Scalping Trading: What It Is, How It Works, and Strategies

Characteristics and goals of scalping

Scalping is fast-paced and requires high execution precision. It is best suited to quick and agile traders.

To maximize profits, a 4-to-1 margin is used in day trading. It's essential to focus on charts that display short time intervals, such as one-minute or five-minute candlestick charts. Useful indicators for observing price fluctuations include the stochastic, moving average convergence and divergence (MACD), and the relative strength index (RSI). Price indicators like the well-known moving averages, Bollinger bands, and pivot points are used as reference points for price support and resistance levels.

How does scalping work?

The basic principle of scalping is to buy low and sell high. Technical analysis is essential to capture short-term price fluctuations. The use of leverage is common in this trading style, which is why it's considered high-risk. You won’t be a good scalper if you don't have good execution, if your strategy isn’t solid, if you don’t know how to manage losses, if you overuse leverage, if you enter or exit late, and generally if you lose perspective while trading.

Advantages and disadvantages of scalping

One clear advantage is the possibility of earning quick daily profits. Since it's an intraday trading strategy, if you have a sufficiently well-crafted strategy and the necessary conditions to have a productive trading day, by the end of each day you'll be able to count your earnings.

Scalping helps you avoid the risks involved in long-term trading and lets you take advantage of every market movement. If you become good at interpreting fluctuations and mastering quick order creation, you can exploit the advantages of intraday trading.

As a scalper, you have the advantage of exploiting technical tools to your benefit. As we've said before, everything here depends on good technical analysis. Charts will be your best friends, and you need to learn to master them. The 1-minute or 5-minute charts will give you the necessary information to make quick decisions based on various indicators like moving averages, MACD, and Bollinger bands. By knowing how to read and interpret these indicators, you’ll identify short-term trends and potential entry and exit points, and avoid classic pitfalls like late entries and exits.

Leverage is always a double-edged sword. It can be a great advantage if used consciously. As a scalper, you are in a position to take tremendous advantage of it, but you must also be very careful and manage your risks skillfully so this tool doesn't turn against you. Keep in mind that leverage can lead to much greater profits, but also to equally significant losses.

Another advantage is the applicability of scalping in many financial markets.

As for disadvantages, the main one is the high level of stress this type of trading can generate. Since the pace is fast and you constantly have to make decisions, you may experience mental exhaustion, potentially leading you to make poor decisions. Because you need to stay alert and react quickly to the slightest market fluctuations, being constantly on edge can tire you out quickly. You might not have enough energy for other activities and feel emotionally drained, leading to issues in your personal life. To mitigate this, a trader can complement their work with mindfulness practices, ensure a proper diet, and maintain good sleep habits, though sometimes trading schedules can interfere with this.

In practical terms, trading this way involves high transaction commission costs. Since the method works cumulatively, every transaction, no matter how small, will incur fees. If you don't have a plan or fee structure designed for this trading style, commission costs could eat up much of your profits and affect the overall profitability of the whole endeavor.

To practice this style of trading, you need to have enough capital. Since the profits are small, each transaction needs to be large enough that by the end of the day there is a significant amount accumulated. While it’s common for scalpers to use leverage so they don’t need to have all the money they’re trading with on hand, caution is of the utmost importance, as leverage can result in disastrous outcomes if you aren’t agile and don't have a well-defined trading strategy.

Markets and assets for scalping

Now that you understand what scalping is as a method, it’s time to think about the different assets you can trade in various markets using this approach.

The stock market is favorite for scalpers due to its high liquidity and the volume of trades that take place. For a scalper, a moving market is ideal, as the flux enables you to capitalize on the small changes that individual stocks make throughout the day, whether you’re buying, selling, or short selling.

The other top market chosen by scalpers is the forex market. It's liquid and active, making it fertile ground for intraday traders who know how to take advantage of price fluctuations in currency pairs. Forex is particularly popular because it operates 24 hours a day, allowing traders in different parts of the world to access the market at any time. Popular currency pairs can have movement around the clock, which is why pairs like EURUSD are commonly used with this strategy.

Scalping in the forex market

As a trader, you might be in a time zone with challenging hours or need to accommodate other responsibilities. In that case, you’ll need a market with constant liquidity. That’s what makes the forex market a favorite among scalpers. When you want to trade at any time and from anywhere, this is the best market to do so. Additionally, forex brokers often offer higher leverage. It always bears repeating, however, that leverage is a double-edged sword and should only be used with a clear strategy and thorough market analysis. As a third advantage, some brokers offer low spreads, which increase profits from small fluctuations.

Scalping in the stock market

As we’ve mentioned, due to its liquidity and dynamism, this is the favorite market for scalping. You can trade stocks of large companies like Apple, Microsoft, or Tesla, which are particularly liquid, with many buyers and sellers creating price fluctuations and fast order executions. These stocks frequently experience significant movements, making it the perfect environment for a scalper with a solid strategy to make the most of it. Remember, technical tools are essential for entering this market with a clear direction. You can use technical indicators like MACD, moving averages, and Bollinger bands to identify entry and exit points.

Scalping in the indices market

The indices market is also a good place for scalping. While it may not be as active as the forex or stock markets, some indices demonstrate considerable volatility, and the advantage is that price movements are more predictable. Indices like the S&P 500, Nasdaq 100, Dow Jones, or DAX 30 have great liquidity and represent large tech companies. During important economic events or macroeconomic data releases, the behavior of indices becomes more predictable. Since anticipating short-term price movements is key to profiting with this strategy, scalpers can capitalize on this opportunity to great effect.

Best indicators for scalping

We’ve discussed the importance of indicators as key tools for effective scalping with good strategy and risk management. These help identify market trends and make informed decisions.

• Moving averages

Moving averages are divided into two types: the simple moving average (SMA), which averages the price of two assets over a given period, and the exponential moving average (EMA), which gives more weight to recent data and is more accurate in detecting rapid price changes.

• Bollinger bands

This is a volatility indicator that shows if an asset is overbought or oversold.

• Relative strength index (RSI)

Measures the speed and change of price movements. It ranges from 0 to 100: if the level is above 70, the asset is overbought; if below 30, it’s oversold.

• Stochastic indicator

This compares an asset’s closing price with prices over a specified period. It also ranges from 0 to 100, indicating overbought conditions above 80 and oversold conditions below 20.

Scalping strategies

• Moving average crossover strategy

One of the simplest strategies involves using two moving averages (typically a fast one, and a slow one) to find trend changes and entry/exit points.

• 1-minute scalping strategy

This strategy seeks to capitalize on price movements within very short periods, typically using 1-minute charts to identify opportunities.

• Breakout strategy

This involves finding key support and resistance levels. A breakout occurs when the price exceeds a significant support or resistance level, signaling a trend change.

Example of a scalping strategy

Let’s look at an example of the moving average crossover strategy. Moving averages help identify trend direction, and crossovers generate entry signals. The RSI confirms whether the market is in an overbought or oversold zone, giving greater certainty about the crossover’s validity.

Strategy parameters

14-period RSI: Helps confirm entry points by identifying if the asset is in overbought (RSI > 70) or oversold (RSI < 30) conditions.

1-minute or 5-minute chart.

Strategy rules

Buy signal (long entry): When the 9-period EMA crosses above the 21-period EMA, a buy signal is indicated, suggesting short-term upward momentum.

Before entering the trade, check that the RSI is above 50 but below 70, confirming that the market has bullish strength but is not yet overbought. Enter a buy trade once the EMA crossover is confirmed and the RSI is in the appropriate zone. Set the stop loss 5-10 pips below the nearest support level or a key level identified on the chart. Set the take-profit target at 5-10 pips, depending on market volatility.

Sell signal (short entry): When the 9-period EMA crosses below the 21-period EMA, a sell signal is indicated, suggesting that short-term upward momentum is weakening.

Confirm that the RSI is below 50 but above 30 to ensure that the market has bearish strength without being in an oversold condition. Enter a sell trade once the EMA crossover is verified and the RSI is in the appropriate zone. Set the stop-loss 5-10 pips above the last resistance or a key level on the chart, and set the take-profit target at 5-10 pips or adjust according to the planned risk/reward ratio.

Scalping platforms: FBS app and MT5

As we've established, scalping involves constantly opening and closing many positions to accumulate small profits, which, depending on your strategy's effectiveness, will add up to your daily earnings. To make this possible, you need a platform that allows for the continuous process of opening and closing positions quickly and efficiently, and provides real-time chart access. Additionally, it’s crucial to work with a broker offering low spreads (if you’re trading forex), or competitive commission plans.

Best financial assets for scalping

Based on everything discussed above, here’s a list of the best financial assets for scalping.

• For currency pairs, due to higher liquidity and volatility:

EURUSD, GBPUSD, USDJPY, AUDUSD

• In the stock market, the most popular assets for scalping are:

Apple (AAPL)

Tesla (TSLA)Amazon (AMZN)

Microsoft (MSFT)

• Indices:

S&P 500 (US500)

Nasdaq 100 (US100)

DAX 30 (DE30)

FTSE 100 (UK100)

• Crypto:

Bitcoin (BTC)

Ethereum (ETH)

Ripple (XRP)

Litecoin (LTC)

Tips and recommendations for scalpers

• Choose a broker that offers low spreads, competitive commissions, and fast execution.

• Create a solid trading plan. Know how much you can afford to lose and how much you want to earn, setting stop-loss and take-profit orders. Follow a strategy that has been tested by other scalpers.

• Stay focused and disciplined. Even in periods of volatility, try to mitigate stress to avoid losing perspective. Avoid distractions and don’t chase the market; stick to your trading plan. But don’t forget to stay informed about the market to make well-informed decisions and be aware of events that can shake up the economic landscape.

• Manage your risks properly. While leverage may be tempting, use it cautiously to avoid significant losses. Control position sizes to align with your plan and risk tolerance. Diversify your trades; as the saying goes, "Don’t put all your eggs in one basket".

• Use tools and take advantage of automation processes to ensure the speed necessary for successful scalping. EAs, hotkeys, alerts, and customizable notifications will be your allies in navigating market volatility.

Frequently asked questions about scalping

• How long does a scalping trade last?

It can last from seconds to a few minutes, or even hours, but must close within the trading session it was opened in.

• What assets are best for scalping?

The best assets are those with high liquidity and volatility, such as currency pairs, large-cap stocks, and cryptocurrencies.

• What is the best time of day for scalping?

It depends on your time zone, but you should look for periods with the most volatility and liquidity in your chosen market.

What are the best platforms for scalping?

• How much capital do you need for scalping?

It depends on the market, the asset, and the broker. In the forex market, you can start with a relatively small amount due to the leverage offered by brokers. However, it’s always a good idea to have enough capital to absorb potential losses and cover commissions.

• Is it legal?

Yes, in most markets, scalping is legal.

What are the most recommended currency pairs for scalping?

The best currency pairs for scalping are those that offer high liquidity, low spreads, and enough volatility to profit from small movements.

• EURUSD

The most traded pair in the forex market. Its high liquidity ensures tight spreads and fast order execution. The volatility is not extreme, making it more predictable than other options. It has consistent price movements during major market sessions (London and New York).

• GBPUSD

The spreads are generally wider than with EURUSD, but it offers high volatility and decent liquidity.

• USDJPY

One of the most liquid pairs, and less volatile than others, as the economies involved are relatively stable.

• EURJPY

The EUR brings liquidity, and the JPY adds volatility, making this pair a good option for scalpers, especially during the overlap of European and Asian sessions.

How do I use stop-loss in scalping trades?

A stop-loss order automatically closes a position when the price reaches a predefined level set by the scalper.

It’s essential for limiting your losses in case the market moves against your position. You can set a fixed value in pips for each position that you’re willing to lose. You can also place the stop-loss near key support and resistance levels, which provides more security and a wider range for trading, and avoids the order being triggered by insignificant movements. A third option is to set the stop-loss based on technical indicators, creating a more dynamic order that adapts in real-time to market fluctuations.

What is a good time frame for forex scalping?

It depends on the chosen strategy, but the most common and effective time frames for this trading style are 1-minute, 5-minute, or even 15-minute charts in some cases.

The 1-minute chart (M1) allows you to see the smallest movements, which can be advantageous, but also exposes you to market noise—false signals due to random minimal movements.

The 5-minute chart (M5) offers a balance between frequency of opportunities and reliability of the signals.

The 15-minute chart (M15) is not as commonly used by scalpers, but the signals show clearer trends, allowing you to capture larger movements that don’t require instant reaction times.

How do I find markets for scalping?

Markets with high liquidity, where you can buy or sell an asset without significantly affecting its price, are your best allies. You need fast order execution, and liquidity ensures there are always counterparts looking to buy or sell. To determine which markets have greater liquidity, you can check the daily trading volume, as higher volume typically indicates greater liquidity. Tight spreads are also indicative of liquidity. But above all, choose a market you understand well so you can navigate it confidently and make the most of it as a scalper.