We can consider two types of scalp traders – discretionary and systematic scalp traders.
Discretionary traders make trading decisions “on the spot,” as the market unfolds before them. They may or may not have a specific set of requirements for when to enter or exit, but their decisions are based on the conditions at hand. In other words, discretionary traders may consider many different factors, but the rules are less rigid, and they rely more on intuition and gut feeling.
Systematic traders take a different approach. They have a well-defined trading system that essentially triggers entry and exit points for them. If certain conditions of their ruleset are met, they enter or exit a trade. Systematic trading is a much more data-driven approach than discretionary trading. Systematic traders rely less on intuition and more on data and algorithms.
In fact, this classification could apply to other types of traders as well. However, the distinction is more clear when it comes to short-term strategies. After all, discretionary trading may not work as consistently on higher time frames.
Some scalpers will employ a strategy called range trading. They wait for a price range to be established and trade within that range. The idea is that until the range is broken, the bottom of the range will hold as
support, and the top of the range will hold as
resistance. This is, of course, never a guarantee, but it still can be a successful scalping system. However, good scalp traders will prepare for a breakout from the range by setting a
stop-loss.
Another scalping technique involves exploiting the
bid-ask spread. If there is a considerable difference between the highest bid and the lowest ask, scalpers can profit off that. With that said, this kind of strategy is more suitable for algorithmic or quantitative trading. Why? Well, humans aren’t as reliable at finding small inefficiencies in the market as machines. As a result, this field is heavily saturated with trading bots. As such, humans who want to adopt this strategy will generally have to compete with algorithms.
Scalping usually involves the use of
leverage. As the percentage targets are relatively small, scalpers will typically want to boost their position size with leverage. This is why scalpers often use
margin trading platforms,
futures contracts, and other types of financial products that offer leveraged trading. However, as scalpers aim to profit off smaller moves with larger positions, they need to be aware of
slippage.