The forex market holds the record as the largest and most liquid market globally. According to a Bank for International Settlements survey, it sees a turnover upwards of $6 trillion every single trading day. Due to this high liquidity, traders can quickly and easily get in and out of positions. They can even do so with minimal slippage costs if they are trading major pairs, which tend to be the most liquid. This has popularized a short-term trading approach called scalping. Nowadays, with crypto adoption going through the roof, it is now possible to apply this popular forex trading technique to these digital assets.
Scalping explained
Scalping refers to a trading approach whereby traders capitalize on small price movements for profit. Usually, they open and close positions over short periods of time, and they do this several times in a single trading day. Typically, these trades may target retracements and other small price movements or take advantage of market inefficiencies. They utilize tight stop losses and close profit targets, which makes this strategy relatively low risk. After a trader has executed several successful scalp trades, they can accumulate a sizable profit over time.
Scalping in forex vs. crypto
In crypto, scalping is best suited when an investor is interested in a particular coin spike, thus giving it high trading volume and high liquidity. Scalp traders in this market will typically look out for short-lived events, such as a news release that causes volatility for a cryptocurrency. In the absence of such events, scalpers may benefit from trading the most popular coins such as Bitcoin, Ethereum, and Binance Coin. These coins have the high trading volumes and liquidity required for scalping.
In forex, scalping is best suited for major pairs. Characteristically, these pairs offer the lowest bid-ask spreads, which is favorable if you’ll be opening multiple trades in a day. They also feature the highest liquidity, which means positions can be entered and exited with ease and at minimum slippage costs.
Technical vs. fundamental analysis: which is better for scalping?
Technical analysis involves analyzing price action data as well as volume data. It aims at predicting price moves based on past patterns of price movement. It also gauges the relationship between the demand and supply of the traded financial asset to predict its future price action better. This way, it helps inform where and when to open and close trades.
In forex, fundamental analysis involves studying a country’s political and economic environment to gain insight into the state of its economy and, consequently, the value of its currency. In crypto, fundamental traders would be looking at news releases impacting their favorite coins, which are likely to affect their market prices.
Due to the short timeframes involved in scalping, technical analysis tends to take precedence over fundamental analysis. This is because fundamental events tend to play out over prolonged periods, rendering them irrelevant over small timeframes. However, some news may cause increased interest in a currency pair or cryptocurrency. Therefore, scalpers need to pay attention to both analysis techniques when trading the markets.
How to profit from scalping
The key to being a good scalper lies within the strategy you employ. You may create a strategy using some of the most common technical indicators such as Moving Averages, RSI, Bollinger Bands, or the Fibonacci retracement tool. Some platforms will also allow you to create your own custom indicators, which you can use to gain an edge over the market.
As aforementioned, scalping typically involves smaller time frames. These may be hourly charts, 30-minute, 15-minute, 5-minute, or even the 1-minute chart. Some scalpers may utilize time frames lower than a minute, but that necessitates the use of trading bots. This is because humans can’t process data in seconds as well as bots can.
However, though this trading technique focuses on lower time frames, it always pays to consider trends manifesting on higher time frames. Such trends can give you a trading bias and tell you when to expect a market correction. Once these are identified, you can then go back to the lower time frame and look for trade setups.
Strategies used in scalping
There are two types of scalpers – discretionary and systematic. Discretionary scalpers are those that trade largely on intuition. Though they may or may not have specific conditions that need to be met before placing a trade, they tend to be less rigid about such rules. Depending on the prevailing market conditions, they make their trading decisions on the fly.
On the other hand, systematic scalpers are more calculated with their trading decisions. They usually have a well-defined strategy, and their trades must satisfy a set of conditions before they can be opened or closed. In algorithmic trading, this is usually the best approach.
There are several strategies that scalp traders may apply in their venture. Let’s look at a couple of them below.
Range trading
This is suitable when the market goes into consolidation, adhering to fixed support and resistance levels. Scalpers may take advantage of such a scenario by buying at support and selling at resistance. However, a stop-loss is necessary when trading such setups to prevent losses in case of a breakout.
Breakouts
When the market breaks through a significant price level, we often can observe an impulse, as stop orders get triggered. Scalpers take advantage of such moves by entering at the breakout and taking profits at first signs of stalling momentum.
The use of leverage
Since scalping aims at small pip movements in profit, scalpers often utilize leverage to amplify their profits. However, this may be risky as any losses would be equally amplified.
Pros and cons of scalping
Pros
- The constant flow of trading opportunities
- It is a relatively low-risk approach
- It is well suited for the use of trading bots
Cons
- It is tedious to execute without EAs
- Trading fees tend to accumulate, which eats into your profits
- You can’t scalp cryptocurrencies or currency pairs with low liquidity levels
Conclusion
Scalping is a trading approach that aims at profiting from small price movements. Scalpers often place several trades in the space of a day, utilizing tight stop-losses and close profit targets. This makes this strategy relatively low-risk. It is best suited for forex pairs and cryptocurrencies that enjoy high liquidity.
