5min read
Published on: Mar 27, 2024
#Trading 101
In a classroom, you come across a variety of characters. A goofy girl with a seemingly careless attitude might top the class. While a guy appearing all serious may not be the smartest kid there. But it is the different kinds of students who make a class interesting.
Similarly, the trading floor is made up of different kinds of characters. There are traders who are looking at long-term future and keep their stocks for long regardless of whatever happens in the market. Then, there are traders who are in the market for a quick buck and are quite happy to make modest profits each day.
One such trader in the trading market is a scalper. A scalper is your ever impatient trader who is always looking at the computer screen, making quick-time trades, and walks around with a happy go lucky attitude.
A scalper is an experienced and smart trader who knows the stock market inside out. We must underline at the onset that scalping isn’t for beginners.
You will find many trading executing the scalping strategy in several markets such as stocks, forex, indices and cryptocurrency.
Today, we will look at the well-known trading strategy of scalping. We will also guide you in becoming a good scalper with a detailed strategy.
Let’s dive in.
Scalping is a trading strategy where you make a series of quick trades capitalising on small price changes so that several small profits in a day add up to a huge profit for you.
To understand the concept in detail, let’s assume a trading scenario.
You buy a stock of a company called ABC for $20. It is common sense that the stock will rise to $20.1 than $21 more quickly and easily.
Sure, the price movement is small, but it is quicker, easier and more likely to happen.
If you are scalper, you will buy the stock at $20 and sell it once it reaches $20.1 or even more, within just a few minutes.
You won’t wait for the stock’s price to rise to $21 as it would require a longer timeframe.
But why are we reiterating on a quick trading timeframe here? Let us explain.
A market doesn’t operate as per our individual whims. Instead, it works through a large complex system involving multiple parties and factors. So, while a stock’s price can rise, it can as likely fall.
A longer timeframe gives a stock an opportunity to rise a lot, but it can lead to a substantial price drop too.
In contrast, though a shorter timeframe allows for a modest price gain, it also limits the range of price drop.
In short, a shorter trading timeframe exposes a trader to small risks in comparison to a larger timeframe.
Let’s go back to the ABC stock.
Remember you made a profit of $0.1 through a quick trade. But it’s so small, you will wonder.
How about buying and selling 1,000 such stocks within the same timeframe? You can then make a larger profit of $100.
You must focus on your screen only for a few minutes to make a quick trade, thereby making a quick buck.
Sounds simple, no? It indeed is.
However, did you wonder what will happen if the stock price falls from $20 to $19.9? You will end up with a loss of $100 in such a scenario.
Remember that a stock can go down as well as go up.
This is why scalping involves making several such trades as mentioned above.
You are as likely to make a profit on a trade as a loss. So, you focus on executing multiple trades in a day so that your wins number more than your losses.
Suppose you complete 50 quick trades in a day. 35 of them gain you $20,000 and 15 of them make you lose $7,000. At the end of the day, you are walking out with a profit of $13,000.
Scalping is not a market-specific trading strategy; instead, it can be applied to any market whether you trade forex, stocks, indices or cryptocurrency.
Note that it is a rather ideal scenario. There are days when your losses number more than your gains and it is only with a substantial scalping experience that you become a smart trader.
A scalper requires several resources and tools for a profitable trading day at the market.
You must have a significant capital to execute a scalping trading strategy in the market. You will be making several quick trades in a day, and you can’t count on the profits of early trades for later purchases.
You need to consider that you might lose on a few early trades; so, you need to have access to capital for executing multiple trades in a day.
We recommend that you use at most 5% of your capital for scalping in a day due to the risks involved.
Scalping involves executing trades quickly, often within 1-5 minutes. You need to have access to a trading app in which you can view the charts with ease, customise the indicators and candlesticks in simple steps and execute trades quickly.
For those looking to gain from scalping, BitDelta offers a unique trading experience - register here.
Since scalping involves making quick trading decisions, you need have access to a high-speed internet.
You simply cannot execute scalping in the trading market with a slow internet as it requires placing orders and making transactions within a span of only a few minutes.
While 40-50 MB/s works for scalping, we recommend that you set up an internet connection with a 100 MB/s speed so that there is a minimum risk of connection failure.
A smart scalping strategy involves taking care of a number of factors while trading.
We list down eight most important factors to consider while executing scalping on the charts.
A scalper needs to factor in high risk while entering the market. Remember that a stock’s price can rise as well as fall.
In an ideal scenario, a 1:1 Risk-Reward Ratio works the best. So, the ABC stock can rise from $20 to $20.1 within 2 minutes; within the same timeframe, it can drop from $20 to $19.9 as well. A price difference of $0.1 is common to both, with a 1:1 Risk-Reward Ratio.
We already advised you to engage in scalping only when you have access to a high capital.
We recommend that you don’t allocate more than 5% of your total trading capital for a scalping session within a trading day.
Suppose you have allocated $100K in your bank balance for trading. So, you shouldn’t cross the limit of $5K for a scalping session in a day.
You need to execute a high number of trades each day so that you can substantially gain off scalping.
Note than one trade isn’t enough because it can offer only a modest profit. So, you need to complete a high number of trades so that several small profits can add up to a large profit.
Most scalpers execute 50-100 trades each day.
A scalping session involves dedicatedly sitting before your trading screen for hours on end. You can’t enter a trade and go around for a walk or even a leak. You need to quickly enter and exit a trade within 1-5 minutes, and you need to execute it several times a day.
Understandably, it requires a high attention span for a trader to execute the scalping strategy effectively.
We recommend that you set up a time limit of 3 or 5 minutes to execute an enter-and-exit trade move.
Keep a small target for closing a trade. This way, you don’t get greedy and not lose much in case of a price drop.
For the first few trades, we recommend that you exit once a stock’s price gains 10%-20%.
The above step also helps you keep a small loss as you quickly exit the trade once a stock’s price drops 10%-15%.
If you get greedy and keep waiting for a stock to eventually gain value even when it’s reflecting a downward movement, you will certainly end up with a huge loss.
A disciplined scalper keeps a daily limit on their scalping capital. Please note that we are reiterating the principle of never getting too greedy in the market as you might end up losing big time.
As recommended above, don’t cross the threshold of 5% of your total trading capital for scalping purposes. Alternatively, you can decide on an amount for yourself as per your risk appetite.
Execute a trade, i.e. enter and exit a trade, within a specific timeframe. While a few scalpers are so quick as to execute the trading strategy within a span of 1 minute, it is nearly impossible for most traders to do so.
As mentioned above, set up a time candlestick of 3 or 5 minutes on the charts to execute an enter-and-exit trade move.
On BitDelta, we recommend only experienced traders with a large capital and a reasonable risk appetite to engage in scalping.
Beginners should refrain from engaging in scalping unless they have practised the trading move multiple times on stock market simulators. In fact, scalping is not at all recommended for beginners in trading.
Hey, listen! You don’t want to be like Jonah Hill and quit everything for scalping just based on somebody else’s experience.
In fact, you need to be a highly disciplined trader to execute a scalping strategy efficiently as one wrong trade can cost you all the gains you made off previous trades in a day.
As far as trading experience is concerned, BitDelta is a very simple and easy-to-use trading application with a user-friendly interface. You can trade over 400 trading pairs on our apps, with easy chart customisation available.
On BitDelta, you can trade forex, stocks, indices and cryptocurrency on our app and smartly execute scalping moves for a profitable trading session.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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