What is Scalping in Trading? How to use Scalping Strategy?

What is the meaning of scalping? Scalping in trading involves entering and exiting trades within seconds to some minutes. It is the adrenaline of financial markets and gives traders the green light to swift moves for quick, fast profits. To succeed in this fast-paced trading arena, effective risk management and a solid entry-exit strategy are essential. But what exactly does this strategy entail? Let’s break it down.

Understanding Scalping Trading

To put it into ordinary words, scalping is the entry and exit of trades within seconds to minutes. Why? It’s done for the purpose of taking advantage of short-term price fluctuations. Scalpers aim for small, consistent profits, where the trades normally last from a few seconds up to some minutes. Performing well in this rapid trading environment takes complete control over risk management and an effective entry and exit plan.

Who is the Scalper Trader?

Scalpers are traders who are in and out of positions throughout the day, as they try to catch minor profits. Since they hold their trades for a very short duration, speed of trades in the financial market becomes essential.

Scalpers need to be truly professional and skilled with quick execution, as scalping may be rather overwhelming. They have several obstacles to overcome, including:

• Aggressive Risk Management: This high frequency of trading forces the scalpers to follow strict risk management if they want to keep themselves profitable even in the high transaction cost scenarios.

• High Frequency Trading Awareness: A scalper should be aware that High Frequency Trading deploys advanced algorithms to execute lots of trade orders in a limited time – something quite impossible for human traders to achieve.

As a rule, only seasoned scalpers can make profits because the reason behind it is that the strategy requires a lot of experience and skills.

How does scalping work?

The core of scalp trading lies in making money out of small changes in prices. Here it goes: It starts with the selection of markets, where the scalpers will focus on highly liquid and volatile markets. Liquidity allows for speedy entry and exit, while volatility provides the needed price movements that capture the small profits.

• Leverage: Most scalpers use leverage to increase their profit margins. With a loan of money, they increase the size of their trades so that even the slightest fluctuations may bring in profits. Their leverage is taken as risks, so it should be used with caution.
• Technical Analysis: Scalpers depend on technical indicators for points of entry and exit. Some basic indicators include: SMA – Simple Moving Average; gives an idea about the trend.

RSI – Relative Strength Index; this shows overbought and oversold conditions of an asset.

VWAP – It gives the average price throughout the day, weighted for volume.

Bollinger Bands – These indicate volatility and possible reversal points.

• Speed of Execution: In scalping, seconds count. Many traders use advanced platforms that guarantee speed of execution to get in and lock in their trades as fast as possible.
• Risk Management: Because scalpers are so active in their buying and selling, tight risk management is a must. With a large volume of trades, tight stop-loss orders become important to limit potential losses and maintain capital.
• Low Profits, High Frequency: Scalpers focus on a great number of trades with small profits that add up to significant gains over time.
• Focus and Discipline: Much focus and a lot of mental stamina are invested in scalping. You have always got to be on your toes, eyes glued to the screen, watching the price movements and acting swiftly to changes.
• Scalability: The scalability of a scalper needs to be adaptive-to change strategies as the market conditions change, news comes, and sentiment shifts.

Analyzing the Market for Scalping

It goes without saying that before any serious scalping can be initiated, heavy market analysis is required. Here is how a scalper would prepare:

• Technical Indicators: The use of major indicators gives a view of the best trading opportunities.
• News and Events: Know when economic reports, earnings releases, geopolitical events take place and could affect market sentiment, thus price movements.
• Order Flow Analysis: Knowing the dynamics of supply and demand helps to have a better idea about the probable direction of prices.

How to Start Scalping

At this point that you are willing or ready to start scalp trading, here is the essential process you have to undertake:

• Learn to Trade: Understand various instruments or products like CFD and options.
• Learn About Financial Markets: Choose a market to trade: shares, forex, futures, and many more.
• Trading Platform: Either open an account with any reliable brokerage firm or log in a trading platform.
• Decide to buy or sell: Use indicators and drawing tools to decide on the market going up or down, then take that position.
• Manage Your Trade Risk: Set “Stop and loss” orders to automate your entry and exit levels so your profit and risk targets are guaranteed.
• Monitor and Close Your Trade: Listen to news events that may influence your trade. Close the position if it has reached your desired profit level or when it has reached your allowed risk.

Types of Scalping Strategies

Generally, there are three types of essential strategies deployed by the scalper:

• High-Volume Trading: Generally, a scalper buys substantial amounts in anticipation of gaining a reasonable profit from minor movements in price; this transaction requires sufficient liquidity for an efficient entry and exit.
• Breakout trading is one approach in which the entries are placed right at the beginning of the breakout to surge along with the market move until the first exit signal. Approachable and widely used across trading styles, breakout trading is such an approach.
• Scalping the Spread: Sometimes known as market making, this strategy attempts to directly draw profits from the spread by buying and selling an asset at the same time. It relies heavily on a very stable, deep liquidity market but is somewhat complicated since the trader is in competition with bigger institutions.

Most of the traditional trading methods have long positions, but going short provides room for opportunities in most cases, especially when using market-making techniques.

Scalping Trading vs. Day Trading

While both scalping and day trading involve buying and selling in the same trading day, they differ significantly:

Scalping Trading vs. Swing Trading 

While in swing trading one holds positions for several days or even weeks, in scalping trading as we have mentioned above, numerous trades are done within seconds or minutes. Scalpers get frequent trades with quick wins, whereas swing traders get bigger profits from fewer and more calculated trades.

• Timing: Scalping involves very short-term moves, whereas swing trading is trading at short length and thus takes a few days or weeks.
• Trade Frequency: Scalping involves dozens or hundreds of trades a day, while for swing trading, it requires fewer trades with bigger outcomes.
• Stress Levels: Scalping is intense because it takes a lot of attention. On the other hand, swing trading is not that stressful since it allows the trader more time to decide.

Advantages of Scalp Trading

• Quick Profits: Scalping allows traders to take advantage of tiny price movements, which can generate quick profits in the shortest possible time.
• Less Market Risk: As these trades just last for a few minutes, the risk due to unfavorable market movements is reduced.
• Consistent Profits: If trading is executed correctly, a good number of trades can result in steady and consistent returns.
• High Liquidity: Scalpers enter into high-liquidity markets, hence are able to immediately get in and out of positions.
• Flexibility: Traders can close more trades in a day while taking advantage of changing market conditions.

Disadvantage of Scalping

• Higher Transaction Costs: The large number of trades done means higher transaction costs in the form of commissions and spreads, and may eat into overall gains.
• High-Stress Environment: Scalping is very demanding because it is very fast-paced and may be too stressful for traders mentally and emotionally.
• Skill Demanded: Scalping requires ample skill, speed in decision-making, and a lot of knowledge related to the market.
• Smaller Profit Potential: Profits are usually small on every trade; therefore, it is necessary to trade in big numbers to generate a reasonable amount of profit.
• Time Consumption: It requires constant observation of the market and may involve your full time.

Train Your Scalping Strategy with BullRush

If you want to improve your scalping skills in a competitive environment, BullRush, a gamified trading platform, is the perfect place. The Trading Challenges and Competitions within BullRush are made to develop your trading skills and strategies. Either it is the strategies practice, prizes that can be won, or the challenge itself, in BullRush growth is fostered, and that with discipline.

Want to train your trading muscles? Get ready for the BullRush Challenge Arena and experience the thrill of competing in trading! Trade, Compete, Win real prizes with BullRush today!