Crypto Scalping and How It Works
Of CNBCTV18.com IST (published)
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The world of cryptocurrency is slowly and steadily adopting more aspects of money markets and traditional stocks. Similar to the evolution of simply buying and selling assets for profit to the future of futures and day trading, crypto has also become a playground for traders.
The world of cryptocurrency is slowly and steadily adopting more aspects of money markets and traditional stocks. Similar to the evolution of simply buying and selling assets for profit to the future of futures and day trading, crypto has also become a playground for traders.
The options are many, and the opportunities to make money come and go quickly. In this article, we discover and explain scalping, a short-term trading strategy borrowed from the stock market that helps crypto traders make quick profits.
What is cryptoscaling?
Crypto scalping is a fast-paced trading strategy that depends on small price movements to make money. Instead of focusing on long-term positions and big profits, scalp traders rely on short-term trades that book small gains from small price changes, over and over again. Thanks to the high frequency of trades, these small profits can add up to significant gains over time.
Since cryptocurrencies are highly volatile, there are many price movements daily. Traders use technical indicators to place extremely short-term trades to profit quickly. The time frame for these trades can be hours, minutes or even less. Therefore, compared to day traders, who usually make around ten trades a month, scalp traders can make upwards of 100 trades in the same period.
Generally speaking, scalpers usually target coins with increased interest due to some news or important events. These coins tend to have high volume and good liquidity for a while. This is when scalpers can step in and generate profits from the increased volatility.
Types of Scalp Trade
Range trade
There are many different types of scalping. Perhaps the most popular is range trading. When the price of a coin fluctuates between consistent high and low points, it is known to move within a “range”.
The high point of the range is known as a resistance level, and the low point is called a support level. Scalp traders can enter positions within these support and resistance levels to book quick profits.
For example, they can buy at a support level and sell at a resistance level. They can also enter short trades at resistance levels and close their positions at support levels. This should result in quick profits, which can be multiplied by opening multiple trades in a day.
Bid-ask strategy
Scalpers can also use the bid-ask spread to make profitable trades. The bid-ask spread is the difference between the ask price and the bid price for an asset in the market. The difference between these prices can sometimes be quite high, allowing scalpers to book quick profits.
This strategy usually uses the use of robots. Manual traders are not as reliable as machines when it comes to effectively identifying minor price differences in the market. Therefore, trading robots are often used to execute this strategy, and those who want to use this strategy manually have to compete with these fast and highly efficient algorithms; a difficult task to say the least.
Another variant of the bid-ask strategy is arbitrage trading. Here, traders take advantage of the price difference between exchanges and trading platforms to book profits. And again, this is most effectively done by trading robots that can execute the positions quickly and book profits before prices fluctuate.
Price trading and margin trading
Some traders use technical indicators to predict potential price movements and execute scalp trades. If they are confident in their predictions, they can also use margin funds to increase position size and maximize gains.
Margin trading refers to using a third party’s funds instead of your own to increase potential gains. However, this is a risky strategy as it is difficult to predict crypto price movements and borrowing funds to trade is always risky. Scalp traders using this technique usually set very tight stop losses to limit potential losses.
Important factors to consider when scalping
The trading platform
The platform you use for crypto scalping needs to be one that doesn’t have a reputation for crashing when trading volumes are high. If you enter a trade and the platform goes down for a few minutes, it could be the difference between profit and loss. So you need a proven platform that won’t let you down in crunch moments.
The technical
When you invest for the long term, you trust the fundamentals. But when you cryptoscalp, you rely almost exclusively on the technical. The market sentiment, minute by minute, determines what will become of your trades, and you must master how to understand it.
One should look at all technical indicators to predict price movements as accurately as possible. Trading volume, price action, support and resistance levels, chart patterns, candlesticks, etc., are all commonly used to identify trade setups.
The data
The charts, numbers and figures you see when you crypto scalp are very different from when you are just investing. The data must be transparent, up-to-date and alive for you to make decisions based on it. So your computing platform needs to be as reliable as possible to get the most out of scalping crypto.
Precautions to take while scalping
Scalping is an everyday source of income for many. However, it is also a risky strategy and requires some important safeguards, especially if you are new to scalp trading.
Conclusion
Crypto scalping can seem like a viable trading strategy that can result in decent profits over time. However, it is also fraught with risk and requires a lot of research to implement. Also, the crypto market is highly volatile and you should only trade/invest how much you can afford to lose completely.
