Scalping is the way traders make money by trading fast and very often in a short time. With this method, traders set very small profit targets for the positions they open, and when they reach these targets, they quickly close their positions. A scalper can trade hundreds or even thousands of times in a typical trading day. Crypto scalping is also very popular due to high volatility of crypto assets.
It’s important to keep in mind that it’s time consuming to trade many times with small profit targets. Although this method is generally seen as low risk by traders, it is not advantageous in all respects.
Disadvantages of scalping
A big portfolio is needed to earn a decent amount of money because of low profit ratio. You can’t avoid a higher level of risk when you trade this way, because a small price movement can bring a bigger loss. If a trade goes against you, you have to close it immediately. It’s very hard to wait until the price returns to the expected position, so scalping is a high risk trading method.
Trading commissions make it harder for you to profit when trading with a low profit target. High trading commissions also make it harder for you to use the “pick up nickels in front of a steam roller” strategy when trading.
Many people do not realize this, but the bid/ask spread (the difference in the price at which you can buy and sell in any given market) is determined by the trading commissions. This means that the bid/ask spread in any market is at least equal to the trading commissions that you pay. If you like to scalp the market, then high trading commissions are a nightmare.
High spread makes it harder for you to profit when trading with a low profit target. This is especially important in the case of a short options strategy, where we need to be right on both direction and magnitude. A wide bidask spread makes it harder to get that right.
If you’re trading a naked put, the “right” price is where you get assigned, so you need to be trading in a liquid enough market to get assigned at the right price. If you’re doing a covered call, you need to be trading in a liquid enough market so that when you’re assigned, you’re not getting a horrible price.
It takes time to earn a decent profit when trading with a low profit target. If you’re patient, you can make a lot of money with this method. The risk comes from the fact that you’re only looking to make a few pips, and each pip could take a few minutes. This is why it’s important to have plenty of time to trade each day. If you’re a busy person, this is not for you.
Stay away from big news!
Another risk in crypto scalping is getting stopped out by a fast-moving news event. This can be mitigated by choosing a longer time frame (such as the 60-minute chart) and/or having a plan for news events.
When scalping, you take advantage of being able to predict the natural swing of prices. But big news suddenly disrupts the natural oscillation, pushing the price in an unpredictable direction.
It’s always a good idea to do this on a demo account for a while to get a feel for the risk of crypto scalping.
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