Short-Term Crypto Trading: A Guide to Scalping and Risk Strategies

What is Short-Term Cryptocurrency Trading?

It’s hard to imagine successful trading of any asset, including cryptocurrencies, without a well-thought-out strategy. One or two lucky trades may be possible, but overall, achieving success will be quite difficult.

This article will focus on various trading strategies, with an emphasis on short-term cryptocurrency trading, its features, advantages, disadvantages, and other nuances.

Short-term trading is a preferred method for traders seeking excitement and fast profits. If you often find yourself glued to the 1-minute chart and enjoy entering and exiting trades quickly, ultra-short-term trading might be a strategy worth considering.

Short-term traders aim to profit from small price fluctuations rather than large price swings. Their objective is to accumulate small gains over time. Ultra-short-term traders typically use leverage and tight stop losses.

One of the most common short-term trading strategies is scalping. Scalping involves making multiple trades within short time frames, relying heavily on technical analysis and quick decision-making.

Let’s start by understanding cryptocurrency scalping and exploring some of the most common scalping strategies.

Common Ultra-Short-Term Trading Strategies

Short-term traders utilize various strategies to capitalize on price movements. Below are four key strategies, including specific entry and exit criteria.

1. Range Trading

This strategy involves identifying a price range in which an asset is trading and placing trades near support and resistance levels.

• Entry: Buy near the support level when the price shows signs of reversal (e.g., bullish candlestick pattern) or RSI indicates oversold conditions.
• Exit: Sell near the resistance level when the price approaches overbought conditions.
• Stop Loss: Below support for long trades, above resistance for short trades.
• Example: BTC/USDT trading between $40,000 and $41,000. Enter a long trade at $40,100, set a stop loss at $39,800, and exit at $40,900.

2. Breakout Trading

Traders look for strong moves beyond support or resistance levels, often accompanied by high volume.

• Entry: Buy when the price breaks above resistance with increased volume; sell when it breaks below support.
• Exit: Set a profit target at the next key resistance/support level.
• Stop Loss: Below the breakout level (for long trades) or above it (for short trades).
• Example: ETH/USDT breaks above $3,200 resistance with high volume. Enter at $3,220, stop loss at $3,180, and take profit at $3,300.

3. News-Based Trading

Traders capitalize on market volatility following major news events.

• Entry: Enter immediately after a news event if there is strong momentum in one direction.
• Exit: Take profit when the momentum weakens.
• Stop Loss: Placed based on recent volatility levels.
• Example: Bitcoin surges after ETF approval. Enter long at $45,000, stop loss at $44,500, exit at $46,500.

4. Momentum Trading

Traders enter positions based on strong price movements.

• Entry: Buy when price trends upward with increasing volume and indicators confirming strength.
• Exit: When momentum slows down.
• Stop Loss: Below recent swing low.
• Example: SOL/USDT rises 5% with high volume. Buy at $100, stop loss at $98, take profit at $105.

How Do Short-Term Traders Use Technical Indicators?

Technical indicators help traders make informed decisions. Here’s how to use some key indicators:

1. Moving Averages (MA)

• Settings: 9-period and 21-period EMA.
• Buy Signal: When the 9 EMA crosses above the 21 EMA.
• Sell Signal: When the 9 EMA crosses below the 21 EMA.

2. Relative Strength Index (RSI)

• Settings: 14-period RSI.
• Buy Signal: RSI below 30 (oversold conditions).
• Sell Signal: RSI above 70 (overbought conditions).

3. Bollinger Bands

• Settings: 20-period SMA, upper and lower bands.
• Buy Signal: Price touches the lower band and bounces.
• Sell Signal: Price touches the upper band and reverses.

4. VWAP (Volume-Weighted Average Price)

• Usage: Helps identify trend direction and trade entries.
• Buy Signal: Price crosses above VWAP.
• Sell Signal: Price crosses below VWAP.

5. MACD (Moving Average Convergence Divergence)

• Buy Signal: When the MACD line crosses above the signal line.
• Sell Signal: When the MACD line crosses below the signal line.
• Usage: Helps traders determine trend direction and strength.

Risk Management in Short-Term Trading

A solid risk management system helps prevent significant losses.

• Maximum Risk per Trade: 1-2% of account balance.
• Stop Loss for Scalping: 0.5-1.5% of entry price.
• Risk-to-Reward Ratio: At least 1:1.5 or 1:2.
• Position Sizing Formula:
  • Position Size = (Risk per trade) / (Stop Loss distance)
  • Example: If your capital is $10,000, risking 1% per trade, and stop loss is $100 per BTC, trade size = $100 / $100 = 1 BTC.

Best Practices for Risk Control

• Use Limit Orders: Reduces slippage and ensures better trade execution.
• Monitor Market News: Sudden news events can impact positions.
• Keep a Trading Journal: Helps track performance and identify mistakes.
• Set Daily Loss Limits: Stop trading after reaching a predetermined loss limit.

How to Choose Cryptocurrencies for Short-Term Trading

Selecting the right cryptocurrencies ensures better trade execution.

• Liquidity & Volume: Choose assets with at least $500M daily trading volume.
• Volatility: Prefer coins with at least 2-5% daily price movement.
• Market Depth: Ensure small bid-ask spreads to reduce slippage.
• Examples: BTC, ETH, SOL, BNB – high liquidity, good volatility, and tight spreads.

Risks and Drawbacks of Short-Term Trading

High Volatility

Cryptocurrency markets are highly volatile, attracting traders due to profit potential but also presenting risks:

• Rapid price movements: Volatility can cause sharp price shifts, creating risk for short-term trades.
• Increased loss risk: While profits are possible, market moves against predictions can quickly lead to losses.
• Difficult forecasting: Predicting price changes is challenging due to rapid fluctuations.
• Emotional stress: Price swings can cause emotional strain, especially when large losses are possible.
• Higher stop costs: Stop and limit orders may execute at unfavorable prices due to sharp movements.
• Leverage risk: Leverage amplifies both gains and losses, increasing risks.

Successful short-term trading requires effective risk management and a deep understanding of market behavior, including managing drawdowns to minimize risks.

Psychological Pressure

Traders face several psychological challenges:

• Emotional decisions: Stress can lead to irrational decisions, like buying at peaks or selling early.
• Fear of missing out (FOMO): Fast-moving markets may cause hasty, unreasoned decisions.
• Loss chasing: Traders may risk more to recover losses, increasing exposure.
• Fatigue: Constant monitoring can cause fatigue, reducing decision quality.
• Confidence swings: Success or failure can drastically affect a trader’s confidence and decisions.
• Stress: Continuous pressure can harm mental health and decision-making.

Traders need to manage emotions and maintain psychological balance to succeed, which may also involve strategies such as Scalping as a Fast-Paced Trading Strategy.

Constant Monitoring

Short-term trading requires ongoing market observation, which has its own challenges:

• Time commitment: Monitoring markets continuously can be time-consuming.
• Fatigue: Long hours can lead to mistakes due to exhaustion.
• Missed events: Key news or market changes may be overlooked.
• Technical issues: Platform failures or internet problems can disrupt trading.
• Hasty decisions: Quick decisions under pressure increase risk.
• Misinformation: Incorrect or misleading data can lead to bad trades.

To reduce risks, traders should use automated tools like algorithmic strategies, and stay informed about Fundamentals of Chart Analysis.

Commission Costs

Commissions can significantly reduce profits in short-term trading:

• Reduced profits: High commissions on frequent trades lower overall earnings.
• Hidden fees: Additional costs like withdrawal fees can add up.
• Lack of transparency: Some platforms have unclear fee structures.
• Frequent trades: Short-term strategies involve many transactions, raising commission costs.

Traders should choose platforms with low fees and streamline their strategies to reduce unnecessary trades, possibly considering entry strategies like the 3 Bar Play Pattern for Short Term Trading or the Ascending Triangle Pattern for optimal market entry.

Common Mistakes of Novice Traders & How to Avoid Them

1. Trading Without a Plan → Always have a strategy before entering trades.
2. Overtrading → Avoid excessive trades; focus on high-quality setups.
3. Using Too Much Leverage → Stick to moderate leverage (e.g., 5x or less).
4. Ignoring Stop Losses → Always use stop losses to control risk.
5. Trading Against the Trend → Trade with the prevailing trend.
6. Emotional Decisions → Stay disciplined and avoid revenge trading.
7. Neglecting Risk Management → Follow risk/reward rules strictly.
8. Not Testing Strategies → Backtest strategies before live trading.
9. Ignoring Trading Fees → High fees can erode profits, especially in scalping.

Tips for Beginner Short-Term Traders

Start with a Small Amount

Safety First: For a beginner trader, the primary focus should be on preserving investments. By starting with a small amount, you reduce the risk of loss and gain the opportunity to adapt to the market without significant pressure.

Master the Platform: Working with a limited sum allows you to understand the ins and outs of your chosen trading platform without the fear of making a costly mistake.

Learning Without Big Risks: A small amount enables you to experiment with different strategies, discovering what works best for you without risking a significant portion of your capital.

Emotional Control: Trading small amounts helps better control emotions. Larger bets often increase emotional pressure, leading to rash decisions.

Gradual Increase in Stakes: As you gain confidence in your skills and knowledge, you can gradually increase your investment amounts.

Learning from Mistakes: If you make a mistake with a small amount, the lesson costs far less than if you were trading with a larger capital from the start.

No Need for Big Trades: Many successful traders started small. The primary goal at the beginning is not to make a lot of money, but to learn how to analyze the market correctly and make informed decisions.

Patience: Starting small also teaches you patience, a key skill for any trader. Trading is a marathon, not a sprint.

Social Learning: Participate in trader communities, listen to the experiences of others, especially those who also started with small amounts. This will help you learn about common mistakes and avoid them.

Self-Evaluation: Regularly analyze your activity, noting what brought success and what led to losses. This will help you adjust your strategy and continue improving.