Scalping is a trading strategy that traders use to capitalize on small price differences in the short term. Profits on scalping trades are typically made quickly, within seconds of the trade becoming profitable, even if the movement is as small as one pip. As a general rule, all trading strategies require rigour and discipline, but these characteristics are amplified when it comes to scalping. Due to the small price difference between the opening and take-profit prices, scalpers must adhere to their trading system in order to avoid significant losses.
The objective of scalping is to place as many profitable short-term trades as possible rather than to earn a substantial profit on one or two long-term trades. Each scalping strategy is based on minimizing risk exposure, as active trading time is reduced, lowering the risk of a contrarian market movement. Additionally, scalping is predicated on the premise that smaller market movements are easier to capture than larger ones, and that smaller market movements occur more frequently.
Analysis of the Market and Scalping
Traders who follow this trading style place a premium on technical analysis over fundamental principles. Scalpers frequently employ advanced charts and indicators to analyze an asset’s historical price movement, spot trading events, and to establish entry and exit points.
Three Popular Indicators for Scalping
The Oscillator Stochastic
The Stochastic Oscillator can be used to secure some quick profits. The term “Stochastic” refers to the price level at the moment in relation to its most recent range. By comparing the current price of a security to its recent range, the Stochastic indicator attempts to identify potential turning points.
Scalpers use this indicator to identify trends in a trending market, particularly those with a consistent up- or downtrend. Prior to a pullback or reversal, prices tend to close near the extremes of the recent range, as illustrated in the example below:
In the above example, we see that the price of WTI oil is moving upward, and the Stochastic lows (indicated by arrows) provide entry points for long trades (the black percent K line crosses above the dotted red percent D line). By contrast, when the stochastic reaches a value greater than 80 or when the crossover occurs (when percent K crosses below percent D), the trade should be exited.
Short positions are advantageous during a downward trend, as illustrated below. This is when traders refer to “selling the rally,” and the presence of a bearish crossover in the direction of the trend indicates that the time has come to enter a short trade.
- Averages that fluctuate
Moving Averages (MAs) are another popular indicator among scalpers, typically in the form of a short-term MA and a longer-term MA indicating the trend.
For the purposes of this article, we will analyze a 3-minute EURUSD chart using the short-term 20 and 5-day moving averages, as well as the longer-term 200-day moving average.
The 200-day moving average is moving upward. As a result, we look for the 5-period moving average to cross above the 20-period moving average in order to initiate positions in the trend’s direction. The chart’s arrows indicate the entry points.
The contrarian scenario (illustrated below with a chart) calls for a decline in the 200-day MA. We are now looking for a short opportunity, which will present itself when the price falls below the 5-day moving average.
Most importantly, when scalping, you should keep in mind that each trade you enter should be in line with the trend, and you should avoid attempting to capture every price swing. As with any other trading strategy, risk management is critical to avoiding substantial losses when scalping.
The Index of Relative Strength (RSI)
Finally, you can use the RSI in conjunction with scalping to determine your entry points in conjunction with the current trend. Consider a few examples. When the price increases (as shown in the first chart), and the three moving averages point upward, dips in the trend should be purchased. Specifically, when the RSI falls to 30 and then rises above it, it indicates that the time is right to enter.
By contrast, when the RSI reaches 70 and then begins a steady decline within a downtrend, there is an opportunity to “sell the rally,” as illustrated below.
Day Trading vs. Scalping
Day Trading Scalping
- Trades that occur frequently and for a short period of time (in and out)
- Trades that are less frequent and last a longer period of time (30 minutes to a whole day)
- Gains that are smaller
- Increased gains
- Reduced dangers
- Risks are increased
- Suitable for day trading
- May or may not employ scalping techniques
- Frequently makes use of automated trading systems
- Executes trading strategies and tactics in a systematic or discretionary manner
- Top Scalper Qualities
Scalpers are disciplined soldiers who adhere to their trading system and always follow the trend. Above all, scalping requires a keen eye for detail, an understanding of technical analysis principles, and a strong work ethic.
Due to the fact that entry and exit points appear and vanish in a matter of seconds, traders are frequently reliant on their computers. From this vantage point, scalping is a time-consuming and complex strategy that is best suited to those who can devote their full attention to trading. It cannot be done in addition to a day job.