Crypto Scalping: Benefits, Strategies & More

Cryptocurrencies are one of the most exciting asset classes today, and the crypto industry as a whole has matured to a remarkable extent. This maturity is one of the prerequisites for mainstream trading activity, and crypto scalping has become an extremely popular and profitable income stream for traders.

The crypto boom of 2021 led to massive interest among professional and at-home traders, and the amount of tools, resources, and platforms to trade crypto has rocketed since. Despite the following market downturn, crypto trading remains extremely popular, arguably far more so than traditional alternatives such as Forex, bonds, and commodities.

Scalp trading is far more than just “Buy and HODL.” If you want to know all about it, including some major pros and cons, and learn how to get started, read on!

What is Scalp Trading?

Scalp trading, often referred to as “scalping,” is an intraday trading strategy employed mainly by professional traders aiming to profit from small price movements in a highly liquid asset.

While scalping is common across various markets, such as equities and Forex, cryptocurrencies offer plenty of benefits for interested scalp traders. For one thing, cryptocurrencies are volatile, meaning that successfully executing strategies can be highly lucrative.

The crypto markets also run 24/7, so scalp traders can craft their own schedules. It’s also possible to engage in a few hours of night-time scalping while most other markets are closed, even if you spent all day at your 9-to-5.

Unlike swing trading, scalping is carried out in time frames of minutes rather than days, weeks, or months. Traders enter and exit positions quickly, using larger amounts of capital and leverage to benefit even from small asset price movements. While a 1% or 2% profit doesn’t seem like much, it can add up when repeated during the same trading session.

Scalpers also rely on technical analysis rather than fundamentals to execute their strategies. This makes sense since it doesn’t matter whether the coin is a good long-term project or not when you exit your position in the next few minutes.

As such, things like Fibonacci retracements, Bollinger bands, RSI, and MACD replace indicators such as a solid team and good tokenomics when scalping crypto. It’s also possible to use signals from various providers and trade on support and resistance breakouts or spikes in volume.

Day Trading vs. Scalp Trading

As mentioned, scalping is dramatically different from swing trading, with fundamentals playing a far greater role in the latter, given the expanded time frame of maintaining an open position. However, scalp trading is also subtly different from day trading, even though many use the two terms interchangeably.

It’s true that both trading styles are carried out intraday, and neither a scalper nor a day trader enjoys sleeping on an open position. However, day traders often try to focus on a small number of trades and hold out for most of the expected daily price movement of the crypto in question.

Day traders may also choose to ride out volatility despite price movements against their position, and finally exit after capturing as large a profit target as possible. Scalpers, on the other hand, enter and exit trades quickly and look to take small profits amplified by large or leveraged positions multiple times during the day.

Types of Crypto Scalping

While the focus is on making a lot of trades that add up throughout the day, there are various strategies for crypto scalping. Here’s a look at the main ones employed by traders.

#1. Bid-Ask Spread

The bid-ask spread is the difference in price between what sellers are willing to sell the crypto asset for and what buyers are willing to pay for it. If the bid and ask are relatively close together, the spread is referred to as narrow, while a larger difference between the bid and ask is termed “widespread.”

The narrower the spread, the better it is for scalp traders since there’s a far higher likelihood that orders will get filled at the desired prices. A narrow spread often means more active trading on that asset, and that’s why the establishment loves liquidity—tighter spreads mean more traders, which means more trading fees for brokers and dealers to pocket.

As far as scalping goes, though, large spreads aren’t very good. The larger the spread, the more likely it is that market orders get filled at prices that aren’t conducive to the trader’s set strategy.

#2. Leverage

Leverage is an extension of trading on a bid-ask spread and is often central to scalping strategies as a whole. As mentioned, scalp trading is based on making multiple trades on small movements during a day, often taking a profit of just a few percent or even basis points.

What makes this profitable is a large amount of capital. 1% of $1 million is a decent profit compared to 1% of $100. Leverage allows even smaller traders to amplify the amount of capital they’re deploying by a certain multiple, meaning that profits can be scaled much faster.

However, leverage also carries a certain amount of threat. Days of high volatility in the crypto markets are often accompanied by news items saying that traders have lost millions to liquidation. Those same traders were scalpers and day traders who lost their capital to overleveraging and couldn’t exit their positions in time.

#3. Range Trading

Range trading refers to the fact that many assets tend to trade between consistently high and low prices for a period of time. This tends to build up what’s called “price resistance” at the top of the range and price support at the bottom.

Supports and resistances are basic concepts regarding technical analysis and are often used by traders. The more traders that employ this sort of analysis, the more of a self-fulfilling prophecy these ranges become.Scalpers can take advantage of this by trading within this range as many times as possible during the day.

#4. Arbitrage

Arbitrage, or “arbing,” means the identification and exploitation of any change in price. This is commonly done across the bid-ask spread but is also possible across different exchanges or broker platforms.

In crypto, arbitrage scalping can and often does extend to decentralized finance (DeFi) and the various decentralized exchange (DEX) protocols found on blockchain ecosystems like Ethereum.

Many DEXs use liquidity pools where users contribute assets into a pool against which other users trade. Prices of the assets in the pools fluctuate based on trading, but often rely on arbitrate scalpers to balance out and attain parity with the wider market.

As the price of a cryptocurrency in one of these liquidity pools deviates by a couple of basis points, arbitrage traders will spring into action. If it’s cheaper than on the wider market, they’ll buy it up from the pool and sell it on a highly liquid exchange to profit off the difference. If it’s more expensive, they’ll buy it on another exchange and then sell it into the pool.

The fact that many DEX platforms rely on arbitrage to work properly is telling and offers an indication as to why many highly capitalized Wall Street firms are so set against crypto regulation.

How to Set up Crypto Scalping

Now that you know what scalp trading is and what some of the most popular sculpting crypto strategies are, let’s take a look at the steps you need to get set up:

#1. Analyze the Market

Since you’re reading this article, you might be thinking about scalping crypto rather than Forex or stocks.

Even so, the cryptocurrency market operates differently from these traditional markets, including the fact that it’s 24/7. Sage advice applicable to traditional markets, such as volumes being lower during lunchtime, simply doesn’t apply to crypto. You can even buy crypto on Christmas Day!

For that reason, it’s a good idea to analyze the market and decide what factors are going to influence your strategy. Rather than lunchtime being a trough when it comes to activity, you may instead observe different phenomena during night and day for major markets like the U.S. or a change in volume when the Asian market “wakes up.”

#2. Choose a Platform

Once you’ve decided on a set of assets and the market(s) you’d like to trade in, it’s wise to search for a platform that’s the right fit for you. Some exchanges are geo restricted so you can eliminate them right away, and others may have fee structures that make them more or less conducive to scalp trading.

#3. Choose Bots

Bots are small programs coded in various programming languages that allow scalpers to automate certain trading strategies. Since scalping is all about speed, bots can help traders enter and exit positions faster and more efficiently.

Some exchange platforms have even integrated bots into their systems, but it’s always wise to do a little due diligence on a bot and its creator before you start investing. There are scams everywhere in crypto, and bots are no exception.

#4. Monitor Multiple Time Frames

Scalp trading is done across as few time frames as possible and tends to rely on technical analysis. For this reason, most traders utilize tools and charts looking at 1-minute or 5-minute time frames rather than the day, week, or even year or YTD charts they’d employ for swing trading or investing.

Benefits of Crypto Scalping

Scalp trading is one of the most popular forms of trading, even though it is sometimes criticized in the media. While it does have certain risks and downsides, here are some of the benefits of scalping.

Quick Profits

One of the main benefits of scalping is that traders can make very quick profits. These profits may be quite small if a lower-risk strategy is chosen, but these small profits can be locked up with quick exits and even compounded in a very short time frame.

Patience is one of the key attributes required of a professional trader, especially when it comes to swing and even day trading.

Still, the fast turnarounds inherent to scalping don’t really require this attribute. Rather, traders are better served enforcing a strict trading strategy and exiting positions to lock in quick gains, even though holding for a little longer might seem like a good idea.

Low Exposure to Risk

Risk management is key to any sort of trading, but crypto scalping can be low-risk if done right. Cryptocurrencies, in general, tend to be viewed as a high-risk asset class, and this is justified given the extreme volatility the markets often experience, and the demise of many projects once considered sure bets.

For this reason, long-term holding and even swing trading can be quite risky. These strategies rely on fundamentals, which are often called into question regarding crypto. Even cryptocurrencies viewed as fundamentally sound can experience extreme volatility in a short space of time, which makes keeping a position open risky.

Scalping crypto, however, means closing those positions very soon after opening them, sometimes even down to a time frame of seconds. This eliminates much of the risk concerning the asset lacking fundamental value, and many so-called “shitcoins” are fair game for scalping if they’ve got enough volume.

Low Investment

As mentioned, scalping with a significant amount of capital is often a good way to make the most profit. However, having lots of funds to start with isn’t always essential. For one thing, you can leverage your capital so that the pay-off is that much higher.

On top of that, the frequency of trades and booking profits means that you can start to compound your capital quite fast. For example, a 1% profit on your first trade means that you have 101% of your starting capital to work with for the second, and things can snowball very quickly.

Disadvantages of Crypto Scalping

There are plenty of benefits to scalp trading, and it can be very lucrative, but everybody would do it if it were that easy. Let’s take a look at some of the cons of crypto scalping.

Higher Fees

One of the problems faced by crypto scalpers is the cost involved in making so many trades. Frequent trading can see profits add up, but so do commissions and trading fees, so choosing the right broker or venue for trading is of the utmost importance to avoid scalping crypto fees.

This is also true when it comes to arbitrage scalping in DeFi. If you’re operating on Ethereum without using a layer 2 solution to cut down costs, gas fees can really eat into your profits unless you’re deploying a staggering amount of capital.

Requires Advanced Knowledge

Scalp trading isn’t particularly easy in a backdrop where trading itself is often needlessly complicated. Furthermore, novices attempting to scalp are mere goldfish in shark-infested waters, with plenty of high-frequency trading firms enjoying massive advantages in both technology and leverage.

Competing against this backdrop is only possible if you know what you’re doing, and it’ll take a lot of research on which coins to trade, what trading venues to use, and what resources you need before getting started. And that’s not even getting into the ins and outs of DeFi, which you’ll need to understand if you want to scalp or arbitrage using a DEX.

Requires Speed

As mentioned, high-frequency trading firms are the big fish in the scalping pond, and speed is of the essence. While it’s possible, it’s very difficult to manually execute scalp trades and carry out the desired scalping crypto strategies. Algorithms and bots are your friends, but every other scalper has them too.

Crypto Scalping Best Practices

Crypto scalping can be a very profitable trading style if done right. There’s a reason that high-frequency trading is employed by some of the most profitable firms in the world, and scalping comes as close as possible to those same methods.

However, there are a few things to remember and a handful of best practices to pay attention to, especially if you’re new to crypto scalping.

Demo Account

Aside from educating yourself on how the crypto markets work and what strategies you’d like to employ, it’s often best to start without any actual funds. A demo account allows you to do this. If you can’t find a good demo account provider, you can also just fire up a spreadsheet and do some paper trading instead.

Granted, a demo account won’t get the profits rolling in, but it’ll help you get used to the process of scalp trading and allow you to get a feel for what works and what doesn’t. It’ll also give you a good idea of what resources you need and what routines to employ.

Utilize Bots

The name of the game in scalping is speed and quantity, and nothing’s faster than automation. It’ll also be quite draining to manually enter and execute the tens or even hundreds of trades required every day to scalp successfully.

That’s where bots come in. A variety of bots, or trading algorithms, can automate scalping and allow you to sit back and take a more strategic approach to things as the bot does the work. So many of the top crypto exchanges even have their own bots that you can use in order to help you scalp more efficiently.

Learn to Manage Risk

Risk management is super important when trading in general, and that holds true for scalping crypto as well. Unfortunately, many trading firms worth billions have come crashing down due to poorly managed risk and an absence of controls, so it’s a good lesson to learn.

One of the simplest tools for basic risk management, especially when using leverage, is the stop-loss order. This is an automatic directive a trader can give their broker whereby a position is closed if it takes a certain amount of loss. So while realizing a loss never feels nice, it’s a lot better than getting caught in a flash crash or a dump and getting liquidated entirely.

Choose a Low Fee/High Liquidity Exchange

Fees are one of the biggest things to watch out for when trading based on volume and focusing on small profits. If you’re buying long-term, a sizable fee doesn’t matter since you’re also looking for a significant profit margin. Although every small fee makes a big difference when scalping for just a couple of percent.

Liquidity is another big consideration. A foolproof strategy is one thing, but if trading volume dries up, executing that crypto scalping strategy may become impossible as orders fail to hit. For this reason, it’s good to choose an exchange that offers significant liquidity, at least in the coins you want to trade.

Try Various Strategies

As mentioned above, there are several scalping strategies you can use to trade successfully. However, not all of them are suited to every situation. Arbitrage trading, for instance, is very suited to DEX platforms using liquidity pools, but you shouldn’t expect to have any success arbitraging between two highly liquid centralized exchanges instead.

It’s also possible to scalp on the short rather than just the long side. Most traders think about buying a coin to open a position and then selling to close it, but short-selling on a downtrend can complement that effectively. Remember that short selling can lead to infinite losses, but longs can only lose their initial investment.

Key Takeaways

Crypto scalping is an extremely profitable way to trade cryptocurrency and a great way to earn a supplementary or even primary income as long as you’re aware of the risks. It relies on a high volume of quick trades and the determination to close out a position for a small profit rather than “letting it run” in the hope of more gains.

It’s a trading style that has certain barriers to entry in the form of advanced knowledge of the ins and outs of the crypto markets, but it can be lucrative if done properly and consistently. Crypto scalping isn’t for everyone, but it’s certainly worth the time and effort it demands.

Scalping Crypto FAQ

• What is crypto scalping?

  Crypto scalping is a trading style where you are looking to make a large number of trades within a short period of time, taking a small profit on each occasion. This is often backed by either a large capital base or leverage, which has the effect of amplifying the profit you make on each trade.

• What coin is the best for scalping?

  When scalping, it’s often preferable to have coins that feature both high trading volume and a narrow bid-ask spread. The coin that consistently matches these characteristics the best is Bitcoin, but there are several other popular and highly liquid cryptocurrencies that you could scalp trade successfully.

• Is crypto scalping profitable?

  When done right, crypto scalping is definitely profitable. One of the biggest advantages is that it creates quick, realized profits rather than notional profits, and scalp traders are generally insulated from things like overnight crashes or extended periods of downturn. Scalpers can even profit using buy-only strategies during a bear run by range trading, for example.

• Is crypto scalping for beginners?

  It is possible for a beginner to engage in crypto scalping profitably, but in general, scalping requires a lot of research and practice. Setting up bots can be tricky, as can carrying out quick on-chain trades when arbitraging liquidity pools.

• Is crypto scalping illegal?

  Crypto scalping isn’t illegal since it is nothing more than a particular trading strategy based primarily on technical indicators and utilizing quantity when it comes to capital and frequency.

  However, the word “scalping” itself has negative connotations, especially in crypto-adjacent industries such as GPU sales. Furthermore, scalping by an investment advisor, in the sense of front-running by purchasing a security for their own account before recommending it to others, is indeed illegal and has been the focus of both civil and criminal enforcement recently in the U.S.