A trader’s guide to scalping

Scalping is a short-term trading approach where traders seek to profit from small price changes by making numerous trades within seconds to an hour. Scalpers may execute hundreds of trades in a single day to accumulate substantial profits.

What is Scalping?

The goal of scalping is to secure frequent small gains rather than larger, infrequent profits. This allows traders to enter and exit the market quickly, taking advantage of minor price shifts.

Some traders prefer scalping because they consider small price movements more predictable than larger ones, and shorter market exposure reduces certain risks. However, scalping in volatile markets, like commodities and forex, can increase exposure to market fluctuations and potential losses.

Scalping is common in highly liquid markets like forex, where assets like USD/EUR experience frequent price changes. By trading derivatives, such as spread bets and CFDs, scalpers can leverage price movements without owning the asset itself, potentially amplifying profits or losses.

Price Action Scalping Strategy

Scalpers primarily rely on price action, focusing solely on price charts and technical indicators without considering broader fundamental factors. This approach uses historical price data to predict short-term market moves.

Scalping is similar to day and swing trading in its short-term nature, but each method has unique characteristics. Here’s a closer look at how they differ:

Scalping vs. Day Trading

Day traders hold trades for a few hours, using technical charts to analyze price patterns and avoid overnight exposure. While both scalpers and day traders close trades within the day, day trading involves longer holding periods and typically fewer transactions than scalping.

Scalping vs. Swing Trading

Swing trading holds positions over days, weeks, or months, seeking fewer but larger profits. With its slower pace, swing trading is often better suited to beginners and retail traders, while scalping is generally more appropriate for experienced traders.

High-Frequency Scalping Strategy

High-frequency scalpers use automated systems to execute numerous trades within seconds, capitalizing on rapid price changes. This is particularly popular in the forex market due to high liquidity and tight spreads, which enable quick entries and exits.

For example, during Brexit developments, forex scalpers leveraged GBP volatility, closely watching price changes around major decisions to capture profitable trades.

Scalping in the Stock Market

Stock scalping is less common due to the unpredictable nature of the share market. Swing trading is often preferred for stocks, as it combines a longer timeframe with opportunities for profit on small price changes.

Top Scalping Indicators

Technical indicators help scalpers spot patterns before placing trades. Using multiple overlapping indicators can improve scalping success. Common indicators include Bollinger Bands, simple and exponential moving averages, and the stochastic oscillator.

Bollinger Bands for Scalping

Bollinger Bands measure if an asset’s price is high or low relative to its past performance, indicating overbought or oversold conditions. Combined with SMA and other indicators, Bollinger Bands are useful for scalping, with an optimal trading timeframe of 1 to 5 minutes.

Moving Averages

The simple moving average (SMA) displays average price trends, while the exponential moving average (EMA) responds quickly to price shifts. Scalpers use short-term moving averages to track recent trends and make quick trading decisions.

Stochastic Oscillator

The stochastic oscillator helps traders assess an asset’s current price relative to its range, highlighting potential reversals. This indicator is particularly useful for cautioning against unfavorable trades, as a single large loss can offset several small gains.

Scalping with Candlestick Patterns

Candlestick charts reveal patterns in price movements, indicating whether a trend is bullish or bearish. Scalpers use these patterns to identify optimal entry and exit points for the highest potential profit.