If you’re thinking about trading cryptocurrencies, you’ll need to decide on the trading strategy you want to pursue. There are many different ways to trade cryptocurrencies and each style is as unique as your personality. Picking a style depends on various factors— from how much time you’re able to dedicate to trading to how much risk you’re willing to take. Digitex Futures CEO Adam Todd shares his thoughts about how to profit from scalping.
What Is Scalping?
Many traders prefer longer-term styles of trading such as position or trend trading. These types of traders often hold a position open for lengthy periods of time using leverage to amplify their profits.
The returns on this type of trading are often way greater than short-term day trading strategies, particularly scalping. However, they can expose (especially novice) traders to far greater risks of getting liquidated if they make a wrong call.
Scalping, rather than seeking to make huge gains with high risk, looks to build-up a lot of small profits over time. Scalping is a very aggressive form of day trading and requires full concentration. Scalpers will often open multiple positions in a day and close them within minutes; sometimes even seconds, looking to profit from the smallest of price fluctuations.
It’s a trading strategy that requires a lot of discipline and practice, but when the conditions are right, according to Adam Todd, you can learn to win at scalping in any market.
When I was trading futures in the pit and later as a sports betting trader, my scalping style was always more focused on avoiding losing trades rather than trying to ride the winners. I did this by making my trades as short-term as possible. I learned that the longer I held a position, the bigger the risk of my position turning into a loser.
How to Profit from Scalping
Adam saw a correlation between how successful he was and how long he held a position open before “going flat” again. He says,
The less amount of time in a position, the better chance I had of that trade not being a loser. My trade selection process was to be flat for most of the time, and occasionally darting in and out of the market stealing single tick profits from larger moves when momentum picked up.
It’s not easy to become a successful scalper, he warns. Scalpers need to understand the markets very well and make a judgment call over their momentum. If the market momentum is high, for example, a scalper may hold the position for a few more seconds longer. But if they fail to see at least a single tick profit within that very tight timeframe, they must know when it’s time to scratch their losses and move on.
No Need to Learn About the Underlying Asset
The Digitex CEO explains that scalpers have absolutely no need to know about the underlying asset they are trading. It doesn’t matter whether they’re buying and selling cryptocurrencies or German government bonds; the strategy is the same—watching the market and profiting from small price movements.
As a young pit trader, I didn’t know what a Bund futures contract was or why it moved around so much. Later, as a sports betting trader, I wouldn’t even know the name of the horse on which I was placing and laying hundreds of bets. Yet, I would go weeks and sometimes months of full-time trading as a scalper without having a single losing day.
He insists that short-term scalping requires zero knowledge of the instrument being traded. Scalpers simply need to enter and exit a position as soon as possible, hopefully making a one or two tick profit from each one. Keeping in mind, as Adam mentioned, that the strategy is about minimizing losses rather than maximizing gains. Scalpers need to be willing to “scratch it or lose a tick without any emotional attachment to the trade.”
Emotions Have No Place in Scalp Trading
As previously mentioned, scalping is a full-time job and it’s very labor-intensive. You need to keep distractions down to a minimum. Adam says,
you can’t be checking your Facebook or writing emails while you’re scalping. You need to be following the price the whole time, whichever way it’s going.
Scalpers also need to leave emotions to one side when they’re trading. If they have an attachment to the asset, they’re unlikely to find success as a scalper. “The safest style of scalping is simply following the price, jumping in when momentum is at its highest and then getting out quickly.”
It’s actually better to have no opinion or knowledge of the long term price direction of the underlying instrument so that it doesn’t affect your ability to go against that opinion in these short term scalp trades.
Scalping with Cryptocurrencies
The current cryptocurrency exchange scene makes it very hard for short-term scalpers to amass profits over time. This is because the maker/taker fee model of cryptocurrency futures exchanges often renders small profits unviable, turning winning days into losing ones.
Adam explains that when he was scalping on the Bund, it was significantly easier because the commission fee to buy and sell one futures contract was one-tenth of the value of one tick, leaving room for profit.
However, with cryptocurrency exchanges, Adam remarks,
Commissions are astronomically high. Currently, my style of short term scalping to win is literally impossible. The commission cost of buying and selling one futures contract with a taker order is more like ten times the value of one tick. That’s absolutely crazy! It’s literally impossible to beat odds like that running against you.
It is because of Adam’s experiences as a pit trader paying commissions and the existing limitations of the cryptocurrency futures exchange market that is motivating him to remove the commissions in trading.
Digitex Futures uses a completely different revenue model that allows it to operate and manage costs through token issuance and token appreciation. All trades are also placed in DGTX, which creates a constant demand for the exchange token and allows the exchange to remove commissions from every trade. This means that scalpers can trade as actively and as aggressively as they want on the Digitex platform without having to part with any of their winnings.
The side-effect of this is a highly liquid marketplace since there are so many people trading on it. “The Digitex Futures exchange will be a short-term trader’s paradise,” Adam enthuses. “Traders will be free to pursue day trading futures strategies like scalping that are not viable anywhere else, creating massive liquidity in the process.”
Demand already seems to be high for commission-free trading with over 1.5 million currently signed up to the waitlist for the public testnet launch on November 30. Just as Bakkt’s launch will help Bitcoin with price discovery, Digitex Futures may just open up a whole new market for short-term scalpers.