Scalping is one of the most popular types of trading which is characterized by the need for speed and adrenaline rush. It is not a long-term hold type of trading but rather a fast entry and exit of positions with the view of earning a small profit. While some traders hold their stocks or currencies for days, scalpers buy and sell within a few minutes or even seconds!
This trading method is especially suitable for those who appreciate activity and are ready to monitor the market movements frequently. However, it is not as glamorous as it sounds and has its own set of challenges. As with any venture, there is a risk involved in scalping and it does not come easily to everyone. If you thrive on the adrenaline rush and are good at making quick decisions, then scalping might suit you.
In this article, the author defines scalping, explains how it works, and provides some basic guidelines for those who are interested in learning more about the practice. Let’s dive in!
What is Scalping in Trading?
Scalping is a form of trading where you buy and sell security with the view of making small profits from each trade. The concept is rather basic: one buys an instrument at a certain price and then sells it at a higher price. Rather than waiting for the big moves on the market, scalpers try to catch the small gains.
For instance, if you purchase a stock at $100 and then sell it at $105 within a minute, you have made a profit of $5. Now if you are able to repeat this process in a single day, it will come to a significant amount! Scalping is most effective in the active markets. This is because there are many players in the market and hence there is a high possibility of entering and exiting the market quickly.
Markets such as forex, stocks, and even cryptocurrencies are suitable for scalping. But what comes with scalping is the need to be alert and agile. It is not for the weak-hearted. If you are just starting out in trading it is advisable to first practice using a demo account without using real money.
Key Features of Scalping
Some aspects of the scalping business are distinct and play a significant role in the overall process.
Here’s a breakdown of what you need to know about this particular trading style.
1. Timeframes: Scalping is done in the shortest time intervals. It’s a common practice among scalpers to use 1-minute – 5-minute charts to make quick decisions. They do not sit for hours or days like the other traders; they work fast to capture the KTP in the form of small movements of prices.
2. High Liquidity: Scalping is most effective with the most liquid markets. Liquidity refers to the situation where there are a large number of buyers and sellers. This makes it easier for the market to allow the entrance and exit of trades with minimal changes in prices. The Foreign exchange and large-cap equities are especially suitable for scalping since these are highly liquid markets.
3. Tools and Indicators: Scalpers Moving depend averages, on RSI instruments also and known as Relative strength index and Bollinger bands are some of the tools that are used by the traders to identify trends and opportunities. These tools are helpful and they also help the scalpers to trade faster and effectively.
4. Focus and Speed: Scalping requires concentration and the ability to work at speeds that are required in this trade. They have to keep their eyes on the screen and hit the buttons to earn their money. A small time loss of a few seconds can be very significant in this type of trading.
It’s not just about entering and exiting trades quickly; it’s also about being ready at all times and having alertness. In the right hands, it can be a thrilling way to trade, as long as one has the appropriate tools and strategy.
Top 6 Scalping Strategies for Beginners and Pros
1. Moving Average Crossover Strategy
Moving averages are widely used by scalpers to identify trends and potential entry points.
- Setup: Use two EMAs—one short-term (e.g., 10-period) and one long-term (e.g., 50-period).
- Entry Signal: Enter a buy trade when the short-term EMA crosses above the long-term EMA. Enter a sell trade when the short-term EMA crosses below the long-term EMA.
- Exit Strategy: Close the trade when the opposite crossover occurs.
2. Stochastic Oscillator Strategy
The stochastic oscillator helps scalpers identify momentum and market conditions that are overbought or oversold.
- Setup: Use default settings (14, 3, 3) for the stochastic oscillator.
- Entry Signal:
- Buy when the %K line crosses above the %D line in the oversold region (below 20).
- Sell when the %K line crosses below the %D line in the overbought region (above 80).
- Exit Strategy: Exit when the oscillator lines cross back, signaling a change in momentum.
3. Bollinger Bands Strategy
Bollinger Bands measure market volatility and help scalpers identify entry points based on price extremes.
- Setup: Apply Bollinger Bands with a 20-period setting.
- Entry Signal: Buy when the price touches the lower band in an uptrend or sell when it touches the upper band in a downtrend.
- Exit Strategy: Exit at the midpoint of the bands or when a reversal occurs.
4. Parabolic SAR Strategy
The Parabolic Stop and Reverse (SAR) indicator is effective for spotting trend direction and reversals.
- Setup: Use the Parabolic SAR with default settings.
- Entry Signal:
- Buy when the SAR dots appear below the price.
- Sell when the SAR dots appear above the price.
- Exit Strategy: Close the trade when the dots reverse position.
5. 1-Minute Scalping Strategy
This strategy is fast-paced and perfect for traders who enjoy quick action. Here’s how you can use it:
- Set Up Your Chart: Choose a 1-minute chart for the market you want to trade (e.g., EUR/USD or a stock).
- Add Indicators: Use a Moving Average (MA) indicator. A 20-period MA works well for spotting short-term trends.
- Watch for Crosses: When the price moves above the MA line, it’s a buy signal. When it dips below, it’s time to sell.
- Set Stop-Loss Orders: Place a stop-loss order slightly below your entry price to limit losses.
6. RSI Scalping Strategy
The RSI helps scalpers spot overbought and oversold conditions. Here’s how to use it:
- Add the RSI Indicator: Set the RSI to a 14-period for short-term analysis.
- Spot Overbought or Oversold Levels:
- RSI above 70 = overbought. Look for a selling opportunity.
- RSI below 30 = oversold. Look for a buying opportunity.
- Confirm with Price Action: Don’t rely on RSI alone. Check if the price is showing signs of reversal.
- Set Tight Stop-Losses: Always limit your risk by setting stop-loss orders.
Essential Tools for Scalping Success
Scalping relies heavily on the use of technical tools and market knowledge to execute trades effectively. Below are the key tools every scalper should master:
1. Trading Platform
Choose a platform with:
- Low-latency execution to ensure trades are executed without delay.
- Advanced charting tools with real-time data.
- Integration with indicators and Expert Advisors (EAs) for automated trading.
2. Technical Indicators
While scalpers can use a variety of indicators, the most effective ones for short-term trading include:
- Moving Averages (MAs): To identify trends and potential reversal points.
- Stochastic Oscillator: To detect overbought and oversold conditions.
- Bollinger Bands: To gauge volatility and predict price reversals.
- Parabolic SAR: To determine trend direction and entry/exit points.
3. Economic Calendar
Economic events like interest rate decisions or employment reports can cause sudden price movements. Scalpers must stay updated on these events to avoid entering trades during highly volatile periods.
Conclusion
Scalping is a strategy that is based on entering and exiting positions quickly with the aim of capturing small gains. This trading style is suitable for people who don’t want to hold their positions for long periods and prefer making numerous trades in a day. To be successful at scalping, one needs to have discipline, attention to detail and good risk management skills. It is possible to make it a profitable strategy for trading if you equip yourself with the right tools, a good strategy and time to practice. First, one has to begin with small amounts of money, then practice using a demo account and then work on improving one’s strategy in order to implement this form of trading.