An Intern Learns – Scalping
Hello and welcome to another blog post from the intern corner. Today I’m going to expand on some of the concepts I discussed last week, with a particular emphasis on the trading technique known as scalping. The reason I’d like to discuss scalping is due not only to its popularity as a trading strategy but also because MahiFX is one of the few platforms to allow it.
As you might recall, while recently trading the GBP/USD on my Mahifx demo account, I ended up having to close my trading positions at a loss. As such, I decided to go back to school, as it were, to try gain an edge by acquiring more trading strategy knowledge. Although the concept of scalping is not a particularly complex one, once you dig a little below the surface there is a lot to come to grips with.
As you know, scalping is the trading technique that seeks to exploit short-term movements in prices. The technique involves placing numerous trades with a view to making small gains on small price changes in short periods of time.
Typically, a scalper trades on a time scale of anything between a few seconds to a couple of minutes. Effectively you’re attempting to make profits on the small fluctuations over very short time frames – trading very close to the market, with minimal exposure. For example, you’d be carefully watching the charts, waiting for the right moment to strike… Your charts are going steadily along in a general upward trend and you notice that they begin to peak suddenly upwards. You’re on the 5 minute view and your sentiment is that for the next 5 minutes this trend is likely to continue. Wham! You place an order, buying the base currency. Adjust your Stop Loss and Take Profit as a precaution, and wait to see how the next 5 minutes pan out. To your delight, the trend continued and you squared your order, taking your profit. Now as you only had the order in existence for 5 minutes, you were able to gain only a few pips in profit. However this is ok, and to make a large profit you need to get comfortable in your seat and do this throughout the day.
In light of this you need to assess your trading personality and appetite for detail as scalping makes heavy use of charting. To succeed as a scalper you will also need to have a lot of time to make numerous trades, some simultaneous, good concentration and quick decision making skills. Scalping is pretty high action for a trading technique so suits a person who thrives in a fast paced, pressured environment. If this sounds like you then give scalping a try!
Now that you have assessed your temperament and skills suitability for scalping, you need to ensure you choose the right kind of market and conditions, because not all are conducive to scalping.
A main point to consider is to ensure you trade with a platform that offers the tightest possible spreads. The reason for this is that for each trade, depending on the platform and broker, there will be a transaction cost which will be based either on commission or the spread, or both. In order to lessen the cost of trading, it is preferable to choose a provider that does not charge commission and that also offers tight spreads. MahiFX provides a useful comparison table on the website to compare its spreads with all the major providers.
Now how this links to the market is that you need to look for the most liquid markets to trade in, as these will typically have the tightest spreads. Of course this necessarily includes the major currency pairs. Although this is not the only place to trade, it is certainly a good starting ground for newbies like me! Another trick to find the most liquid markets is to trade during the busiest times. Remember – more traders equals higher liquidity. As you know there are major trading areas across the world, Sydney, Tokyo, London and New York. As the day progresses each location’s time zones overlap at certain times. When the waking hours of Japan and Australia overlap, there are more traders trading at the same time. In London, our trading times overlap with New York from 13:00 to 21:00 GMT. So during these hours the traders in New York are also trading and so there will be increased market liquidity.
A second aspect to consider is market volatility. This relates to the amount of fluctuation in the market. For unseasoned traders it is likely best to start with currency pairs that have limited volatility. Perhaps consider looking at pairs such as the EUR/JPY or even USD/CHF. These are stable pairs but still offer a little more fluctuation than a historically tight pair such as GBP/EUR. And at the end of the day it is the little spikes in the market that a scalper looks to profit from.
The last aspect to take in consideration is whether your trading platform can accommodate your scalping style. It is very important to have a good understanding of your platform so that you don’t fumble with mouse clicks when you need to react quickly. Not all platforms cater to the scalping technique, but happily MahiFX does.
MahiFX is a market maker as we don’t have to go to a broker to get our spreads. These are generated by our internal price engine, which itself is given info from the typical interbank markets. This allows us to offer the really tight spreads which are paramount to scalping and trading very close to the market.
MahiFX has some other great features that facilitate scalping. One example is how charts are incorporated directly into the books. By changing the time frame in these views you can quickly gain clearer insight into market movements. You can then bid right behind the market with just two clicks. Another example is in regard to the fact that as scalping involves lots of little decisions and order placing, your orders book could easily get a bit too crowded; however MahiFX allows users to hide cancelled and filled orders, enabling users to focus only on their live orders.
There are additional tools that can assist with executing scalping and other trading strategies such as technical indicators, a topic that I’m going to discuss in my next blog. In the meantime, you might want to have a look at the interesting MahiFX Infographic “What Forex Trading Style Suits You”