Scalping strategy in the crypto market

In our Sunday reviews, we touch on trading strategies that are used in the cryptocurrency market. Today we analyze the advantages and disadvantages of scalping.

The widespread use of scalping in the stock and Forex markets was also supported in the digital currency market. If a strategy is popular, it means it is profitable. Let's take a closer look at the features of this trading style.

Scalping (English Scalping - cut off the top) is one of the intraday trading strategies that brings profit to the trader when making a large number of short-term transactions, during which the price manages to change in the predicted direction. This profit lies on the “surface” of the overall deep price dynamics. An analogue of the expression “scalping” can be considered the phraseology “skim the cream.”

The features of this strategy are a large number of quick transactions, and for profitable trading the share of successful transactions must be at least 60%. 

Necessary conditions for using scalping:

- high market volatility

- good liquidity of the asset

- low exchange commissions

As you can see, the cryptocurrency market is perfect for using such a strategy, if, of course, the level of commission fees of the trading platform allows traders to use this tool.

It is generally accepted that when scalping a trader does not have time to properly analyze situation, but simply opens a position at the beginning of the impulse and closes it when the price begins to roll back. In other words, “catch the wave.” It is sometimes argued that scalping is suitable for beginners who have little understanding of analytics, but are able to feel the price dynamics. In fact, the ability to “feel the market” comes only with experience and the ability to apply the acquired knowledge in trading.

Among the scalping techniques there is the so-called “trading within the spread”, which allows you to clearly and slightly simplified imagine the analogue of such a technique in real life.

Imagine an “exchanger” that has set fixed rates for the purchase and sale of currencies. And around him are “money changers” who “steal away” the client, offering him a slightly better rate. So, money changers are scalpers who trade inside the spread. 

“Trading inside the spread” is not the only scalping technique.. Scalpers most often use well-proven methods:

- wave analysis;

- technical analysis indicators;

- graphic patterns;

- reading the deal tape and order book;

Sometimes not one technique is chosen, but a mix of methods that are used together. 

Scalping is a high-risk and complex way of making a profit, which requires not only certain knowledge in trading, but also experience, intuition and excellent reaction. Yes, a reaction!

There are scalpers who, when high-speed trading, do not even use the mouse, because it reacts slower than decisions are made. In this case, using a hotkey combination speeds up the process. Fractions of seconds count.

Disadvantages.

Perhaps the most basic disadvantage and significant obstacle to scalping is exchange commissions. Since the number of transactions with this strategy is very large, their profitability significantly depends on the size of the commission. Of course, you can find crypto exchanges with suitable commission levels. But the fact is that on large and reliable exchanges the commissions are quite high. And small, start-up exchanges attract customers with low tariffs. Here you will have to analyze the reliability of such exchanges and compromise with risk management. These are “not trading risks.”

Another disadvantage is the large percentage of unsuccessful transactions. These are typical “trading risks” and they can be resolved by constantly improving the trader’s qualifications. In other words, if you engage in trading not professionally, but in your free time, then such a strategy will require effort to “work on yourself,” not to mention the time that the scalper spends without taking his eyes off the monitor.

Special bot programs will help solve the problem of scalping time. They are capable of generating many short-term profitable trades. But there are pros and cons, which we have already written about in our article “Advantages and disadvantages of trading cryptocurrency using robots”. 

Trading with high-frequency bots helps solve another problem of scalping, which is associated with a high emotional load on the trader.. 

The next disadvantage is the change in market volatility. When the market is in the consolidation stage, scalping makes no sense. The strategy becomes profitable with average volatility, and with high volatility it can be both highly profitable and highly unprofitable.

Waiting for signals to enter the market “with a scalpel in your hands” also takes a lot of time and can last for several days until the market comes out of consolidation.

Advantages.

Despite all the difficulties of using such an instrument, under certain conditions skills, in two hours of trading you can earn the profit that an ordinary trader earns with medium-term investing.

In addition, for beginners, the scalping process serves as an education in the laws of the market and it does not require large investments. It makes it possible to study the wave nature of prices in practice and, like under a microscope, provides the opportunity to observe the process of formation of impulses and rollbacks.