Scalping Trading Strategy: Why and How to Use it

Scalping is a day trading strategy that involves buying and selling of financial assets within a few seconds or minutes.

It is different to the ordinary day trading, where traders can hold their assets for hours. Also, it is different than swing trading, which involves buying and holding assets for a few days. Further, scalping is different from position trading that involves buying and holding assets for weeks or months.

In this article, we will look at what scalping is, why people use it, and some of the strategies you should use.

As a trader, you are exposed to hundreds of strategies. Certainly, you cannot use all of them. If you attempt doing this, chances are that you will lose your entire investment within a very short duration.

The secret is to have one or two strategies and then mastering them.

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What is scalping?

Scalping is a simple strategy where a trader opens a trade and then watches it. He will then close the trade once it goes positive. This can be seconds after opening the trade.

Scalping is a form of day trading that involves buying and selling of financial assets within seconds or minutes. The strategy itself is relatively simple; just analyze several assets, find the one you think will go up and buy it and vice versa.

Unlike other types of traders, scalpers are not interested in knowing the fundamental details of the assets they are trading. For example, in case of stocks, they are not interested in the firm’s revenue or growth.

Similarly, in forex, they are not interested in the macro issues like interest rates and inflation. They are only interested in the current price action

Why scalp?

Scalping is a simple strategy where a trader opens a trade and then watches it. He will then close the trade once it goes positive. This can be seconds after opening the trade.

There are many reasons why one can decide to scalp:

1) It is a very simple strategy that anyone with limited experience as a trader can undertake.

2) A scalper one can trade for a very short period of time on a daily basis. In fact, many scalpers trade for less than 30 minutes per day.

3) As a scalper one does not need to understand a lot about the macro environment. Remember that one can make money in whatever way a trade goes.

4) It is possible to foresee the market short term than it is on a long-term basis. For instance, one can tell how the dollar is going to trade on a daily basis. No one can accurately predict how the dollar will behave in a longer duration.

Finding the asset

The first thing you need to do as a scalper is to identify an asset. This asset could either be:

  • currencies
  • equities
  • commodities
  • indexes

You should avoid identifying very many assets. You should avoid being a jack of all trades but a master of none. As a scalper, the more you try very many things, the harder it will be for you to make a good return on investment.

For instance, you can decide to focus on Brent oil. In this, you will only trade Brent oil while ignoring other asset classes. If your area is equities, you can select one or two companies and specialize on them.

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Mode of analysis

As a scalper, you will definitely need a mode of analysis to define your entry and exit positions. The best strategy to follow here is to identify the trend (upwards or downwards) and then move with it.

For instance, if Brent oil is moving upwards, you could either buy the trend or wait for the reversal. To do this, there are a number of strategies you can use.

You can use technical indicators such as moving averages, Stochastics, and the Relative Strength Index (RSI). You can use each indicator separately or combine two or three.

Ideally, you need to have a technical analysis method that you have back-tested for a long time. If you have this, your process of making money will be a walk in the park.

In addition, you need to define the timing when you will be trade. Based on your risk appetite, you can trade on any market time. For instance, you can trade effectively during the Asian markets, the European markets or the American market.

This will be based on the asset class you are trading.

Finally, you should be cognizant of periods when there is economic data. The economic calendar is therefore a very valuable tool to use. Remember that there are traders who have achieved a lot of success in trading news.

Just assess and test yourself to find out what works for you.

Once you create and test your strategy, you will be good to go. To succeed, you will need to be a very disciplined person by following the rules you set. For instance, if you purpose to make 200 pips a week, you should learn to stay away from the market once you hit your target.

Approach to Scalping strategy in stocks

As mentioned above, you can conduct scalping in all types of assets, including bonds, stocks, commodities, and currencies. In this part, let us look at a simple approach you can use to scalp stocks.

Gainers and Laggards

First, you need to use tools that help you identify the premarket gainers and laggards. The idea is that you want to focus on those stocks as soon as the market opens. So, find these stocks and learn why they are moving.

Level 2 Data

Second, use level 2 data to identify the order flow in the market. This data is provided by some of the leading brokers. At DTTW, all our traders have access to this order flow data. Using this data, together with time and sales, you can understand the how to position your trades.

Technical analysis & price action strategies

Third, use technical analysis and price action strategies. For example, some traders focus on indicators like VWAP to predict whether to buy or short a stock. Others use price action strategies to identify these opportunities.

Finally, trade and always remember to have a stop loss and take profit per trade. If you break the rules you set yourself, you will have a very difficult end.

Useful external resources for you scalping strategy

  • Beginners guide to scalping – Ig.com

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