5 of the Most Popular Crypto Scalping Strategies in 2024
Cryptourrencies are known for their volatility. While that may put some traders off, it creates many potentially lucrative opportunities for those with significant experience who can react quickly. In this article, well explore five of the most popular crypto scalping strategies and help you learn how to scalp crypto with a simple framework.
What Does Scalping Mean in Crypto?
As in any other financial market, cryptocurrency scalping refers to a type of trading where traders aim to take advantage of short-term market movements. This approach involves entering and exiting trades within minutes or even seconds, aiming to capitalise on small price fluctuations.
Scalpers typically use high leverage and execute many trades to accumulate small returns over time. The objective is to make seemingly insignificant gains that add up rather than seeking larger, less frequent returns. Scalping is particularly popular in crypto trading, as digital assets are inherently volatile and experience extreme daily price changes.
How easy is scalping in the cryptocurrency market? Compared to longer-term trading styles like swing or position trading, scalping requires more discipline, stronger risk management skills, and a solid understanding of market mechanics. As such, scalping is a more advanced technique and can be considered more complex than other styles. However, through practice, crypto scalping can become accessible.
What Is the Best Time to Scalp Crypto?
While crypto markets are open 24/7, volumes often pick up during regular trading hours for other markets. Generally, London and New York sessions, particularly their overlaps, are the most active, with plenty of volume and volatility for scalpers to take advantage of.
In terms of the best timeframe for scalping in crypto, scalping is usually done on the 1-, 2-, or 3-minute charts. 5-minute and 15-minute charts are often used to help set a directional bias.
Crypto Scalping: Unique Features
Crypto scalping has some unique features that differentiate it from scalping in traditional financial markets like forex or stocks. They make crypto scalping both challenging and potentially rewarding, especially for traders who can navigate the fast-paced and unpredictable nature of the cryptocurrency markets.
- High Volatility. The crypto market is highly volatile, with prices frequently experiencing significant fluctuations within short timeframes. This volatility can provide numerous opportunities for scalpers but also cause challenges.
- 24/7 Market. Unlike traditional markets, the crypto market operates 24/7, allowing scalpers to trade at any time. This provides more flexibility but also requires constant monitoring, as opportunities can arise at any moment.
- Liquidity and Spread. Liquidity in the crypto market can vary greatly. Scalpers often focus on high-liquidity pairs where spreads are narrow, making it possible to execute quick trades with ease.
- Technological Tools. Crypto scalpers often use trading bots and algorithms to execute trades quickly and efficiently. The use of automated tools is more prevalent in crypto due to the rapid pace of the market. Also, scalpers rely heavily on technical analysis, utilising advanced charting tools and indicators specific to crypto markets. The TickTrader trading platform by FXOpen provides over 1200 trading tools you can use for free to analyse crypto markets.
- Risk Management. Given the volatility, effective risk management is crucial in crypto scalping to protect against sudden adverse price movements.
- Regulatory Environment. The crypto market is less regulated than traditional markets, which can lead to increased risks, including market manipulation. Scalpers must be cautious and stay informed about the regulatory landscape.
5 Cryptocurrency Scalping Strategies
Lets dive into particular strategies.
1. Range Trading
Range trading is a popular scalping strategy for cryptocurrencies. It involves identifying a specific consolidation range within which an asset is likely to fluctuate. Scalpers aim to buy at the lower end of the range (support) and sell at the upper bound (resistance).
To get started with range trading, traders first need to identify a ranging market on a low timeframe, like the 1- or 5-minute charts. Then, they determine support and resistance levels near the strong highs and lows of the range. These levels then serve as entry and exit points, with a trader entering at support looking to exit at resistance and vice versa.
Some will look for reversal candlestick patterns, like hammers or shooting stars, at support or resistance, respectively, before entering with a market order. Others will simply set limit orders at their chosen entry point.
Stop losses are typically placed beyond the ranges high or low, depending on the direction of trade. Scalpers usually use a 1:1 risk/reward ratio or dont place stop-loss orders, but the latter is a risky approach.
2. Breakout Trading
Breakouts occur when a level of support/resistance is broken through, often indicating the start or continuation of a trend. There are several ways you can take advantage of breakouts, but its not uncommon for a false breakout to occur. We can use a pullback filter to validate a trade.
To start, we need to identify a support or resistance level. The easiest way is to look for relatively equal highs or lows forming, like in the chart above. When the level is broken with a strong impulsive move, we can enter on the close of the breakout candle. However, if the move isnt particularly strong, like at a), then we could wait for a pullback. We can place a stop order to enter as the pullback itself breaks out, as marked by the dotted lines.
Profits might be taken at an opposing support or resistance level. However, some scalpers may prefer to attempt to ride the trend and trail their stop loss above or below swing points as the trend progresses. Similarly, stop losses can be placed above or below the nearest swing points.
3. Chart Patterns
Chart patterns can be a powerful tool for scalping, helping traders to identify potential trend continuations and reversals. While there are many different chart patterns out there, its best to stick to just one or two to avoid confusion, at least until you master their use. Well use rising and falling wedges in this example, as they often lead to strong moves.
There are two ways to enter: either on the breakout or on the retest of the broken trendline. As you can see in the example, entering retests might be a more accurate method, but itll mean you miss out on some trades. Conversely, entering on the breakout is riskier, as it could just as easily be a false breakout.
Your profit target and stop loss will depend on the pattern youre using. Given that wedges typically prompt a prolonged trend, you could look for significant areas of support/resistance to start taking profits. For a more conservative approach, you might take profit at a distance equal to the height of the wedge placed from the breakout point. Stop losses might be calculated in accordance with the 1:2 risk/reward ratio.
4. Using the Relative Strength Index and Bollinger Bands
Some scalpers rely heavily on technical indicators to help them determine entries and exits. One popular combination is the relative strength index (RSI) and Bollinger Bands.
When the RSI crosses 70, indicating overbought conditions, or below 30, showing the asset is oversold, traders can look to confirm a reversal entry with Bollinger Bands. If an asset is overbought and crosses above the upper band, a short position can be considered. If the asset is oversold and the price breaches the lower band, a long position could be entered.
As for exit conditions, some scalpers may prefer to take profits at the midpoint of the Bollinger Bands or the opposing band. Others take profit when RSI crosses above or below 50, depending on the direction of trade. In terms of stop losses, traders place them above or below a nearby area of support or resistance. Alternatively, they consider the take-profit target and place the stop loss, considering their risk aversion.
At FXOpen, we offer both of these indicators in our free TickTrader trading platform. There, youll also discover a whole host of additional indicators and tools ready to help you navigate the markets with confidence.
5. Bid-Ask Spread
The bid-ask spread refers to the gap between the maximum price a buyer can offer (bid) and the minimum price a seller can accept (ask) for a specific asset. Scalpers can take advantage of the bid-ask spread to potentially generate returns. This strategy can be particularly effective in less liquid cryptocurrencies where spreads are naturally wider.
When spreads are wide, traders place buy orders and sell orders simultaneously. They buy at the lowest possible bid price and sell at the highest possible ask price. Traders using this strategy typically place limit orders rather than market orders. Limit orders allow them to specify the price at which they want to buy or sell, increasing the chance of capturing the spread. Since the return per trade is usually small, traders must execute many trades to achieve significant returns. This necessitates careful risk management to ensure that small losses dont outweigh the small gains.
How Can You Create Your Best Crypto Scalping Strategy?
Now, its time to create your own scalping trading strategy for crypto. While your strategy will ultimately be unique to you and your preferences, you can try these steps to begin developing your own system.
- Choose a Timeframe: Select a short timeframe that suits your trading style, such as 1-, 3-, or 5-minute, to base your trades on. Try to balance choosing one that allows you to capitalise on short-term movements while giving you enough time to think through your decisions.
- Identify Support and Resistance Levels: Use trendlines to pinpoint potential entry and exit points. You can also look for psychological or dynamic levels if desired. Set a rule that youll only enter and exit at these levels to avoid impulsive decision-making.
- Employ Indicators: Use indicators like the RSI, moving averages, and Bollinger Bands to confirm your entries and exits. You can set specific criteria to help filter out potential losing trades, like only trading a resistance level when RSI is overbought.
- Develop a Risk Management Plan: Risk management is almost as important as your strategy itself. Use stop-loss orders and proper position sizing to manage potential losses and protect your capital. Set defined loss limits and rules for avoiding emotional decision-making.
- Test and Refine: Continuously backtest and optimise your strategy using past price action, and make adjustments as needed to improve its performance. Its a good idea to keep a trading journal to record your trades and analyse your decision-making process.
Pros and Cons of Scalp Trading in Cryptocurrencies
Scalp trading in the cryptocurrency market has its advantages and disadvantages.
Pros:
- Frequent Opportunities: The volatility of crypto can present more scalping opportunities compared to other assets, boosting the potential returns a scalper can make.
- Lower Long-Term Risks: The frequent in-out nature of scalping means that scalpers have less exposure to adverse market events, like regulatory changes or macroeconomic events.
- Psychologically Easier: For some traders, scalping is preferable since it allows them to bank small gains. This can be easier psychologically since theres no anxious wait to see if a trade hits a longer-term target.
Cons:
- Risk of Significant Losses: As mentioned, scalping requires discipline. Given the need for high leverage, poor risk management can wipe out a scalpers account within a few trades if they arent strict with their strategy.
- Time-Consuming: Scalping requires constant monitoring of the market, which can be both time and energy-consuming. The ongoing need for quick decision-making may also be particularly draining for some traders.
- High Costs: The fees associated with frequent trading, like spreads and transaction costs, can eat into returns.
Final Thoughts
Crypto scalping can be a rewarding trading approach for those who can navigate its fast-paced and volatile nature. However, its crucial to remember that effective scalping requires more than just a good strategy. Traders must be disciplined, agile, and ready to react quickly to market changes. They should also have a deep understanding of the specific market conditions and tools available in the cryptocurrency space, including the use of automated bots and advanced charting software. Risk management is equally important, as the high leverage and frequent trades characteristic of scalping can lead to significant losses if not carefully controlled.
Once you feel ready to deploy your strategy for real, open an FXOpen account to gain access to dozens of assets with high-speed trade execution, tight spreads from 0.0 pips, and low commissions from $1.50. Happy trading!
FAQ
What Is Scalping in Crypto?
Scalping in crypto is a fast-paced trading strategy focused on making numerous trades throughout the day to capture small returns from minor price fluctuations. Scalpers hold positions for very short periods, sometimes just seconds or minutes, aiming to build up small gains that accumulate over time rather than seeking large returns from long-term positions.
How Can You Scalp Crypto?
Scalping crypto involves selecting a cryptocurrency with significant volatility and liquidity. Traders analyse short-term market trends using technical indicators to identify optimal entry and exit points. They often place limit orders to ensure trades are executed at specific price levels, aiming for small, frequent returns. Risk management is crucial, so traders use stop-loss orders to protect against unexpected price movements, while continuously monitoring the market to react quickly to changes.
What Coin Is Best for Scalping?
The best crypto to scalp typically has several key characteristics that make it suitable for quick, frequent trades. High liquidity is crucial, as it helps traders to enter and exit positions at the desired prices. A coin with a narrow bid-ask spread is also ideal, as it reduces the cost of each trade. Additionally, the coin should exhibit consistent price volatility, offering frequent small price movements that scalpers can capitalise on.
*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.
Read more: https://fxopen.com/blog/en/5-best-crypto-scalp-trading-strategies/
Text source: Forex Trading Blog
