Scalp trading is a popular trading approach predicated on making a large number of trades in order to leverage small price movements to generate consistent returns. Given the large price volatility of cryptocurrencies, scalp trading can provide a lucrative venue to generate profits from short-term price fluctuations.
However, crypto scalping requires extensive trading knowledge and very solid risk management. If not done properly, crypto scalping can lead to large losses as small price moves compounded with trading fees can quickly render trades that would otherwise be profitable into potential money sinks.
- Scalp trading in cryptocurrencies involves making numerous quick trades to capitalize on small price movements, aiming for consistent returns.
- Crypto scalp trading involves quick decision-making and efficient execution, typically within a timeframe of 5 to 30 minutes. It requires constant monitoring of market trends and prices.
- The most popular crypto scalp trading strategies are range trading, arbitrage, bid-ask spread, and price activity. Increasing exposure through borrowed funds, also known as margin trading, is an essential component of all scalping strategies.
- Range trading strategy: Identifying price ranges and trading between support and resistance levels.
- Arbitrage strategy: Exploiting price differences between different markets or pairs.
- Bid-ask spread strategy: Capitalizing on the difference between bid and ask prices.
- Moving average crossover: When the short-term MA crosses above the long-term one, it signals a potential upward trend, and vice versa.
- Price activity strategy: Using short-term price action analysis for scalp trading.
In this article, we are going to explain how crypto scalping works, what are the prerequisites of successful crypto trading, and examine the most popular crypto scalp trading strategies.
What is scalp trading in crypto?
An example of scalp trading positions within a three-hour window.
Cryptocurrency scalping refers to a short-term trading strategy where traders aim to make small profits by taking advantage of short-term price fluctuations in cryptocurrencies. Scalpers typically execute multiple quick trades within a short period, capitalizing on small price movements.
The goal is to accumulate profits by buying at a lower price and selling at a slightly higher price, often within minutes or even seconds. Cryptocurrency scalping requires careful analysis, swift decision-making, and efficient execution to capitalize on small price differentials.
How does crypto scalp trading work?
Scalp trading is a type of trading where people try to make small profits by buying and selling things quickly. In the case of crypto scalp trading, it means buying and selling cryptocurrencies like Bitcoin or Ethereum within a short time, sometimes even a few minutes or seconds.
Generally, the best time frame (the duration between the entry and exit) for scalp trades is between 5 and 30 minutes. There are also the so-called 1 min scalping strategy in crypto and the 5 min scalping strategy in crypto, which basically refer to the duration of the chart used to identify a price trend.
Here’s how a crypto scalp trading scenario might play out in practice:
- You study the prices and charts of cryptocurrencies to understand when they might go up or down in value. This helps you decide when to buy or sell.
- When you see a cryptocurrency that you think will go up in price soon, you quickly buy some of it at a lower price.
- Once you own the cryptocurrency, you wait for the price to go up just a little bit, and then you sell it, making a small profit.
- After selling, you repeat the process by looking for another opportunity to buy low and sell high. This can happen many times throughout the day, allowing you to make lots of trades with small profits.
- It's important to be quick and pay attention to the prices and market trends because they can change fast.
While crypto scalping might sound easy in theory, in practice, it can be very challenging, requiring careful analysis, quick decision-making, and an understanding of the risks involved. If you’ve never scalp traded before, you should seriously consider using a demo account before using real money – most of the best crypto exchanges give you the ability to trade with demo funds as if they were real money.
The 5 best crypto scaling strategies: Use these techniques to generate a profit
To be successful in scalp trading, it's important to have a clear strategy and stick to it. Avoiding impulsive decisions and emotional breakdowns is crucial. Here are five popular scalp trading strategies that can be used by both beginner and experienced crypto traders.
1. Range trading
Range trading is a strategy used in crypto scalp trading where traders identify price ranges or consolidation patterns in the market. When “in a range”, the price of a cryptocurrency tends to fluctuate between defined support and resistance levels. Traders aim to buy at the support level and sell at the resistance level within the range. If you’re an experienced trader, make sure to determine market trends and identify support and resistance areas with trend lines.
For example, you might notice that the price of Bitcoin has been moving between $27,200 and $27,900 for a couple of days. Such a scenario might be a good time to employ the range trading strategy, buying the cryptocurrency when it falls toward the lower bound (the support level) and selling it when it approaches the higher bound (the resistance level). You should repeat the process for as long as the price remains in the price channel you’ve observed.
2. Using arbitrage
An image of Bitcoin trading pairs on Binance. You can observe significant price discrepancies between different pairs.
Arbitrage is one of the most essential scalping strategies. Arbitrage trading refers to the practice of buying a cryptocurrency for a lower price in one market and then selling the same cryptocurrency for a higher price in a different market.
There are two types of arbitrage – geographic arbitrage refers to buying and selling of an asset based on a different geographical location, whereas pairing arbitrage refers to buying and selling of an asset between different pairs (for example, buying BTC with USDT, and then selling it using the BTC/ETH trading pair).
Reacting to arbitrage opportunities has to be swift and decisive and requires a lot of work to monitor prices for all the markets at the same time. With CoinCodex, you can easily check markets for all cryptocurrencies and see real-time prices and trading volume by navigating to the exchange tab (for example, here’s Bitcoin’s markets page).
In addition, you can use advanced tools like arbitrage scanners to monitor crypto markets from the comfort of a unified dashboard that draws data from multiple exchanges at once.
3. Bid-ask spread strategy
The bid-ask spread strategy is another common approach used in scalp trading. It involves taking advantage of the price difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept) in the market.
The aim of the bid-ask spread strategy is to buy a cryptocurrency for as low of a bid price as possible and then sell it for as high of an ask price as possible. The best cryptos for using this strategy are those that have rapidly changing markets, which provide opportunities for scalping.
4. Moving average crossover
The Moving Average Crossover involves the use of two moving averages – a short-term moving average (SMA) and a long-term moving average (LMA). The most common combinations are the 50-day and 200-day moving averages.
The strategy involves looking for instances where the short-term moving average crosses above (bullish crossover) or below (bearish crossover) the long-term moving average. These crossovers are interpreted as signals for potential changes in the trend direction. Here's a more detail explanation of both crossover types:
- Bullish crossover: This occurs when the short-term moving average crosses above the long-term moving average. It is considered a signal that the asset's price may be entering an upward trend, and traders might interpret this as a buying signal.
- Bearish crossover: This happens when the short-term moving average crosses below the long-term moving average. This suggests a potential shift to a downward trend, and traders might see it as a signal to sell or take a short position.
5. Price activity
The price activity method is based on the underlying factors that influence the price of a crypto asset. Contrary to other arbitrage strategies, the price action method is similar to buying cryptos without the intention of scalping. The only difference is the short time period you are focusing on when using price action analysis to scalp trade.
There are many different approaches to identifying price trends. Due to the high-speed nature of scalp trading, technical analysis plays the most important role when identifying investment opportunities suitable for scalping. As there is a significant overlap between scalp trading’s price action strategy and regular investing, you can check our article on how to use technical indicators like RSI and SMA to find bullish cryptos.
The importance and risks of margin trading
Margin trading allows traders to increase their exposure to markets by entering bigger positions with borrowed funds. This can make scalp trading, which by default involves a very small profit of roughly 1.7% on your investment, or $1.7 if you invested $100 in Bitcoin. However, by using margin to use a 5x leverage, that same price move would generate $8.5, the same profit as if Bitcoin’s spot price increased by 8.5%.
Remember that leverage applies both ways – the losses are amplified just as much as potential profits. In addition, using margin incurs additional charges and fees, which can render breakeven trades unprofitable.
Important factors to consider when crypto scalp trading
To properly execute crypto scalp trading, you need to be decisive, have a strong background in trading, and possess strong risk management skills. In addition, you generally need to follow a broad set of guidelines, carry out our various trading strategies, and do your own analysis – this includes:
Market analysis: Analyze various market indicators, such as price charts, volume, and order book depth, to identify short-term price movements and potential opportunities for quick profits.
Setting entry and exit points: Determine specific entry and exit points for their trades based on their analysis. These points are often based on technical indicators, support and resistance levels, or patterns in the price charts.
Quick trade execution: Enter and exit trades swiftly to take advantage of small price differentials. Use limit orders or market orders to execute trades promptly and avoid missing out on potential profit opportunities.
Tight stop losses: To manage risk, set tight stop loss orders. These orders automatically close the trade if the price moves against their position by a predetermined amount, limiting potential losses.
Small profits, large volume: Aim to make small profits on each trade, often just a fraction of a percent, but seek to accumulate profits by executing a high volume of trades throughout the day.
Leverage: Using leverage can multiply the potential returns (and losses), turning small price swings into highly profitable investment opportunities. Keep in mind that the higher the leverage, the bigger the risks.
- Constant monitoring: Closely monitor the market and your positions, looking for quick opportunities to enter or exit trades. Use advanced trading tools, such as real-time price charts and order book data, to make informed decisions.
The bottom line: Scalping crypto can be profitable if you are disciplined and well-versed in crypto trading
Cryptocurrency scalping requires a great deal of trading knowledge, ranging from technical analysis indicators and fundamental factors to trading charts and other advanced tools. If you don’t know how to interpret price activity and identify market trends, then crypto scalping is not for you. You’d be much better off investing in crypto for the long term and reaping the potential profits sometime down the line without the constant stress of having to make quick (and correct) decisions.
If you want to get involved with cryptocurrency markets but don’t know where to start, check our ultimate guide on crypto investing to find the right investing approach for you.