Scalping is not unlike day trading in which a trader will open a position and then close it again during the current trading session; in other words never carrying a position into another trading period or holding a position overnight.
Whereas a day trader may look to take a position once or twice, or even a few times a day, scalpers are much more frenetic and try to skim really small profits multiple times in a session. And whereas a day trader may trade off the five-minute and the minute charts, scalpers will often trade off of tick charts and one-minute charts. In particular, some scalpers like to try and catch the high-velocity moves that occur around the time of the release of economic data and other important news events, such as the release of the employment statistics or GDP releases if that is what is high on the economic agenda.
Scalpers like to try and scalp between five and 10 pips from each trade they make and to repeat this process over and over throughout the day. Using high leverage and making trades with just a few pips profit at a time can add up, especially if your trades are profitable and can be repeated many times over the course of the day. You have to have the temperament to be a scalper.
You cannot take your eye off the ball when you are trying to scalp a small move, such as five pips at a time. Even if you think you have the temperament to sit in front of the computer all day, or all night if you are an insomniac, you must be the kind of person who can react very quickly without analyzing your every move.
There is no time to think. This is especially true in order to cut a position if it should move against you by even two or three pips.
The Difference Between Market Making and Scalping Scalping is somewhat similar to what market makers do who trade around the spread. When a market maker buys a position he is immediately seeking to offset that position and capture the spread.
Although the two types of investors serve different purposes, this is what a market maker does all day long. This is not referring to those bank traders who take proprietary positions for the bank. The difference between a market maker and a scalper, though, is very important to understand.
A market maker earns the spread, while a scalper pays the spread. So when a scalper buys on the ask and sells on the bid, he has to wait for the market to move enough to cover the spread he has just paid.
In the converse, the market maker sells on the ask and buys on the bid, thus immediately gaining a pip or two as profit for making the market. Thus, the risk of a market maker compared with a scalper, although they are both seeking to be in and out of positions very quickly and very often, is much better for the market maker than the scalper.
Market makers love scalpers because they trade often and they pay the spread, which means that the more the scalper trades the more the market maker will earn the one or two pips from the spread.
The Pros and Cons of Scalping Scalping is very fast paced. If you like the action and like to focus on one or two minute charts, then scalping may be for you. If you have the temperament to react quickly, and have no compunction in taking very quick losses, not more than two or three pips, then scalping may be for you. But if you like to analyze and think through each decision you make, perhaps you are not suited to scalp. How to Set Up for Scalping Setting up to be a scalper requires that you have very good, reliable access to the market makers with a platform that allows for very fast buying or selling.
Usually the platform will have a buy button and a sell button for each of the currency pairs, so that all the trader has to do is hit the appropriate button to either enter or exit a position. In liquid markets, the execution can take place in a fraction of a second. As a trader, it is up to you to research and understand the broker agreement and just what your responsibilities would be and just what responsibilities the broker has.
You must pay attention to how much margin is required and what the broker will do if positions go against you, which might even mean an automatic liquidation of your account if you are too highly leveraged. Read the small print. Different brokers may offer different platforms, therefore you should always open a practice account and practice with the platform until you are completely comfortable using it.
Since you intend to scalp the markets, there is absolutely no room for error in using your platform. If you press the sell button by mistake, when you meant to hit the buy button, you could either get lucky if the market immediately goes south so that you profit from your mistake, but if you are not so lucky you will have just entered a position opposite to what you intended.
Mistakes like these can be very costly. Platform mistakes and carelessness can and will cause losses. Practice using the platform before you commit real money to the trade. Liquidity As a scalper you only want to trade the most liquid markets. Also, depending on the currency pair, certain sessions may be much more liquid than others. Even though the forex markets are trading for 24 hours a day, the volume is not the same at all times of the day.
Usually, when London opens at around 3am EST, volume picks up as London is the major trading center for forex trading. Thus when two of the major forex centers are trading this is usually the best time for liquidity. The Sydney and Tokyo markets are the other major volume drivers. Guaranteed Executions Scalpers need to be sure that their trades will be executed at the levels they intend.
Therefore, be sure to understand the trading terms of your broker Some brokers might limit their execution guarantees to times when the markets are not moving fast. Others may not provide any form of execution guarantee at all. Redundancy Redundancy is the practice of insuring yourself against catastrophe. By redundancy in trading jargon, I mean having the ability to enter and exit trades in more than one way.
Be sure your internet connection is as fast as possible. Know what you will do if the internet goes down. Do you have a phone number direct to a dealing desk and how fast can you get through and identify yourself? All these factors become really important when you are in a position and need to get out quickly or make a change.
Choosing a Charting Time Frame In order to execute trades over and over again, you will need to have a system which you can follow almost automatically. As a scalper you will need very short-term charts, such as tick charts, or one- or two-minute charts and perhaps a five-minute chart. Getting Prepared to Scalp 1. Get a sense of direction It is always helpful to trade with the trend, at least if you are a beginner scalper. To discover the trend, set up a weekly and a daily time chart and insert trend lines, Fibonacci levels and moving averages.
If your charts show the trend to be in an upward bias the prices are sloping from the bottom left of your chart to the top right , then you will want to buy at all the support levels should they be reached. On the other hand, if the prices are sloping from the top left down to the bottom right of your chart, then look to sell each time the price gets to a resistance level. Depending on the frequency of your trades, different types of charts and moving averages can be utilized to help you determine direction.
The price could be heading back to a target of 1. The daily chart shows the price has reached the Clearly there is a possibility of a pullback to the trend line somewhere in the vicinity of 1. As a scalper, you can take the short side of this trade as soon as your shorter term charts confirm an entry signal.
Prepare your trading charts Set up a minute and a one-minute chart. Use the minute chart to get a sense of where the market is trading currently, and use the one-minute chart to actually enter and exit your trades.
Be sure to set up your platform so that you can toggle between the time frames. Figure 3 Expectancy — Testing the System for Reliability Now, before you follow the above system, test it using a practice account and keep a record of all the winning trades you make and of all your losing trades. Most often it is the way that you manage your trades that will make you a profitable trader, rather than mechanically relying on the system itself.
In other words stop your losses quickly and take your profits when you have your seven to 10 pips. This is a scalping method and is not intended to hold positions through pullbacks. If you find that you can manage the system and you have the ability to pull the trigger quickly, you may be able to repeat the process many times over in one trading session and earn a decent return.
Remember that too much analysis will cause paralysis. Therefore, practice the methodology until it is automatic for you, and even boring because it becomes so repetitive. You are in the business of scalping to make a profit, not to boost your adrenalin or feel like you are playing in a casino.
Professional traders are not gamblers, they are speculators who know how to calculate the risk, wait for the odds to be in their favor and manage their emotions. When to Scalp Remember, scalping is high speed trading and therefore requires lots of liquidity to ensure quick execution of trades. Only trade the major currencies where the liquidity is highest, and only when the volume is very high, such as when both London and New York are trading.
The unique aspect of trading forex is that individual investors can compete with large hedge funds and banks — they just need to set up the right account. Check out Forex Basics: Setting Up An Account. When Not to Scalp Do not scalp if you do not feel focused for whatever reason.
Late nights, colds and flu symptoms and so on, will often take you off your game. Stop trading if you have a string of losses and give yourself time to regroup. Do not try to get revenge with the market. Scalping can be fun and challenging, but it can also be stressful and tiring. You must be sure that you have the personality to indulge in high-speed trading.
You will learn a lot from scalping, and then by slowing down you may find that you can even become a day trader or a swing trader because of the confidence and practice you may get from scalping.
Remember though, scalping is not for everyone. Always keep a log of your trades. Use screen capture to record your trades and then print them out for your journal. It will teach you a great deal about trading and even more about yourself as a trader.
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