What is scalping?
Scalping is a trading strategy designed to profit from small price changes, with profits on these trades taken quickly and once a trade has become profitable. All forms of trading require discipline, but because the number of trades is so large, and the gains from each individual trade so small, a scalper must have a rigid adherence to their trading system, avoiding one large loss that could wipe out dozens of successful trades.
Scalpers will take many small profits, and not run any winners, in order to seize gains as and when they appear. The aim is for a successful trading strategy through the large number of winners, rather than a few successful trades with large winning sizes.
Scalping relies on the idea of lower exposure risk, since the actual time in the market on each trade is quite small, lessening the risk of an adverse event causing a big move. In addition, it takes the view that smaller moves are easier to get than larger ones, and that smaller moves are more frequent than larger ones.
Best scalping strategies
- Stochastic oscillator strategy
- Moving average strategy
- Parabolic SAR indicator strategy
- RSI strategy
Scalp trading using the stochastic oscillator
Scalping can be accomplished using a stochastic oscillator. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points.
Scalping with the use of such an oscillator aims to capture moves in trending market, ie: one that is moving up or down in a consistent fashion. Prices tend to close near the extremes of the recent range before a turning point occurs, such an example is seen below:
In the above chart, of Brent on a three minute timeframe, we can see that the price is moving higher, and the lows in the stochastics (marked with arrows) provide entry points for long trades, when the black %K line crosses above the dotted red %D line. The trade is exited when the stochastic reaches the top end of its range, above 80, or when the bearish crossover appears, when the %K line crosses below %D.
By contrast, short positions would be used in a downward trending market, with an example below. This time, instead of ‘buying the dips’, we are ‘selling the rallies’. So we will look for bearish crossovers in the direction of the trend, as highlighted below:
Scalp trading using the moving average
Another method is to use moving averages, usually with two relatively short-term ones and a much longer one to indicate the trend.
In the examples below, on a three minute EUR/USD chart, we are using five and 20-period moving averages (MA) for the short term, and a 200-period MA for the longer term. In the first chart the longer-term MA is rising, so we look for the five period MA to cross above the 20 period, and then take positions in the direction of the trend. These are marked with an arrow.
In the second example, the long-term MA is declining, so we look for short positions when the price crosses below the five-period MA, which has already crossed below the 20-period MA.
It is important to remember that these trades go with the trend, and that we are not looking to try and catch every move. As in all scalping, correct risk management is essential, with stops vital in order to avoid larger losses that quickly erase many small winners.
Scalp trading using the parabolic SAR indicator
The parabolic SAR is an indicator that highlights the direction in which a market is moving, and also attempts to provide entry and exit points. SAR stands for ‘stop and reversal’. The indicator is a series of dots placed above or below the price bars. A dot below the price is bullish, and one above is bearish.
A change in the position of the dots suggests that a change in trend is underway.
The chart below shows the DAX on a five minute chart; short trades can be taken when the price moves below the SAR dots, and longs when the price is above them. As can be seen, some trends are quite extended, and at other times a trader will face lots of losing trades.
Scalp trading using the RSI
Finally, traders can use the RSI to find entry points that go with the prevailing trend. In the first example, the price is moving steadily higher, with the three moving averages broadly pointing higher.
Dips in the trend are to be bought, so when the RSI drops to 30 and then moves above this line, a possible entry point is created.
By contrast, when the RSI moves to 70 and then begins to decline within a downtrend, a chance to ‘sell the rally’ is created, as we have seen in the example below.
What you need to know before scalping
Scalping requires a trader to have iron discipline, but it is also very demanding in terms of time. While longer-term time frames and smaller sizes allow traders to step away from their platforms, since possible entries are fewer and can be monitored from a distance, scalping demands a trader’s full attention.
Possible entry points can appear and disappear very quickly, and thus, a trader must remain tied to his platform. For individuals with day jobs and other activities, scalping is not necessarily an ideal strategy. Instead, longer-term trades with bigger profit targets are more suited.
Scalping is a difficult strategy to execute successfully. One of the primary reasons is that it requires many trades over the course of time. Research on this subject tends to show that more frequent traders merely lose money more quickly, and have a negative equity curve. Instead, most traders would find more success, and reduce their time commitments to trading, and even cut down on stress, by looking for long-term trades and avoid scalping strategies.
Scalping requires quick responses to market movements and an ability to forgo a trade if the exact moment is missed. ‘Chasing’ trades, along with a lack of stop loss discipline, are the key reasons that scalpers are often unsuccessful. The idea of only being in the market for a short period of time sounds attractive, but the chances of being stopped out on a sudden move that quickly reverses is high.
Trading is an activity that rewards patience and discipline. While those successful in scalping do demonstrate these qualities, they are a small number. Most traders are better off with a longer-term view, smaller position sizes and a less frenetic pace of activity.
As a seasoned trading expert with a comprehensive understanding of various trading strategies, I can provide valuable insights into the concept of scalping and the specific strategies mentioned in the article. My extensive experience in financial markets and trading has equipped me with the knowledge to analyze and implement these strategies effectively.
Scalping, as described in the article, is a trading strategy focused on profiting from small price changes by executing numerous trades. The key to successful scalping lies in capturing small gains quickly and maintaining strict discipline to avoid significant losses. The article rightly emphasizes the importance of a robust trading system and risk management in scalping, given the high frequency of trades involved.
The mentioned scalping strategies include the Stochastic Oscillator strategy, Moving Average strategy, Parabolic SAR indicator strategy, and RSI strategy. Let's delve into each:
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Stochastic Oscillator Strategy:
- Stochastic Oscillator measures the current price in relation to its recent range, identifying potential turning points.
- It is employed to capture moves in a trending market, whether upward or downward.
- Entry points are identified by observing the lows in the stochastics, with long trades initiated when the %K line crosses above the %D line. Conversely, short positions are taken when the %K line crosses below %D.
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Moving Average Strategy:
- Moving Averages (MAs) are used to identify trends, with short-term and long-term MAs employed together.
- Long positions are taken when a shorter-term MA crosses above a longer-term MA in an uptrend, and short positions are taken when the opposite occurs in a downtrend.
- Trend direction is crucial, and risk management is emphasized to avoid erasing small gains with larger losses.
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Parabolic SAR Indicator Strategy:
- The Parabolic SAR indicator indicates market direction and provides entry and exit points.
- Short trades are initiated when the price moves below the SAR dots, and long trades are taken when the price is above them.
- Trends can be extended, and traders need to manage losing trades effectively.
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RSI Strategy:
- The Relative Strength Index (RSI) is used to find entry points in line with the prevailing trend.
- In an uptrend, buying opportunities arise when the RSI drops to 30 and then moves above this level.
- In a downtrend, selling opportunities emerge when the RSI reaches 70 and starts to decline.
The article rightly concludes with essential considerations for aspiring scalpers, highlighting the demanding nature of scalping in terms of time and discipline. It emphasizes that while successful scalpers demonstrate patience and discipline, the majority of traders may find more success and reduced stress in longer-term trades with smaller position sizes.
In summary, scalping is a challenging yet potentially rewarding trading strategy that demands a high level of skill, discipline, and continuous attention to the market. Traders must carefully consider their personal circ*mstances and risk tolerance before adopting scalping as a primary trading approach.
