Scalp Trading: A Comprehensive Overview

Scalp Trading: A Comprehensive Overview

Scalping is a trading method that comprises a large number of open deals with lower gains. Scalpers feel that it is simpler to profit from smaller market movements.  A disciplined exit strategy can turn many little earnings into enormous returns. This strategy contrasts with long-term trading, which is more fundamentally based.

Scalping trading strategies and techniques rely on technical indicators and chart pattern identification to locate profit opportunities.

The Process of Scalp Trading 

Scalping demands a trader to keep a careful eye on the trading station. This is because scalping requires a trader to open and close a huge number of positions usually in a short period of time to be lucrative.

Charting time periods is also important for understanding when to start and exit transactions. Most scalping techniques are designed to detect extreme price movements. Once discovered, scalpers will take a position in the same or opposite direction.

To make scalping work, this trader often opens at least five trades every day. Finally, scalpers will want to open numerous trades each day and rely on large position sizes to increase profits. This is due to traders’ limited ability to capture tiny market movements.

Scalping Trading Techniques

Now that we know what scalping is, let’s look at several scalping tactics you can utilize daily. Scalpers often use technical analysis tools to find prospective trading opportunities.

Some of the most common technical indicator tools utilized by expert scalpers are:

Parabolic SAR Indicator
The Parabolic Stop and Reverse (SAR), also known as Parabolic SAR, is an excellent technical indicator for scalping in these situations. This scalp trading approach will generate numerous contrarian trading chances throughout the day. 

Overall, the Parabolic SAR flashes “buy” indications when it is visible beneath market values. In contrast, “sell” signals appear when the indicator swings above market prices.

The Parabolic SAR is particularly fascinating because it provides its own indications for closing each position. Essentially, long positions can be held until the indication “stops” and “reverses.” When this occurs, the indicator is effectively delivering a new signal, and the opposite trading position should be taken.

Stochastic Indicator
The stochastic oscillator is a momentum indicator that distinguishes between overbought and oversold market conditions. The 5-minute chart below begins with a downward price move, resulting in an oversold state in historical stochastic readings.

Scalpers may have seen this short-term price movement as a new opportunity to enter long bets. Stop losses on this scalp trade would be set below the price low that produced the oversold reading on the Stochastics indicator. Once the position opens, they seek a way to profitably exit the trade. Of course, this entails recording trading gains that exceed any trading expenses imposed by a broker.

Technically, the first signal to close the trade occurs when the stochastic readings return to the overbought zone. This incident removes the trade’s initial premise and signals that market prices are about to fall. As this happens, professional scalpers will close the long trade and collect minor profits on the position.

Moving Average
A moving average is one of the most often used technical indicators. The chart below shows how scalpers employ Exponential Moving Averages (EMAs) to build positions. EMA is a sort of moving average that gives greater weight and significance to the most recent data points.

When prices fall below the 50-period EMA, a sell signal appears, and short contracts can be opened. Buy signals become visible when market prices cross above the EMA dividing line, allowing long positions to be opened. 

EMAs can be an excellent tool for predicting trend direction because individual trade factors can be changed. Shorter EMA settings (less than 50 price periods) will generate a greater number of buy/sell signals throughout each trading session.

Longer EMA settings (over 50 price periods) will give a smoother moving average line and fewer trading signals. Individual parameters will be determined by the number of trade signals a scalper wants to see per day.

Relative Strength Index (RSI)
The Relative Strength Index (RSI), like the Stochastic indicator, looks for severe market circumstances. Scalping with the RSI works most effectively in volatile market conditions like news events. A competent scalper would have recognized the negative momentum on the gold chart and initiated a short position at $1,510 (bid price).

When the Relative Strength Index (RSI) indicator readings approached the oversold area, scalp traders would profitably exit the position. Similarly, another short trade emerges when prices fall through trendline support for the second time. Using this scalping strategy, traders might enter new short positions at $1,509.80.

On the 5-minute charts, gold prices break above the downward trendline, indicating that the second short trade should be closed. This shifts the trading bias to bullish (positive), resulting in increased interest in long positions.

Advantages of Scalping

There are various advantages to scalp trading. First, traders are less susceptible to trend reversals. Some financial assets tend to trend in one way before moving in another.

Second, the win rate – or percentage of successful trades – will most likely be higher. More experienced traders recommend targeting a success rate of at least 80% to make scalping work.

Another advantage of scalping is that a trader does not need to be knowledgeable about the item in question. Unlike long-term traders who rely on fundamental knowledge, scalpers concentrate on technical analysis.

Disadvantages of Scalping

The most significant downside of scalping is connected with risk management.  Maintaining a huge position size also poses a significant risk. As a result, stop losses are crucial in any scalping method.

When scalpers fail to apply firm stops in their positions, they might incur huge losses. This is especially true if short-term trend reversals occur in currency pairs.

Managing Risk in Scalping

Scalpers must have active stop-loss orders. This is owing to the increased risks commonly associated with scalping tactics. Traders must constantly use protective stop losses in their positions. Furthermore, because of their huge position sizes, scalpers typically place their stop losses 5 pips below their market entry.

Bottom Line

Scalpers seek to profit from tiny price swings in the market. The underlying principle behind scalping is that it is easier to benefit from smaller market movements than from longer-term trades. This strategy entails opening a huge number of trades aimed at little profits.

As a result, scalping tactics are particularly effective in volatile markets. Market news events typically provide opportunities for scalpers.

Traders scalp either in the same direction (trend-following) or in the other way (contrarian approach). Scalping tactics demand traders to keep a tight eye on the trading station and open/close a large number of positions.

Traders typically base their scalping tactics on 1-minute charts, with a maximum of 15 minutes.  Given the increased dangers connected with scalping tactics, traders should always use protective stop losses in their accounts.