Financial markets are full of opportunities and assets to generate reliable income streams, and choosing the right approach is vital to capitalize on these chances. Some investing styles involve high risks for high returns while alternating between long and short terms.
One of the most successful techniques for accumulating tiny gains over time is scalping, and using this approach in the crypto market can be a great idea.
This allows you to reap small profits repeatedly and avoid price drops. However, Crypto scalping must be executed carefully and timed very accurately. Let’s explain how this strategy works and how to get started.
Understanding Crypto Scalping
Scalp trading is a famous strategy that implies entering the market for a brief timeframe ranging from 1 to 5 minutes. Depending on asset class and volatility, some traders expand this period to 10 and 15 minutes.
It is a very short-term method that aims to “scalp” small price movements frequently. Scalpers may perform 50-100 attempts daily to accumulate tangible returns, while crypto scalping bots can help perform 100-500 entries.
It is a powerful strategy to take advantage of the unstable nature of most virtual currencies. Bitcoin is one of the most volatile assets, with recorded volatility of over 50% almost every year.
The leading digital currency experienced a peak daily volatility of 6.1% in 2021 when the coin reached $60,000 for the first time. In the following two years, it also reached an all-time high daily volatility of 5.5% (2022) and 4.1% (2023).
However, significant uptimes are met with risky downtimes, which can take the investor’s returns in any direction. Therefore, you must set and update the order limits and track and analyze the market carefully.
Automated trading software and crypto scalping signals make the process much easier. It fastens the research process, allowing traders to execute a vast number of orders per day.
What Makes Scalping Beneficial in Crypto Markets?
Executing an order and closing it in five minutes in a stagnant market sounds unreasonable because the accumulated profits in each attempt are little or close to zero. Therefore, scalping prevails in stocks and Forex markets, while cryptocurrencies offer the following benefits.
- High Volatility: Besides Bitcoin’s volatility, other coins like Ethereum, Litecoin, and Ripple experience broad swings at around 3% daily, meaning that prices can go up and down very often.
- High Liquidity: Millions worldwide trade cryptocurrencies, making the market highly liquid and execution very fast. It also allows scalpers to open positions with tight spreads and low slippage.
- 24/7 Access: Unlike Forex and stock exchanges, crypto markets operate around the clock every day, allowing investors to optimize their market entry to capitalize on price volatility at any time.
- Tech Acceptance: The development of exchanges makes them compatible with trading bots and automated software to find and analyze the best scalping opportunities and digital currencies.
- Improved Regulations: Financial regulators and traditional banks are becoming more adaptive to blockchain-based assets, increasing the number of users and lowering the default risk.
What is The Best Timeframe for Crypto Scalping?
Choosing the right timeframe depends on market conditions and asset volatility. The 5-minute crypto scalping strategy can work with highly swinging coins, as a small period is enough to generate sufficient gains.
Therefore, traders may choose a 1-, 2-, or 3-minute timeframe to capture market movements and avoid sudden price dips. However, some may expand to 10- and 15-minute charts to locate broader trends and multiply their gains.
It is worth noting that you must balance the gains earned on each entry with the spread. As such, you must realize enough returns to pay the transaction costs and remain in the money. Otherwise, the broker’s fees will offset the tiny profits.
Best Crypto Scalping Strategy
You can optimize your approach using different chart options or trading techniques. Here’s how you can do it.
Range Trading
One of the popular scalping trading strategies used to identify a consolidated range where the price is expected to rise or drop (for short selling) and scalp tiny gains from these moments.
As such, the trader must determine the support and resistance levels and select a strong low point to enter and exit at a strong high end.
You can use bullish chart patterns, like the shooting star or hammer, to predict price reversals or climbs and make a successful entry. You can set the stop-loss limit at the top end outside the range for buy orders and under the range if you are executing a sell order.
Breakout Trading
The breakout strategy implies finding moments when the market price leaves the current fluctuation range and creates a new trend on either side.
You must carefully identify a breakthrough trend zone because false breakouts happen, which can carry little risk if you implement less than a 5-minute timeframe. New trends can last for a few minutes to hours or even days. Therefore, realizing little gains in these windows can be beneficial.
You can either capitalize on the breakout very briefly to avoid risks or ride the trend and trail your stop loss below swing points as the trend progresses.
Following Chart Patterns
Chart patterns allow you to identify possible trend reversals or breakouts. You can apply one or two patterns to improve your readings and track strong price movements.
Once you identify the creation of a new trend, you can enter the breakout point and set a 5-10-minute scalping timeframe. Alternatively, you can wait and retest the broken trendline for more accuracy on the entry point and not follow a false trend.
Setting the stop-loss limit depends on the pattern. A conservative approach involves targeting a distance equal to the wedge’s height, measured from the breakout point. Stop losses are typically set using a 1:2 risk/reward ratio for better risk management.
RSI and Bollinger Bands
Technical indicators can be significantly helpful in finding entry and exit points. The relative strength index RSI and the Bollinger bands can be used to find overbuying and overselling zones, indicating where the price line can be a breakout or reverse.
If the RSI scores over 70, it suggests an overbought area where the price is likely to reverse, which is the perfect to execute a short position.
If the RSI scores under 30, it suggests overselling, where the price can potentially bounce upwards, making it suitable for long positions.
Similarly, with the Bollinger bands, if the price reaches the top band, it indicates overbuying, while overselling is suggested when reaching the bottom band. You can set your loss limits to the middle line in the Bollinger bands or when the price line reaches the opposite band.
Analysing Spreads
You can use the spread range to optimize your scalp trading strategies.
The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). Scalp traders can exploit this difference to generate returns, particularly in less liquid digital currencies where spreads tend to be wider.
Wide spreads allow traders to place simultaneous buy and sell orders, buying at the lowest bid price and selling at the highest ask price. This way, traders place limit orders instead of typical market orders, as they specify their desired price, improving the likelihood of earning from the spread.
However, gains with this approach can be tiny, which is why scalpers rely on high trade volume to ensure sufficient earnings.
Best Crypto Scalping Indicators
You can optimize your technique by adding trading indicators. Combining multiple technical indicators can be confusing for beginners, while experts can improve their approach with these tools.
Exponential Moving Average
The moving average is a classic chart option for investors to predict prices using historical data. However, the exponential moving average (EMA) adds extra weight to the most recent price data to highlight the short-term estimations.
Traders can choose multiple timeframes to retrieve and analyze prices and draw trend lines that indicate a future direction. You can use the lines interception points with the market price to confirm trends and identify a good entry point to execute a buy/sell order.
Moving Average Convergence Divergence
The MACD is a momentum indicator tracking the relationship between two moving averages. Similar to the EMA, traders analyze the MACD and market lines and intersection points to find trend changes.
It generates a histogram under the price chart, representing the momentum strength and intensity. This way, you can understand market volatility and make your decisions.
Volume-Weighted Average Price
The VWAP calculates the average historical prices weighted by volume to analyze if the current price is above or under its average value. The VWAP limits can be used as support and resistance points to track reversals and breakouts and optimize the entry point.
Parabolic SAR
The parabolic stop-and-reverse indicator is useful for understanding trend shifts by drawing dots around the market price. When the dots change their location, from under the line to above or vice-versa, it suggests a change in trend direction.
This helps scalpers time their short-term strategy and exit the market before or right when the reversal happens.
Fibonacci Retracement
This indicator helps locate the support and resistance zones by dividing the price line into key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. This assists traders in finding breakout points to enter the market or execute short positions when pullbacks are due.
For example, if a price drops to the 61.8% threshold and reverses, it signals an opportunity for a quick trade.
Advantages and Disadvantages
Scalping is a popular strategy, and executing it with cryptocurrencies enables you to capitalize on the unstable nature of the market. However, there are some challenges that come with this trading style. Let’s explore the advantages and disadvantages.
Pros
- Taking advantage of the volatile crypto market means that even the smallest trade windows can be enough to accumulate gains.
- Minimizing the market exposure that comes with keeping positions for the long term, as traders execute orders within 15 minutes max.
- The high liquidity of digital coins enables traders to open positions at favorable bid-ask spreads and low delay possibilities.
- Thousands of blockchain-based coins have different volatility rates, allowing traders to scale their strategy across multiple coins.
Cons
- The trading costs (spreads and broker’s fees) can offset the small gains earned during each session.
- Finding the perfect entry and timeframe requires maximum focus and planning, which can be tiring compared to long-term trading.
- Less-liquid digital coins or assets may have elevated slippage, leading to delays, wrong entries, or missed opportunities.
How to Start Scalping Crypto: Step-by-Step
Getting and accumulating small profits is usually advised for professional traders. However, you can scalp profits with proper planning and careful due diligence. Here’s how you can start.
Research The Market
There are around 13,000 cryptocurrencies, almost 9,000 of which are active. This means a wide range of assets and markets to explore, analyze, and execute short-term positions.
Different digital assets have different volatility rates and factors affecting their price movements, giving you a broad selection of investments suiting your style and objectives.
You must carefully consider current trends, technological advancements, institutional adoption, and real-life utility, as changes in these factors can drive volatility and prices.
Choose Your Timeframe
Choosing the right time period depends on volatility and current market conditions. You can use the below classification to guide your selection.
- 1-2-minute timeframe: Bitcoin and Ethereum are ideal choices due to their high volatility, liquidity, and tight bid-ask spread.
- 5-10-minute timeframe: Cardano and Polygon are suitable due to moderate volatility rates, allowing traders to find small breakouts.
- 15-minute timeframe: Litecoin and Ripple are good choices because they are less volatile and entail slow price movements, allowing scalpers to identify trends at less time-tense windows.
Select The Entry/Exit Points
After choosing the asset and timeframe for your short-term position, apply chart patterns and use indicators to find the best entry time.
Fibonacci Retracement levels help confirm resistance and support levels, while the EMA indicator is used to predict trend changes and enter the market when a breakout is created.
Employ Crypto Scalping Bots
Bots are programmed algorithms to execute rapid trades in the digital assets market. They identify small price movements and operate based on predetermined conditions, helping traders capitalize on volatility faster and more accurately.
Traders can deploy a scalping bot to track indicators, identify market entry points, recognize bullish and bearish patterns, open orders quickly, and update take-profit and loss-limit prices.
Set Your Order Limits
Setting your order loss limits and gain targets is essential to make the most of each scalping session. Use technical indicators to optimize your risk management tools and set your exit strategy.
For example, if you are scalping on a bullish movement, you can set the loss-limit point at the bottom end and the take-profit at the top end of the trading range. This way, your position will be closed once you realize your target gains, or in the worst case, you will not incur losses.
Execute and Time Your Entry
Place your order at the right time, like price breakouts or pullbacks, and ensure you exit the market when you reach your target earnings or realize enough gains to offset the broker’s fees.
Monitor your trades closely and take into consideration that you might need to change your strategy or adjust the timeframe at any moment. For example, you may exit earlier than expected or stay beyond the selected period to keep up with new market conditions.
Conclusion
The Scalping trading strategy requires entering and leaving the market within short periods of time that extend to 15 minutes maximum. Most traders follow a 5-minute timeframe to optimize their gains from volatile markets.
Crypto scalping is successful due to the high market volatility and frequent price changes of most coins and tokens. Bitcoin and Ethereum have proven historical success with short-term trading due to their broad price swings and fluctuations, making them valid options.
