3.11.2009

Forex Trading Methods - Scalping

What is Forex Scalping?

Forex scalping is the art of using high leverage and a large number of short term trades to steadily increase an account. Usually, only 1 to 5 pips are targeted for each trade. This type of trading appeals greatly to day traders and those looking to minimize the risk involved in trading currencies. Next to money management, “risk control” is the single most important trait to a surviving (and thriving) currency trader. The small amount of time that is spent in the market limits much of the risk in exposure in comparison to a longer term system. Also, the freedom involved in a speedy Forex scalping system in such a liquid market is a “magnet” that drives many traders from other markets to try their hand in currency. A disciplined and steady scalper could seamlessly double or triple an account, and spend only a fraction of the time in the market as a common day trader.

Forex Scalping - The Problem

Though Forex scalping may seem like a preverbal “holy grail” at first glance, there are still many unseen hurdles that surround the controversial method of trading. If you do wish to add scalping to your trading toolbox, it is extremely important to pick a broker who can support a scalpers’ system. You will quickly find that many brokers do not allow scalp trading, as the method of quickly entering and exiting trades may actually cause the broker to lose money at the dealing desk. Forex scalping also does not give the broker a means to trade against their clients which is a way of money making for them. Out of the hundreds of online Forex brokers, only a handful support scalping. It is a very thin line between scalping and short term trading. Generally if you hold trades for a minute or less, you may have problems with brokers. They could warn you and then if you continue shut down your account. However, if you trade in minutes or more, most likely you will not have problems with dealing desk brokers. Non dealing desk (ECN) brokers allow scalping where you can hold a position for seconds however the minimum to open an account is higher ($2,000 and above).

Forex Scalping Strategy

Effective Forex scalping strategies take advantage of extremely slight price fluctuations (sometimes only 1-3 pips) many times in order to steadily build an account. Because of the smaller number of pips gained per trade, larger than normal leverages play a key role in a successful Forex scalping strategy. By leveraging much more than a standard day trader in a liquid environment, a very skilled scalp trader is able to make just as much money as the day trader in a shorter period of time. However, this is an obvious double-edged sword. The market can just as easily move against you on a high leverage, which could produce substantial blows to your account.

Also, it is important to take into consideration the physical and mental speed of a trader who will only stay in the market for seconds to minutes. Executing a scalping strategy by hand can be extremely difficult considering the quick amount of time you must be in and out of the market for your strategy to be affective. Many successful Forex scalping strategies are built to be automated; the rules to the system are coded into a trading platform to automatically perform scalp trades around the clock. Though it is completely possible to trade a Forex scalping strategy manually, the majority of today’s traders would agree that automating the process based on a set of rules would be the best way to ensure speed and reliability. When choosing a platform to automate your scalp strategy, it is extremely important to stick with those platforms that allow the execution of your system on every tick (such as MetaTrader 4). This ensures that your entrances and exits will be on a per-tick basis, and will give you a much higher probable rate of success than those platforms who will execute your code more periodically.

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.
Forex scalping can be a good method of growing a managed Forex account quickly, but should not be looked at as the “holy grail” of trading. Most brokers do not support scalping, and a consistently profitable Forex scalping strategy can be very difficult to engineer. However, if much time and effort is spent in system optimization and setting up a good relationship with a scalp supporting broker, the benefits could be well worth the time spent.
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!