders per day.

Perform automatic trading (Trading Bot)

Some traders use trading bots to automate the scalping process. The trading bot is programmed to detect short-term trading opportunities and execute buy and sell orders quickly, helping to optimize the performance of the scalping strategy.

To use a trading bot, you need to do the following steps:

• Register a trading bot account: Sign up on the bot platform of your choice.
• Connect API to exchange: You need to generate an API key from your exchange account (e.g. Binance, Coinbase, Kraken) and provide it to the trading bot. API is an application programming interface that allows bots to access your account and execute trading orders without needing a password.
• Security note: When creating an API, only allow bots to make transactions and do not grant withdrawal permissions to avoid security risks.

Newbies should note that using a trading bot is not without risks. Bot algorithms may not operate effectively during highly volatile market conditions or unexpected events. Therefore, always have a risk management plan and do not use all your capital on a single strategy.

Popular Scalping methods

Scalping can be done through many different strategies. Here are some common methods that scalp traders use in the crypto market:

Arbitrage method

Arbitrage used in scalping is based on profiting from price differences between different exchanges or trading pairs. Traders can buy assets on one exchange at a low price and immediately sell them on another exchange at a higher price.

Arbitrage is still a popular strategy in the cryptocurrency market in 2024, but its effectiveness and profitability are no longer high.

Many traders have already switched to using it trading bots to automate the process of finding and executing arbitrage orders, because manual trading is often too slow to exploit these opportunities.

However, arbitrage opportunities become available more competitiveespecially with trading bots that can execute orders faster. Trading fees and withdrawal fees can also significantly reduce potential profits​.

Learn more: What is Arbitrage? Risks of Arbitrage Trading in Crypto.

Market Making Method

The market making strategy trader acts as market maker by providing liquidity to assets. This method is especially popular in financial and cryptocurrency markets, where liquidity is important.

Market maker will place buy and sell orders at the same time for an asset with the goal of making a profit from difference in buying and selling prices. They place many buy/sell orders continuously, regardless of whether the market trend is up or down.

A trader can place a buy order for Bitcoin at a price of 30,000 USD and a sell order at a price of 30,020 USD. When both orders are filled, the trader makes a profit from the price difference.

Trade according to short-term trends

Scalp traders can use technical indicators to identify short-term trends and trade against that trend. They will look for entry points when the price moves in an up or down trend and exit as soon as the trend begins to weaken.

If the Bitcoin price is in a short-term uptrend, a scalp trader can open a buy position when he sees a confirmation signal from technical indicators, and then sell immediately when a small profit is achieved.

Risks and challenges when trading Scalp

Although scalp trading can bring attractive profits, it also carries many risks. In particular, the high volatility of the crypto market can create unforeseen risks.

Risk from transaction fees

With high trading frequency, trading fees can become a big factor in reducing overall profits. Many crypto exchanges have fees ranging from 0.1% to 0.2% for each buy and sell order. If not carefully calculated, trading fees can eat away most of a trader’s profits.

Unforeseen fluctuations

Although scalping is intended to take advantage of small fluctuations, the crypto market can change very quickly, leading to a situation where you cannot exit a trade in time, causing a loss. Traders need to use command stop loss to limit the risk of unwanted losses.

Requires a lot of time and concentration

Scalping requires constant focus and close monitoring of the market. Traders must make quick and accurate decisions, which can create great psychological pressure, especially for beginners.

Read more: 3 Ways to avoid price fluctuations in Crypto.