What Is Scalping Trading?
Scalping is a trading strategy used by traders seeking short-term gains from small price differences. Profits on scalping trades are usually made quickly, as soon as the trade has turned profitable, even if the movement is as little as 1 pip. As a rule, all trading strategies require rigour and discipline, but these qualities double their importance with scalping. Precisely because the price difference between the opening price and the take-profit price is so small, scalpers must remain faithful to their trading system, thus avoiding significant losses.
The purpose of scalping is to place as many short-term winning trades as possible rather than make sizeable profits with one or two long-term trades. Every scalping strategy relies on lower risk exposure, given that the time of active trading is reduced, thus lowering the risk of a contrarian market movement. Additionally, scalping is based on the premise that smaller market moves are easier to capture than larger ones and that smaller moves occur more frequently.
Market Analysis and Scalping
Traders adopting this trading style prefer technical analysis rather than fundamental principles. Scalpers often use advanced charts and indicators to assess an asset’s historical price movement, spot trading events and determine their entry and exit points.
3 Popular Indicators You Can Use With Scalping
- The Stochastic Oscillator
You can use the Stochastic Oscillator to shore up some quick profits. The term “Stochastic” describes the current price level in relation to its most recent range. By comparing a security’s current price to its recent range, the Stochastic aims to provide potential turning points.
Scalpers use this indicator to spot trends in a trending market, mainly where the up- or downtrend is consistent. Prices tend to close near the extreme points of the recent range before a pullback or a reversal occurs, as seen in the example below:
In the above example showing the 3-minute timeframe of WTI oil, we observe that the price is moving upwards, and the lows in the Stochastic (marked by arrows) provide entry points for long trades (the black %K line crosses above the dotted red %D line). In contrast, when the stochastic peaks above 80 or when the crossover appears (when %K crosses below %D), it means that the trade should be exited.
Short positions are ideal in a downward trend, as shown below. This is when traders speak about “selling the rally”, in which case the presence of a bearish crossover in the direction of the trend signals that it’s time to enter a short trade.
- Moving Averages
Another popular indicator among scalpers is represented by Moving Averages (MAs), usually in the form of a short-term one and a longer-period one showing the trend.
For the purpose of this article, we will analyse a 3-minute EURUSD chart, with the short-term 20 and 5-day MAs and the 200-day MA for the longer term.
We observe that the 200-day MA is moving upwards. Therefore, we look for the 5-period MA to cross above the 20-period MA to open positions in the trend’s direction. The arrows on the chart indicate the entry points.
In the contrarian scenario (illustrated below with a chart), the 200-day MA moves lower. We now look for an opportunity to go short, which will present itself when the price crosses below the 5-day MA.
Most importantly, when scalping, you should remember that every trade you place follows the trend, and you shouldn’t seek to capture each and every price swing. As with every other trading strategy, risk management is vital with scalping, preventing substantial losses.
- The Relative Strength Index (RSI)
Lastly, you can use the RSI with scalping to identify your entry points along with the current trend. Let’s look at a couple of examples. When the price rises (as seen in the first chart), with the three MAs pointing higher, dips in the trend are to be bought. Specifically, when the RSI declines to 30 and then moves above this point, it means it is the right time to enter.
In comparison, when the RSI reaches 70 and then starts declining steadily within a downtrend, there’s a chance to “sell the rally”, as seen below.
Scalping vs Day Trading
|Frequent, short-term trades (in and out)||Less frequent and longer-term trades (30 minutes to a whole day)|
|Smaller gains||Greater gains|
|Lower risks||Higher risks|
|Can be used with day trading||May or may not use scalping methods|
|Often uses automated trading systems||Uses either systematic or discretionary trading strategies and tactics|
Top Qualities You Need as a Scalper
Scalpers are disciplined soldiers who always follow the trend and stick to their trading system. But above all, scalping requires a sharp eye for detail, knowledge of technical analysis principles and determination.
As entry and exit points appear and vanish in seconds, sometimes, traders are tied to their computers. From this perspective, scalping is a demanding and complex strategy suitable only for those who can fully dedicate themselves to trading. It can’t be done alongside a day job.