Scalping trading strategy: Essential tips and tools

Among the many commonly used trading strategies, scalping trading stands out as a unique and intriguing approach to achieving daily results. Rooted in the pursuit of quick profits from short-term price movements, scalping has gained popularity among traders who thrive in fast-paced environments. If your focus is on daily results, this could be what you are looking for.

Content:

1. What is scalping?
2. Two main types of scalping
3. Key scalping tools
4. 6 Popular scalping strategies
5. 3 techniques with key technical indicators
6. Scalping different markets
7. Elements of success in scalping
8. Advantages and disadvantages of scalping
9. Scalping risk management
10. How to start scalping trading today

What is scalping?

Scalping trading meaning

Scalping is a trading strategy where traders make many small, quick trades to profit from minor price changes. These trades usually last just a few seconds to a few minutes. Unlike day trading, where positions might be held for hours, or swing trading, which involves holding for days or weeks, scalping is about taking advantage of tiny price shifts in a very short time. This makes scalping a fast-paced and intense trading method.

Scalping involves buying and selling assets quickly within minutes or even seconds

Key characteristics of scalping trading

Scalping is defined by short holding periods, a high number of trades, and small profit margins per trade. Scalpers hold positions briefly, often closing them within minutes or seconds. They trade frequently throughout the day to accumulate profits from many small gains. Each trade aims for small profits, but the high volume of trades helps to achieve overall profitability. This strategy requires strict discipline, quick decision-making, and effective management of risk in a fast-moving market.

1 . Short holding periods

Scalping involves holding positions for extremely short durations, often ranging from seconds to minutes. This approach contrasts with traditional investment strategies that emphasize holding assets over longer periods to capture more substantial price trends.

2 . Frequent trading

Scalping traders engage in numerous trades throughout a single trading session. The frequency of trades is a defining characteristic of this strategy, as scalpers seek to accumulate profits through a high turnover of positions.

3 . Small profit targets

The primary objective of a scalping strategy is to capture small price differentials on each trade. The cumulative effect of these incremental gains contributes to the overall profitability of the scalper's trading activities.

Two main types of scalping

Scalping the news and volatility

Scalp trading around important news events, a technique often associated with 'news trading', is a specific form of trading the financial markets. Scalp traders, in contrast to in-depth fundamental analysis that assesses long-term trading opportunities, leverage volatility introduced by breaking news to execute rapid trades. The primary aim of this trading strategy is to capitalize on the immediate movement as the market adjusts to new information.

Consider a scenario where the Non-Farm Payrolls (NFP) report is anticipated to show an addition of 150,000 jobs, but the actual figure reported is 250,000. Scalp traders would swiftly act on such an unexpected result, likely taking a position to buy the dollar. These short positions, while typically brief—lasting from a mere two minutes to up to half an hour—are held just long enough to benefit from the short-lived but intense fluctuations as the financial markets assimilate the data.

Momentum-based scalping

While movements on the very low timeframes like 5M and 15M are much less predictable and appear more erratic than those observed on 4H or 1D charts, suggesting a chaotic nature at times, they are not devoid of patterns. For individuals aiming to secure profitable trades through momentum-based scalping, heavily traded yet relatively more volatile instruments—most notably crude oil—play a pivotal role.

On the five-minute and 15-minute charts of crude oil and similar instruments, traders can discern not only general trends but also very short-term fluctuations that provide a trading opportunity between the highs and lows. Utilizing a strategy effectively to capitalize on these movements, momentum-based scalpers aim to execute multiple trades over a short period, targeting smaller price gains that accumulate. This approach often employs a combination of technical tools, including SMAs, PSAR, and fast stochastics, to pinpoint potential scalp trades' entry and exit points, thereby turning the market's rapid ebb and flow to their advantage.

Key scalping tools 

Technical analysis tools

In scalping trading strategies, the use of technical analysis tools is key, with scalpers relying heavily on charts and indicators that provide real-time market data. This approach helps to make informed decisions quickly during the trading day, as scalp trading often involves rapid entry and exit from positions, capitalizing on small price gaps between the bid price and ask price.

Here are some of the main indicators used in scalp trading:

• Moving average convergence divergence (MACD): This indicator helps to identify momentum and trend changes by comparing two moving averages.
• Relative strength index (RSI): Often used to detect overbought or oversold conditions in the market, signaling potential reversal points.
• Exponential moving average (EMA): Gives more weight to recent price data and is used to identify short-term trend directions and dynamic support and resistance levels.
• Bollinger bands indicator: This indicator consists of a set of three lines that can indicate overbought or oversold conditions in the market.
• Volume weighted average price (VWAP): Gives an average price a security has traded at throughout the day, based on both volume and price. It is particularly important for traders looking to get a true sense of where the majority of volume has transacted.
• Parabolic stop and reverse (SAR): Helps to identify potential reversals in the market price direction of a traded asset.
• Schaff trend cycle (STC): Combines the common concepts of cycles and trends to help identify market reversals and direction.

Automated trading systems

Automated trading, also referred to as algorithmic trading or algo trading, regarding scalping strategies, offers the distinct advantage of speed and precision. This is essential for executing many trades rapidly and efficiently to capitalize on small price shifts. Unlike other trading strategies that aim for large gains through fewer transactions, scalping requires a high frequency of opening and closing trades, which can be more effectively managed by bots capable of analyzing market conditions and reacting instantaneously. Moreover, traders can customize these algorithms to fit their unique scalping approaches, allowing them to place multiple trades across various markets with a consistency and discipline that is challenging to maintain manually.

Broker and platform considerations

Before you start scalping and crafting your trading strategy, remember that choosing a broker with low and stable spreads and low commissions is crucial, as many trades will be made, and costs can quickly add up. It's also important to ensure your broker is reliable, licensed and regulated, and comes with a good reputation. Your broker must also offer fast withdrawals and deposits, alongside a trading platform known for its speedy execution, which is vital for the high-frequency nature of scalping strategies and other similar short-term trading styles.

6 Popular scalping strategies

1. Scalping with moving averages

This strategy involves using moving averages to determine the direction of the market trend and to identify entry and exit points. To execute, a trader might use a short-term moving average (like a 5-period MA) crossing over a longer-term moving average (like a 20-period MA) as a buy or sell signal. See below for a more detailed play-by-play of this strategy.

2. Range trading

Range trading is about identifying consistent high and low price points within which a stock oscillates. To spot these ranges, traders can use tools such as support and resistance levels or Bollinger Bands.

Tools for spotting ranges:

• Support and resistance levels
• Bollinger bands

3. Breakout trading

Breakout trading targets price moves that exceed established ranges or trend lines. Traders wait for the asset to 'break out' from its typical pattern before entering a trade.

Strategies for trading breakouts effectively:

• Set stop-loss orders to minimize potential losses.
• Confirm breakouts with increased volume

4. Momentum trading

Momentum trading focuses on assets that are moving significantly in one direction on high volume. Traders strive to ride the wave of strong price movements and exit before the momentum reverses.

Strategies for trading momentum effectively:

• Identify stocks exhibiting strong momentum using technical indicators.
• Use trailing stop-loss orders to protect gains and manage risks.

5. 1-minute scalping strategy

This strategy is a high-speed trading technique that targets a 1-minute time frame for tiny, quick profits.

Indicators for this strategy include: 

• Stochastic Oscillator for overbought or oversold markets
• RSI Indicator to gauge price movement and speed.

6. 5-minute scalping strategy

Similar to the 1-minute strategy, but with a 5-minute focus, allowing for slightly longer trades. It requires swift action and tight stop losses to secure small gains frequently. Scalping tools such as Bollinger Bands, moving averages, and MACD can help in making informed decisions.

3 techniques with key technical indicators

Scalping relies on technical analysis tools and technical indicators to identify short-term price changes and trends. Traders can use tools such as moving averages, RSI (relative strength index), MACD (moving average convergence divergence), and Fibonacci retracements to make informed decisions. Here’s how a scalping trader might apply these powerhouse trading tools.

Setting up the RSI indicator

The trader sets up their trading platform to display the RSI indicator on their chosen trading chart. The RSI typically uses a 14-period setting (price averaging over 14 trading sessions) as default, which is good for short-term trading in general, but someone following a scalping strategy may prefer a tighter 9-period, which is far more sensitive to recent changes.

RSI ranges from 0 to 100. Traditionally, an RSI value above 70 is considered overbought, suggesting that a bullish price trend may be due for a price pullback or reversal. Conversely, an RSI value below 30 is considered oversold, indicating a potential bounce or upward price movement.

The trader monitors the RSI values on their chosen asset. Let's say they're trading a forex pair. If the RSI crosses above the 70 level, indicating overbought conditions, the trader might consider this a potential signal to enter a short (sell) position, anticipating a reverse or at least a pullback from its recent upward move.

Once scalp traders open a position based on the RSI signal, they might also set a tight profit target, capturing just a few pips. Alternatively, they might set a stop-loss order just above the recent high to protect their position in case the price continues to rise against their trade.

Setting up the MACD indicator

The MACD indicator is used to identify potential trend changes and momentum shifts, and consists of three components:

• The MACD line: the difference between two
• The signal line: a moving average of the MACD line.
• The histogram: the difference between the MACD line and the signal line.

The default settings are usually 12-period and 26-period exponential moving averages (EMA) for the MACD line, and a 9-period EMA for the signal line.

When the MACD line crosses above the signal line, it generates a bullish signal, indicating potential upward momentum. Conversely, a bearish signal is when the MACD line crosses below the signal line, indicating potential downward momentum.

Let's say a scalp trader is monitoring a particular stock. If the MACD line crosses above the signal line and generates a bullish signal the trader — seeking quick entry and exit points — might interpret this as a potential opportunity to enter a long (buy) position, anticipating a short-term upward price movement.

Using Fibonacci retracement levels for scalping

Before using Fibonacci retracements on your trading platform, you must first identify the current trend, and the two significant swing points within that trend. Then you can draw or lay the Fibonacci retracement levels from the starting point to the ending point from high to low or low to high.

The most common levels used are 23.6% (0.236), 38.2% (0.382), 50% (0.5), 61.8% (0.618), and 78.6%(0.786). These levels indicate potential areas of support (in an uptrend) or resistance (in a downtrend) where the price might reverse or bounce.

When the price retraces to one of the Fibonacci levels, it might present an opportunity to enter a trade in the direction of the prevailing trend.

For a long-term trader following an uptrend, if the price retraces to the 61.8% Fibonacci level and shows signs of bouncing, they might consider entering a long (buy) position with the expectation that the price will continue its overall upward movement. Whereas a scalping strategy focuses on smaller price moves and opening a long position when the retracement touches the 38.2% level is more common.

Since scalp trading aims to capture small price movements, the trader might set a tight profit target based on the anticipated bounce from the Fibonacci level. They could also set a stop-loss order just below the Fibonacci level to manage risk.

Traders often look for confluences of Fibonacci levels and other technical factors, such as trendlines, moving averages, or candlestick patterns, to increase the reliability of their signals. Chart patterns such as triangles, flags, and pennants all complement the above tools in helping scalpers predict short-term price changes.

Scalping different markets

Scalping can be applied to various financial markets, including forex, cryptocurrencies, commodities, stocks, and indices, each requiring specific strategies and considerations.

Forex scalping strategy

A forex scalping strategy involves making rapid trades on major currency pairs, aiming to capture small price movements. Forex traders often focus on highly liquid currency pairs like EURUSD and USDJPY, utilizing indicators to identify quick entry and exit points for forex scalping. Is there a best forex scalping strategy? It largely depends on the trader's style and the market conditions.

Crypto scalping strategy

Crypto scalping involves trading digital currencies like Bitcoin and Ethereum on very short timeframes. Scalpers take advantage of the high volatility in the crypto market, using tools like moving averages and RSI to make quick trades. The unpredictable nature of cryptocurrencies makes it essential to stay updated with market news and trends.

Stock scalping strategy

Stock scalping focuses on buying and selling stocks within a short timeframe to gain from small changes in the price. This strategy is popular in highly liquid stocks, allowing traders to enter and exit positions swiftly. Scalping stocks requires a solid understanding of market movements and the use of a reliable platform.

Commodities scalping strategy

Scalping commodities, such as gold and oil, requires understanding their unique market dynamics. Traders use technical analysis and price action to capitalize on short-term price shifts. Given the volatility of commodity prices, effective risk management and quick decision-making are crucial for success.

Indices scalping strategy

Indices scalping involves trading major indices like the S&P 500 or the Dow Jones Industrial Average. Scalpers look for small price fluctuations within the index, using technical analysis indicators to inform their trades. This strategy benefits from the broad market exposure indices provide, reducing the impact of individual stock volatility.

Elements of success in scalping

Self-discipline is more important for scalp traders than for any other type of trader. There’s often little or no time to set stops if you’re scalping, so many scalpers rely on manual closing for many or most of their trades. As you’ve discovered, this means that emotions are a critical factor. Controlling them and minimizing greed are central to any scalper’s success. You must be very strict in cutting losses if you scalp.

Planning is also a crucial factor in a scalper’s success. It’s important to study the economic calendar fairly carefully before ordering each day even if only to avoid trading around unpredictable major releases. Managing capital and avoiding overexposure are key skills required by scalpers. The chaos of low timeframes means that if things go wrong, they usually go wrong extremely quickly.

Advantages and disadvantages of scalping

Scalping is a distinctive trading style utilized in financial markets, where traders aim to snatch small profits through a scalping strategy. By executing multiple trades over a short period, scalpers attempt to accumulate gains that, bit by bit, can add up to a significant amount. This approach contrasts with methods like swing trading, which seeks larger profits over a longer time frame. 

Here are some of the advantages of adopting scalping trading strategies

• Law of large numbers: Scalpers benefit from the frequency of their trading system, as having a multitude of winning trades versus losing ones can display their "edge" more rapidly. This can mean that the impact of individual losses is less pronounced compared to other strategies, such as those applied by swing traders.
• Opportunities in volatility: When markets are volatile, scalpers may find more opportunities to enter and exit trades quickly for profit.
• Active market participation: Scalpers are continually engaged with the market, which can lead to a deeper understanding of market dynamics over time.
• Less market knowledge needed: Scalping can be more accessible for newcomers, as it demands comparatively less background knowledge to get started.
• Low barriers to entry: Scalping's approachability is particularly appealing to retail traders who wish to participate without substantial capital.
• Liquid markets: In highly liquid markets, such as stocks and forex, scalpers can effortlessly enter and exit trades, which is conducive to the scalping method.
• Short-term exposure: By holding positions for minimal durations, scalpers can mitigate the risks associated with trend reversals, potentially limiting losses.

However, scalping isn't without its risks involved, and it requires a well-honed skill set and a strict exit strategy to be successful. Here are some drawbacks to consider:

• Stress and time consumption: Scalpers often face high stress due to the intense focus required for day trading. It also demands a significant amount of time, which can interfere with other life responsibilities.
• Transaction costs: Engaging in multiple trades means that transaction costs can pile up, potentially eating into the small profits scalping strategies aim for.
• Dependence on technology: A scalping strategy relies on a high-speed platform for quick execution of trades. Delays can be detrimental to a scalper's performance, making a reliable system essential for their trading account.
• Leverage risks: While leveraging can amplify gains in scalping, it also has the potential to magnify losses, introducing a higher level of financial risk.
• Profit targets: The marginal profit per trade can make it difficult for traders to meet their financial objectives, as significant earnings require a substantial number of successful trades.
• Risk of significant loss: A solitary, substantial trading loss can obliterate the profits from many successful trades, presenting a considerable financial threat.
• Cryptocurrency volatility: Due to the extreme volatility often found in cryptocurrency markets, cryptocurrency scalping entails a heightened degree of risk.

Scalping risk management

While scalping offers various advantages for those seeking active engagement in financial markets, it also necessitates careful risk management and a strong strategic framework to navigate its inherent challenges.

It’s critical for scalpers to have a robust and efficient trading system, as even a slight delay can turn a potential win into a loss. Additionally, scalpers must be vigilant about the costs associated with their high trade volume, ensuring that their scalping strategy remains profitable after accounting for fees. With Exness’ fast platforms, unique trading tools, protection, and competitive spreads, the risks and costs can be managed more effectively. However, scalpers should still be prepared for the demanding and time-intensive nature of this strategy.

Common mistakes to avoid when scalping

Crafting a successful scalping strategy hinges on recognizing and steering clear of certain pitfalls. In this fast-paced style of trading, where profits are made in the blink of an eye, being aware of common blunders can make the difference between a lucrative day and a disappointing one.

• Overtrading: This mistake can lead to excessive fees and emotional exhaustion, eroding profits. To prevent this, focus on quality rather than quantity, making fewer trades but with higher conviction. Set a trade limit per day to maintain discipline.
• Ignoring market conditions: A successful scalper needs to be highly adaptable, recognizing when market conditions change and adjusting strategies accordingly. Failure to do so can result in misreading buy or sell signals, leading to poor trade decisions. Always stay informed and be ready to pivot your approach.
• Poor risk management: Neglecting proper risk management can quickly wipe out gains from successful trades. It's crucial to set stop-loss orders and only risk a small percentage of your capital on each trade. Consistently applying these rules is the backbone of a resilient scalping strategy.
• Lack of preparation: Scalping demands a high level of skill and knowledge that only comes with continuous learning and practice. Lack of preparation can lead to misguided trades. Invest time in planning, backtesting your strategies, and staying current with market trends to enhance your trading performance.

How to start scalping trading today

Scalping occupies a unique niche in the world of trading, catering to individuals who thrive on quick decision-making and immediate results. While it offers the potential for consistent—albeit small—profits, scalping does bear transaction costs. At the same time, it calls for a game plan, the emotional discipline to follow it through, and lightning-fast reactions during each trade session.

If you are considering this strategy, you must approach it with thorough research, a commitment to skill development, and learning to manage risk. Ultimately, scalping is a dynamic and demanding strategy that requires a blend of technical expertise, mental agility, and a deep understanding of market intricacies. If you are a beginner trader, practicing and mastering your strategies in a risk-free simulated environment, such as a demo account, is recommended before risking real money.