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The Method of Scalp Trading

Good day, I welcome you to this wonderful discussion we are going to have. As we move along together with practical examples, you would see why scalping can be a viable strategy in you trading system when trading. I would begin by briefly talking about what Scalp Trading is, then i would render some practical examples to show how to scalp trade.

There are different types of trading styles by which a prospective trader can use to get started in trading, however most of these styles are best suited to the personalities of the traders making use of them.
There are generally four types of styles a trader can employ when attempting to make a trade, they include:

• Swing Trading
• Day Trading
• Position Trading
• Scalping

We would be looking at scalping as a trading style which any prospective trader can use in order to make profits from the markets.

What is Scalp Trading

Scalp trading or scalping is a type of trading method by which a trader opens a position and closes that same position within a short period of time in order to make quick and small profits. The name Scalp trading is derived from the aims of a trader, which is, to literally Scalp lots of small profits from a huge number of trades throughout the trading day.

Traders make use of this strategy because smaller moves occurs more frequently in the crypto markets than larger ones, this makes it very appealing for scalpers alike to benefit from, because there are many small movements in the crypto markets.
Due to this fact, scalpers can place multiple trade in a single day trying to make small profits.
A trader using this method should be aware that to be successful, you have to have intense focus and quick thinking. This is so because not everyone can handle such demanding and very fast style of trading. It is certainly not for those seeking to make big wins all the time, rather it is suitable for those trying to rake in small profits over a long period of time in order to make significant profit.
The idea behind scalping as a strategy is that lots of small profits would easily morph into very large gains.
This trading style focuses on opening larger trading positions sizes, i.e. making use of leverage, for smaller profits as you hold those positions at the shortest period of time, which can be from a few seconds to some minutes. They also use tight stop-losses.

Qualities of a Scalper

• Have fast fingers
• He can think fast, change bias, or direction quickly
• An impatient individual that doesn't like to wait for long trades.
• Have the tenacity to be focused at charts for several hours a day
• Likes the excitement of the fast movement of the market.

Classification of Scalp Traders

There are two types of scalp traders depending on the the pre determined set of rules or requirements by which they follow. They are discretionary and systematic scalp traders.

1. Discretionary scalp traders are traders who makes trading decision on the spot, as the formations of the markets starts unfolding. They might or might not have a specific rules to follow, however they make decisions based on the prevailing conditions. To be succinct, discretionary scalp traders can decide to consider many factors, their rules are not that rigid, and they rely more on intuition and gut feeling.

2. Systematic scalp traders use a different approach to their trading style. They have a trading system that is well defined and can trigger entry or exit points for them. Their rules are more rigid, if certain conditions in their rules are met, then it is an opportunity to either enter or exit a trade. Systematic trading is more data-driven than discretionary trading which relies more on intuition.

Pros & Cons of Scalp Trading Style

Using scalp trading as a method in which you want to be trading with can be great, but you should also consider the downside in using this strategy.

Pros

• Small movement that traders can benefit from.
• All position are closed at the end of the day.
• Because the positions are opened and closed within a short period of time, you reduce the risk of losing your account.

Cons

• Stay glued to charts, which can make it a tiresome activity.
• Opening multiple positions everyday to seek small profits.
• Requires quick thinking and intense focus.
• Since you are in and out a position quickly, you can only focus on one pair at a time, which makes it easy for you to miss out of profitable trades in other pairs.
• High cost of spread end up eating you small profits.

Finger Trap Scalp Trading Method - 8/34 EMA

I am going to be giving an example of how the scalp trading method can work using the Finger Trap method.
This method employs the use of Moving Averages (MAs), but in this case it is Exponential Moving Averages (EMAs).

Moving Averages tracks the closing price of an asset pair within a period, say 1 minute, 1 hour etc. However Exponential Moving Averages give more weight on the most recent close of prices within a period. This means that EMAs gives signals on what is happening now rather that what has happened in the last minute, hour, week etc.

In the Example below, I used the MT4 trading platform from instaforex. I am using 8 and 34 EMAs which are the yellow and purple lines you see on the chart. The Yellow line is the 8 EMA and the purple line is the 34 EMA. As you can see the yellow line (8 EMA) is closer to the candles than the purple line. The 8 and 34 used denotes the period of the EMA. The way this method works i believe is that when the yellow line (8 EMA) crosses the purple line from bottom facing up, the it can be seen that an uptrend market is by the corner. And if the yellow line crosses the purple line from top facing bottom, then it can be said that a downtrend is by the corner.

The principle behind this method is that you quickly enter a trade and come out of it quickly, so naturally the timeframe of the charts are between 1minute and 1hr, but I prefer 15minute. On getting signals from the EMA, you should prepare for it in terms of entry points and exit points. Sometimes too you don't have to wait for the yellow line to cross over the purple line, you can also open a position when the candle stick goes under the yellow line which can also indicate a downtrend as well as when the candlestick goes above the yellow line, it could indicate an uptrend.

The blue candlesticks indicates the bullish candles which shows when the market is in a bullish market or an uptrend, and the red candlestick indicates the bearish candles which means that the market is in a bearish market or downtrend.

First Example

For the first example, i used the M5 chart of BTC/USD, which is the 5 minutes timeframe of the BTC/USD chart. This means that every candlestick action between the open of the candle and the close of the candles is within 5 minutes.

Image 1 - Bearish signal on BTC/USD M5 chart

From Image 1 above i saw that two candles were below the yellow line which to me indicated that the market was in a downtrend, so rather than wait for the yellow line to cross the purple line, i decided to open a sell position.

Image 2 - Open sell position on BTC/USD M5 chart

Here i have opened a sell position which is the green broken line that is just near the red candlestick, then i started setting up the stop-loss system. When i opened the position, i was already at a loss because of the spread which is the amount gotten from the bid and ask price.

Image 3 - Placed stop-loss

At this point i had put the stop-loss in place which is the red line above the green line which is the open position. Then i allowed the market to move to see how the market would be.

Image 4 - Closed position

Because of the nature of scalp trading, i closed the position after the market move a little, that is, two candlesticks. When i closed the position i was lucky enough to close in profit. This was demonstrated from the blue section in my account history.

Second Example

This second example is the M1 chart of the LIT/USD, Litecoin 1 minute chart. Here there candles move every one minute.

Image 1 - Opening of position

In this example, the yellow line crossed the the purple line from up to down indicating that the market is in a downward trend. So i decided to open a sell position for this market.

Image 2 - Market movement

Here we can see that the market moved in the direction in which i hoped for. Also we can see that the opened position gave a negative P/L on the account section.

Image 3 - Market movement & closing of position

We can also see that this position was a successful one as the trend last for some time, 3 minutes i think, judging by the number of candle sticks. So i closed the position as quickly as possible. Even though the position proved successful, i still closed at a loss because of the spread price which affected the profits gotten from this position.

thanks @yohan2on for giving me this opportunity to take on this exercise.