7 tips on how to significantly improve your scalping trading strategy

It’s believed that scalping was first used in the futures market in the 1970s when traders would make trades based on price changes in the pit. Decades later, Paul Rotter, also known as The Flipper, made the news with his advanced trading algorithms and high-speed computer systems. And you guessed it – he did in the futures exchange, the Eurex, to be exact.

Without any sugar coating, scalping can be a complicated trading strategy. That’s why it’s important to have a comprehensive guide with tips, explanations, and best practices to help you navigate it.

A quick brush-up on the basics of scalping

Scalping involves making multiple trades in a short amount of time that are triggered by small price movements. The goal is to generate small returns from each trade, with the cumulative gains adding up over time. 

In traditional trading, traders tend to hold onto assets that are rising in price, at least in the short to medium term. However, scalping goes against this instinct. Scalpers have the discipline to exit an asset even if they are experiencing significant gains. They may jump back into the assets later that day or week, depending on market conditions.

For beginners, it can be a daunting trading strategy as a quick scalp trader must possess a high level of skill and experience. Risk management is also crucial. In fairness, it is not a suitable trading strategy for traders who are risk-averse, as it involves a high level of risk.

Scalping vs. day trading

Day trading is a broader trading strategy than scalping, and it involves buying and selling assets within a single trading day. Day traders may also make multiple trades. But they are typically looking to capitalize on larger price movements and hold positions for longer periods of time than scalpers. Day traders are also more reliant on fundamental analysis compared to scalpers.

It’s also important to compare the amount of time and attention required. Day trading may involve more analysis and planning and less of quick decision-making. That is why day trading may be more accessible to newer traders.

Expert tips for successful scalping

If you want to refine your approach and take your trading to the next level, here is how to scalp more effectively.

Use a reliable trading platform

Scalping requires fast moves. The implication from that is a trading platform must have low latency and fast order execution to support the strategy. Otherwise, you won’t be able to enter and exit trades quickly enough and at the desired price.

You also want to be able to trade with confidence and avoid missed opportunities or losses due to platform downtime. Even minor glitches or crashes can bring down your entire operation. 

Choose volatile assets

Volatile assets tend to have larger and more frequent price fluctuations. This means that there are more opportunities to take advantage of small price movements, which is crucial for scalping. 

Higher trading volume may also require more liquidity in the market. That is another thing that volatile assets can offer to you – the ability to execute trades more quickly and at better prices. 

Use the right technical indicators

Technical indicators are valuable tools for scalping traders, who use them to gain information about the market’s price action, momentum, and trend direction. Some of the best scalping indicators are:

• Simple Moving Average (SMA) calculates the average price of an asset over a specified period. It is used to identify the direction of the trend and potential areas of support and resistance.
• Exponential Moving Average (EMA) is similar to SMA. But it gives more weight to recent price data and is used to determine potential entry and exit points.
• Average Convergence Divergence (ACD) is another popular momentum indicator that shows the relationship between two moving averages.
• Parabolic SAR (Stop and Reverse) helps with potential trend reversals. The indicator places dots above or below the price depending on the trend direction, which helps with setting stop loss orders.
• Moving Average Convergence Divergence (MACD) helps spot changes in momentum and trend direction.
• Stochastic is used by traders to determine overbought or oversold conditions in the market (needed for potential entry and exit points).

Set a tight stop loss

In such a dynamic environment, you want to get as much help with risk management as you can get. With a tight stop-loss, traders can quickly exit a trade if the market moves against them. This frees up their trading capital and allows them to move on to the next opportunity.

Use multiple time frames

For one, multiple time frames provide a better view of market trends. For example, traders can use a higher time frame to identify the primary trend and a lower time frame to identify shorter-term trends. If done accurately, it’ll account for more informed trading decisions.

Thanks to multiple time frames, you will also confirm signals from different indicators and reduce the likelihood of false signals. Remember: you don’t have much time to hesitate about the accuracy of their trading decisions. So, confirmations are always appreciated. 

Buy at breakouts

It’s hard to pinpoint the best strategy for scalping, but this one is definitely up there with the best. To get you up to speed, a breakout occurs when the price of an asset breaks through a significant level of support or resistance. 

If you can identify a breakout early (with the help of technical analysis), there is a better chance of opening a trade at the right time. Just make sure to look for supporting signals, like an increase in trading volume or a significant price movement.

Avoid trading during news releases

News releases generally increase the risk of losses for scalpers. This is because they are often accompanied by unpredictable price movements, so it gets much more difficult to predict where the price will go next. Plus, scalpers who are trying to use small price movements aren’t as efficient with bigger swings.

Incorporate an economic calendar into your approach. This will help you keep track of upcoming events and plan your trading activities around major news releases.

Common challenges when implementing a scalping strategy

While the potential rewards can be significant, there are also several common challenges you may encounter: 

• Managing risk – Risk management can be challenging because the fast-paced nature of scalping means making quick decisions and acting on them rapidly.
• Emotion control – You should be prepared for a stressful and emotionally taxing experience. It won’t always be the case, but the ability to stay calm and focused under pressure will be immensely helpful to you. 
• Technical proficiency – Scalpers must be able to interpret charts, indicators, and other technical analysis tools quickly and accurately.
• Market volatility – Sudden market movements can be challenging to predict, and traders will need the skills to mitigate potential losses in those situations.
• Time commitment – For most, scalping means constantly monitoring the markets. So, it’s a lot of time to dedicate to trading compared to many other strategies.

How to become a scalper

If you’re interested in becoming a scalper, here are a few steps to get you started:

1. Develop a solid understanding of the markets. Before anything else, you need a strong foundation in market analysis and trading strategies.
2. Choose the right market. Scalping is most effective in markets that offer high volume and low volatility. 
3. Choose a broker with low commissions. The cost of making frequent trades will not go unnoticed. 
4. Choose a scalping strategy. You should go for a strategy that prioritizes identifying short-term price movements and executing trades quickly.
5. Practice on a demo account. Refine your strategy and get comfortable with the trading platform before scalping with real funds.
6. Start small and gradually increase position sizes. Going bigger as you gain experience and confidence is better for minimizing risk and avoiding large losses.
7. Finally, monitor your trades closely. Also, be prepared to adjust your strategy as market conditions change.

To summarize, scalping is for those with the necessary skills and experience. Before going in, you should be aware of the challenges, including managing risk and transaction costs and the psychological toll of frequent trading. But with practice and patience, traders can increase their chances of success in this exciting market.

Sources: 

Scalping (day trading technique), Corporate Finance Institute

Top indicators for a scalping trading strategy, Investopedia

The perils of trying to time volatile markets, Wells Fargo

What time frame should you trade? BabyPips