What is Scalping?

Editor
Editor
Jun 13, 2019 · 4 min read

From its earliest days, the cryptocurrency market has been a notoriously volatile place. The price of Bitcoin has risen from mere pennies a coin to thousands of dollars, but that movement has been anything but straight up.

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There have been heart stopping bear markets and wild swings along the way, including some that took the price down by more than 90%.

For many investors, that volatility is a problem, but traders see things another way. For scalpers, the volatility of the cryptocurrency market is a feature, not a bug. For the brave, scalping can be a great way to make money, turning volatility into a path to stable profits.

Understanding Scalping

In the entertainment world, scalping means reselling concert and sports tickets at inflated prices, but this term means something different in the financial arena. In this world, scalping involves monopolizing on minor price changes to create profits, and it is becoming an increasingly popular trading strategy among cryptocurrency investors.

This trading strategy is not for the faint of heart, but it can be an effective way to make money. The typical scalper may place as many as 200 or 300 trades in a single day, banking on small price changes to build large profits over time.

In order to make this seemingly risky strategy work, scalpers make sure they have a strict exit strategy in place. Without this kind of discipline, losses can add up just as quickly, if not faster, than any pending profits.

Scalpers, whether they are working in the stock market or buying and selling cryptocurrencies, take large positions when they buy. By taking these large positions, scalpers can realize large profits even when the price movements are relatively small.

At first blush, scalping may seem like a strange strategy for a volatile market. After all, the price movements of these virtual coins have often been anything but small. Even so, the price movement of leading cryptocurrencies has settled down quite a bit, and this relative price stability makes scalping an increasingly viable trading strategy.

Fast Movements, Big Profits

No matter where they operate, scalpers need to move fast. They may take huge positions in the stock, or cryptocurrency, of their choice, but their holding periods are often measured in mere minutes, or even seconds. In some cases, scalpers may hold their positions for several hours, but that is often considered a long time to hold.

You can think of scalping as an extreme form of day trading, one that requires fast movement, excellent technology and a powerful connection to a trading platform. Scalpers also make full use of their margin power, often leveraging their trades at four to one.

This leveraging strategy, combined with the nimble movements scalpers are able to achieve, can build profits throughout the day. As these small profits add up, the scalper can assess their positions and alter their trading strategies accordingly.

The Use of Charts

The use of charts is widespread in the world of scalping, but the charts are of a very specific type. Scalpers typically use ultra short-term charts, allowing them to take advantage of tiny price changes to build large profits.

Momentum can be everything when it comes to scalping, and scalpers scour the charts they use for clues regarding future price changes. And as cryptocurrency markets stabilize, this unique trading strategy could prove more popular still.

Stable Coins and Scalping

It was not long ago that daily price swings in popular cryptocurrencies were measured in thousands of dollars, but those days are largely passed. After bouncing around for some time, cryptocurrency prices have settled down into a relatively narrow trading range, opening up new possibilities for experienced scalpers and newcomers alike.

Now that the price swings are smaller, scalpers can use their favorite strategy, an equation that involves large positions, small price movements and fast action. But without an exit strategy, it can all break down, and those profits could quickly turn to losses.

A Sound Exit Strategy

Like other day traders, scalpers often fall into dangerous traps, and it is important for new traders to learn from these blunders. Some scalpers overleveraged their positions, others trade react too slowly, and others fail to set stop losses.

A sound exit strategy can help scalpers steer clear of these pitfalls. Scalpers must be certain of their decisions, but they also need the flexibility to move fast when market conditions change. Setting a mental stop loss can protect scalpers when things change unexpectedly, protecting profits and creating a positive cycle.

Scalping has long been used by day traders in the stock market, and now cryptocurrency traders are utilizing the same strategies. As once volatile cryptocurrencies turn into more stable coins, this strategy of booking large profits through small price movements should become more viable, allowing brave investors the chance to earn even more money.

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