The Forex Scalper’s Tool Box
Scalping is a trading method that focuses on taking quick profits out of the market, thereby limiting exposure. Scalpers maintain that the less time you spend exposed to the Forex market’s high liquidity, the less likely you are to experience large drawdowns.
Just like any other profession, you will have to obtain the tools of the trade before you can turn a profit. Let’s take a closer look at what you will need in your little box of tricks!
I know many scalpers that don’t necessarily have a system, but a feel and a knack of knowing the behaviours of any given currency pair. But saying that, its always good to have some discipline when it comes to scalping in the form of a system. At least to start off with. We can’t all be a Paul Rotter!
If you do scalp with a system, make sure it’s one that you are comfortable with and one that is best for you and not what some guy has written about or trying to sell on a forex forum.
For best results, test your scalping system ideas on a micro account. Your losses will be small, and unlike a demo account, you will experience the fear that comes along with the possibility of losing real money. There is no hard, fast rule of the length of time you should test any given system, but I tend to work with it for 2 weeks at least. Keep in mind that market conditions, especially those that occur on the short time frames that scalpers utilize, can change quite frequently.
BORING!! I hear you cry. Well maybe, but sometimes the waiting game and trust in your system can pay off. No system will work all of the time, and losses can lead you to abandon your system for “the next best thing.” If you have a winning system, you must let the losses come with the wins. The wins will, over time, overshadow the losses.
If you embrace impatience, this can lead to impulsive and emotional trading where you open a position out of frustration or boredom rather than because your system signals it to be the right time. Impatience can lead to a blown account in no time at all and if not overcome, the losses will take over.
When you are making a lot of trades back to back, it is extremely important that you decide beforehand how much you are willing to lose per trade. If you haven’t already decided on how to manage your money, stops and limits won’t be of much use to you since they will be inconsistent. As a starting point, set your limit to twice that of your stop. For instance, if your stop is 10 pips, set your limit to 20. This way, you can lose three out of five trades and still turn a profit. As you gain experience, you can fine-tune this ratio to better suit your skill level.
High Speed Internet
The Forex market moves fast. You can cost yourself pips if you are working from a slow Internet connection. Worse yet, a news event can move the price of a currency pair dozens or even hundreds of pips in a very short space of time. If you are slow in entering your stops, you could lose quite a bit of money.
The speed of your connection comes into play even more prominently if you are planning on scalping or utilising automatic trading, particularly high frequency trading. In any system where time is of the essence, connection speed is understandably critical. If the latency on your connection is great, the delay between you requesting a trade and the execution of the trade will also be great.
All professional traders must have access to charts. If you know how to read them, charts can provide you with instant support and resistance areas. These areas are essential to scalping strategies, as the price tends to move between them. However, unlike other trading styles scalping is more concerned with short time frames rather than the longer trend. The big picture, while important to know with regards to overall market direction plays little part in a scalper’s minute to minute decisions. A scalper therefore is more concerned with intraday charts, for example the 1 minute, 15 minute and 1 hour charts would make more sense than the 15 minute, 4 hour and 1 day charts.
Indicators such as the RSI, MACD and oscillators such as the Stochastic can make it easier for you to identify support and resistance as well as overbought/oversold conditions. Indicators save time and prevent misreading of the naked price data. Take care, however, that you don’t fall into the trap of using dozens of indicators on a single chart. Data overload, especially in scalping, will cost you money.
Over analysing and crowding your charts can create a type of market noise, making it very difficult to get a clear picture of what is going on. While it is good to know what each indicator does, it is best to stick to one or two at a time when conducting analysis. Developing your understanding of indicators on historical data is also a good idea.
The spread is the cost in pips that the broker charges you for opening a position. It is the difference between the ask price and the bid price on a currency pair. To scalp profitably, you need a low spread where the bid and ask price are squeezed together as tightly as possible. A spread of one pip is ideal, although to obtain this you will likely have to open a very large account. A spread of three pips for the most popular currency pairs is not unheard of, but a spread of this level or beyond, by its very nature is not really suitable for scalping.
A Scalping-Friendly Broker
Not all brokers welcome scalpers. Some view scalpers as a profitable proposition because, frankly, most scalpers lose money. Others, however, fear the high transaction costs that scalpers can generate. Most brokers have a real-time chat option on their websites. Be direct and ask them upfront if they are scalper friendly. The spread is usually a good indicator of this as a tight spread is essential for scalping. Those that are not interested tend to have larger spreads, as this is less significant in trading which is of a few, large and long transactions. Those that like scalpers understand that market, and generally tend to offer tighter spreads appropriate for multiple quick trades.
As a scalper, you must be aware of upcoming news releases at all times. This type of fundamental analysis cannot be gained from looking at historic charts. News moves the Forex market in the present and can nullify technical analysis, as technical analysis relies on past information. Your broker may provide a Forex calendar on their website that advises of upcoming events and announcements or if not, most forex forums have this facility.
By far, the most important tool a scalper has, rests on their shoulders. Plan every trading session, and then stick to your plan. Once you pull the trigger, stay in the trade until either your stop or loss is hit. There are always exceptions to prove the rule, but bear in mind that most scalpers fail because they are inconsistent.
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This post was written by Daniel Lindsay. Follow him on Google + for more forex related articles.