Embarking on the exciting journey of active trading is akin to navigating a bustling marketplace. For those eager to delve into one of the most dynamic trading forms – scalping, it is important to explore the different popular scalping strategies. Much as adept bargain hunters swiftly seize fleeting opportunities in a crowded market, scalping involves executing rapid trading strategies to profit from very short-term market fluctuations.
Before delving into the top scalping trading strategies, let's revisit the definition of scalping, examine its advantages and disadvantages, and identify the types of traders for whom it is most suitable.
A simple definition of scalping
Scalping, as a trading strategy, aims to leverage minor price fluctuations in a financial asset, with traders holding positions for short durations, typically ranging from a few seconds to a few minutes. The fundamental idea behind this strategy is the conviction that extracting profits from minor price movements is more feasible than navigating larger market shifts or overarching trends.
What are the advantages of using scalping in your trading?
- Best way to make quick profits
- Only method to make money with extremely small price changes, regardless of the direction of the underlying asset
- Ideal trading style to get instant results (whether you make or lose money)
- Most exhilarating and stimulating form of trading
- No big planning or researching to do in advance
- Doesn't heavily rely on identifying and following long-term market trends, which means that it can take advantage of all market conditions, including directionless markets.
- Short market exposure means less risk to surprise
- No overnight risk
- Scalping usually uses derivative products to profit from leveraged and margin trading
- Doesn’t require a large sum of money to start trading
- Can be used on various financial instruments and markets
What are the limits and risks of scalping?
- Because of the high leverage often associated with scalping, it is a very risky strategy
- Most traders use scalping but lose money because they lack discipline, commitment and a trading plan
- Being right about the direction of a financial asset isn’t enough to make money with scalping, as you also need to be right about the timing
- The risk of slippage can influence your financial results
- Depending on your broker’s fee structure, scalping can be costly because you accumulate a large number of trades in your trading sessions
- The scalping trading style is not available with every broker
- Scalping requires an extremely fast quality order execution policy with reliable liquidity venues, as well as a reliable and powerful Internet connection
- As an extremely energy and concentration consuming trading style, scalping is a very stressful type of trading.
Who should get involved in scalping and who should avoid?
Scalping is tailored for individuals seeking to profit from extremely short-term price movements and achieve rapid gains. Therefore, it is not suitable for those with a long-term investment mindset and financial goals.
This trading style demands commitment, discipline, and focus, posing challenges for traders with other commitments or limited time for trading. Scalpers also need to make rapid decisions in real-time, requiring a quick thought process and the ability to act swiftly.
Given the high leverage and fast-paced nature of scalping, individuals with a higher risk tolerance and the ability to maintain composure under pressure are more suitable. Those with a solid understanding of market dynamics, technical analysis, and risk management are better equipped to navigate the challenges of scalping.
4 most popular scalping strategies
1# Using supports and resistances levels
Most scalpers use technical analysis techniques to pinpoint important short-term support and resistance levels on the charts of the financial assets you trade. These levels carry significant importance as they typically align with historical price points that have previously been tested several times by market participants.
A support level represents a price at which an asset has historically halted its decline, while a resistance level indicates a point where the asset has tended to stop rising.
To delve deeper, support levels act as psychological barriers where buying interest historically emerges, preventing the price from falling further. Traders often perceive these levels as attractive entry points.
On the flip side, resistance levels symbolize psychological thresholds where selling interest historically surfaces, hindering the asset's upward movement. These levels are viewed as potential selling opportunities to close your positions, unless you’re using short-selling in your trading through financial products like CFDs (Contracts For Difference).
Short-selling is a financial strategy where traders sell an asset they don't own, anticipating a decline in its price. The goal is to profit from the expected decrease by borrowing the asset from a broker and selling it in the market. The trader later repurchases the asset at a lower price by giving it back to the broker, securing a profit.
Short-term traders engaged in scalping may focus on immediate price action and thus consider short-term support and resistance levels, usually visible on a 1-minute or 5-minute chart. You also need to remember that supports and resistances may change rapidly in fast-paced markets, so you need to continuously reassess and update your levels based on real-time price movements.
Integrating various timeframes could provide you with a more comprehensive understanding of potential price barriers and enhances your decision-making accuracy in dynamic market conditions.
2# Using the economic calendar to trade when news are published
News trading also stands out as a popular scalping strategy, involving the strategic use of the economic calendar to pinpoint instances of important news releases that may lead to heightened market volatility.
Aiming to profit from short-term market fluctuations driven by the immediate impact of significant news events requires a combination of thorough preparation, quick decision-making, and effective risk management to capitalize on price fluctuations while mitigating potential downsides.
Continuous monitoring of economic calendars, understanding the specific dynamics of chosen financial instruments, and adapting to changing market conditions are essential elements for success in news trading.
The impact of economic events on the financial markets varies based on the macro-economic landscape, central bank policies, and the specific financial instruments under consideration. Currently, major market-moving events include central banks' announcements, the Non-Farm Payrolls (NFP) report, and key indicators such as growth, employment, and inflation figures.
To execute a news trading strategy successfully, you should therefore stay well-informed about scheduled economic announcements and have an understanding of the potential impact of central bank decisions and economic indicators on the markets they are focusing on.
Changes in interest rates and shifts in monetary policy, or unexpected results in economic data can trigger significant price movements depending on how surprised the market is, but the reaction isn’t always the one we expect - remember that sometimes bad news for the economy can be good news for investors and vice-versa.
The most common goal in news trading is to strategically enter and exit very short-term positions, leveraging the anticipated market reactions to news releases. But traders may adopt different approaches, such as entering the market slightly before a news release to capitalize on the initial reaction.
However, this approach carries inherent risks, as predicting market movements with certainty is challenging. Alternatively, some traders prefer to wait until after the news release to navigate the erratic movements that often follow. The key is to align the trading approach with one's risk tolerance, market knowledge, and preferred style.
3# Using the Bollinger Bands indicator
Bollinger Bands are a popular tool in technical analysis that consist of a middle band (usually a simple moving average) and two outer bands that reflect the volatility of a financial instrument. The distance between the outer bands expands and contracts based on market volatility, with widening during higher volatility periods and contraction during lower volatility.
Traders also use Bollinger Bands to identify potential overbought or oversold conditions and locate entry and exit points in the market. When prices touch or surpass the upper band, it may indicate overbought conditions, signaling a potential reversal or pullback. Conversely, prices touching or falling below the lower band may suggest oversold conditions.
In the realm of scalping, the selection of parameters for Bollinger Bands depends on the trader's preferences and the characteristics of the specific financial instrument. This involves adjusting the number of periods used to calculate the moving average (middle band) and standard deviation.
While a standard period might be 20, scalpers often experiment with shorter periods like 10 for quicker responses to price changes. Additionally, the standard deviation, typically set at 2, can be reduced for a more sensitive indicator in fast-paced scalping.
However, you should note that lower Bollinger Band settings generate more trading signals but also pose a higher risk of false signals due to frequent price movements beyond the bands. To better read the markets with the Bollinger Band indicator, try to adjust the setting of the technical indicator, depending on the sensitivity of the asset you trade and the timeframe you use.
4# Using a combination of several moving averages
Many traders incorporate moving averages into their trading strategies as a means of gauging the prevailing trend in a financial instrument. The rationale behind using moving averages lies in their ability to smoothen price data, offering a picture of the underlying trend by mitigating market noise and short-term fluctuations.
But when applied to short-term charts, such as 1 or 2-minute intervals, in conjunction with other moving averages, these indicators transform into valuable tools for discerning potential entry and exit points in the market. The synergy of multiple moving averages on short-term charts can provide clues about when to initiate or close trading positions.
Of course, the selection of appropriate parameters for moving averages will play a crucial role in their effectiveness. For example, opting for a shorter period, like 10, endows the moving average with a heightened responsiveness to immediate market shifts. Many traders use a combination of a 5-8-13 simple moving average combination with bullish and bearish crossovers providing buying and selling signals.
Best practices for successful scalping
- Be sure scalping is the right strategy for you
- Avoid overtrading
- Be sure not to be addicted to active trading
- Always remain calm
- Control your emotions
- Implement proper risk management strategies
- Always follow your trading plan
- Avoid over-leveraging
- Do not ignore broader market conditions and trends
- Favor liquid markets to profit from better trading conditions
- Do not rely solely on technical analysis, also take into account fundamental aspects and follow the economic calendar (especially when taking advantage of news trading)
- Identify the most favorable hours based on market volatility and specific characteristics of the markets you focus on
- Do not ignore trading costs and associated costs
- Always choose a competitive regulated broker with fast execution
- Do not underestimate technology issues that can result in missed opportunities, or worse, in losses
- Keep your scalping sessions relatively short to avoid fatigue and keep 100% focused
- Stay committed to always learn new techniques or new things about trading
- Review and refine your strategy from time to time
- Start with a demo account
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