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Trading Strategy 2 – Scalping Trading
What is Scalping Trading?
Scalping trading, also known as scalping, is a popular trading strategy that is commonly used alongside leverage trading in the financial derivatives markets like forex, gold, cruel oil and indices. It’s characterized by relatively short time periods between the opening and closing of a trade. To simply put, scalping means to “scalp” lots of small profits from a huge number of trades over short periods of time throughout the day.
Scalping is an intraday trading style with the shortest period of holding time. The key to scalping for large gains focuses on obtaining larger position sizes for smaller profits in the shortest period of holding time (from several seconds to several minutes). Scalping aims to rake in small profits from many trades within a trading day to make an overall profit. As scalping is a kind of intraday trading strategy, scalping positions will be closed ahead of the closing of a trading day.
The Theory Behind Scalping
Traders who adopt a scalping trading style are called scalpers. Scalpers believe that it's less risky to make stable profits from small moves in prices than to take the risk on large price moves. As the market sees lower risks when it’s moving in a narrow range, scalpers can quickly enter and exit the market in the ideal range many times. By gaining several points of profits from each small trade, scalpers will maximize their profits in a short period of time. Therefore, scalpers can perform hundreds of trades within a trading day to collect many small gains. Their goal is to make enough of these small trades to ensure their profits are always greater than their losses (transaction costs included), thus adding up to an overall profit.
Characteristics of Scalping:
1. Ultra-short period of holding time: Scalpers are usually only held onto for a few seconds to a few minutes at the most.
2. High-frequency trading: Scalpers can execute dozens or even hundreds of trades within a trading day.
3. Small profits from a single trade: The target profit ranges from several points to dozens of points at a time. For raking in more profits, scalpers usually make small moves add up to profits through a large volume of trades executed.
4. More trading opportunities: Scalpers always have opportunities to trade, regardless of whether the market is moving in a trend or in a range.
5. A higher chance to make wins: With concentration on small fluctuations, scalpers generally leverage technical analysis tools to help judge the market trends, so they enjoy a higher chance to make profitable trades.
Scalping vs. Intraday Trading
In essence, scalping is an ultra-short-term intraday trading style. In terms of short-term trading, scalping and intraday trading share the same characteristics of short cycles of holding time, high-frequency trading, etc. However, they are different in specifics as shown below:
|Holding time||Several seconds to several minutes||Several minutes to several hours|
|Profits from each trade||Small||Higher|
|Trading frequency||High, from dozens to hundreds of times||Relatively low, from several to dozens of times|
Scalping Trading Strategies and Skills
In general, some technical analysis tools are required for scalping, helping assist traders in judging the short-term market trends. The technical analysis tools commonly used to assist scalpers include: one-minute and five-minutes candlestick charts, Relative Strength Index (RSI), Moving Average Convergence and Divergence (MACD), moving average (MA) and Bollinger Bands (BOLL), etc. Take “touch scalping”, a commonly used scalping strategy as an example, the theory of the trading style is that the market will always touch the support and resistance levels in a certain cycle before a breakout, i.e., the market trend of touching the upper or lower key mark is determinate before a breakout, so scalping can be used together with technical analysis for successful trading in a particular cycle no matter what direction the market is heading.
In the traditional forex market, the mainstream scalping trading strategies fall into two categories:
1) Quickly enter and exit the market to make profits by leveraging a high profit margin. Trades need to make judgements on the market price trends, as well as the support and resistance levels.
2) Scalp from quote differences among trading platforms. Due to the differences in the source of quotes, server speed, network and other aspects, platforms are out of sync in making quotes. Speculators can use the platform with fast quotes as a reference and operate on the platform with slow quotes. Because they have grasped the short-term trend in advance, the chance to making wins from scalping is extremely high. However, as trading platforms improve their operating abilities and strengthen the software defense capabilities, fewer traders have used scalping through quote differences among trading platforms.
Notes on Scalping
1. As scalping trading is fast-paced and requires solid know-how and experience, scalpers need to make quick decisions in seconds. Therefore, scalping requires intense focus and quick thinking to be successful.
2. Traders need to spend hours of undivided attention to their trading. Although the short period of holding time facilitates scalpers to trade in their leisure time, they still prefer to spend lots of time and focus on their trading to secure higher profits. The key to scalping is turning small gains into overall profits. If the number of trades is too small or there are losses, the profits can hardly cover the transaction costs.
3. Compared with algorithmic trading, manual operations carry risks. With the features of short-term and high-frequency trading, quick thinking, and execution of trades, use of common technical analysis tools, scalping trading is actually more suitable to be executed by automated trading algorithms. For traders operating manually, they need to master technical analysis knowledge and have to deal with relatively low trading efficiency.