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What is Scalping

June 8, 2012 by admin in Articles, Forex with 0 Comments

Forex scalping has high popularity and high risks as well as any other type of trading.
Forex scalping provides an additional degree of risk management as a result of holding trading positions for a very short period of time as well as constant monitoring of the price and collecting quick profits as they appear.

Scalping Forex is fun. Learn it and trade profitably!

The only way to make small account big in a short period of time is through the use of really high leverage.But just do not jump of the sea cliff right away. Start with reasonable leverage for scalping, for example 20:1 or at most 50:1, then move on as you see scalping skills improve. But even before that do not be lazy to demo trade your scalping system – make sure it will not disappoint you later…

Scalping Profits

Scalping Profits

The only way to trade with high leverage without risking blowing up an entire account in only 10-15 trades is by trading with a tight stop loss. Trading without stop loss will “kill” your investment in a very time.

It is wise to decide on the size of the trading lot and exposed risk in advance.
Do a simple math: calculate the worst possible situation, e.g. 10 consecutive losses in a row; then see if your account will survive and if there be something left to move on. And, although 10 losses in a row is a extremely very failure scenario.

Although Forex is active 24/7, not every hour is suitable for scalping.
No scalper wants to sit in front of the monitor for numerous hours bored and disappointed with the “sleeping” price as it literally moves nowhere.
Scalpers hunt for volatile, liquid market. There are 4 major market sessions: London, New York, Tokyo and Sydney session. To trade effectively scalper needs to learn behavior of a chosen currency pair and define most active sessions, even particular hours for this pair to be able to catch good price moves.Another thing to keep in mind is spread which brokers charge for different currencies.
The higher the spread the harder it will be to collect desired pips (because once trading position is opened, trader must cover spread cost – earn pips for broker first – and only then collect your own pips).
Of course, the lower the spread the easier and faster it is to gain pips.

Another factor to consider is an average daily range of the price for chosen currency.
The wider it is the more realistic is an opportunity to profit from price movements.

One of the scalpers’ favorite currency pair is EUR/USD with its low spread and good daily price range.

Once in the trade, scalpers should manage trading risks by:
1) moving stops to break-even as soon as situation permits;

2) taking profits at a logical levels: at round market price numbers: 00, 10, 20, 50 etc., at previous support/resistance levels, at Fibonacci levels etc.

3) getting out of the trade if the price freezes for longer time than expected.

Scalp-trading is very demanding and requires a lot of concentration, constant monitoring of the price and very quick decision making. Also, short time frames used in scalping strategies, require a good seize of trading complemented with sound technical analysis skills. It is not a place where beginners feel very comfortable as it demands a good chunk of experience.

Scalping involves substantial risks. A lot of beginners have common problem when trading highly leveraged accounts – they tend to maximize profits by trading with full capital at once. Do not do that! Maximizing chances for higher profits goes hand in hand with maximizing risks! The size of positions opened must be calculated very accurately so that your entire account will not be wiped out with just one(!) very unfortunate trade.

Another factor that increases risks for scalpers is the spread traders pay when open a trade. Each time a new trade is open, the spread cost is paid to the broker, thus opening 10 small trades instead of 1 long term trade increases the cost of trading in 10 times. If to measure risk/reward ratio of such scalping activity it may show very risky and potentially losing trading.

To understand the full challenge of scalping as a trading style, consider this: hard work and small gains accumulated over a decent period of time could easily be wiped out with one large loss. Finding a balance between profit levels and size of  acceptable losses presents the most difficult challenge to scalper’s strategy.

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