FOREX Scalping Techniques
Scalping is the rapid trading of a highly liquid instrument, such as FOREX -- the foreign exchange market. Scalpers try to eke out small profits from short-term trades, such as those with a duration of seconds or minutes. A successful scalper uses a precise set of techniques. He must know the FOREX market intimately, including pricing conventions and order placement. Success also requires that a scalper quickly exit unprofitable trades.
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Broker Selection
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Scalpers must use a FOREX broker who offers a real-time trading platform and has the ability to execute trades quickly without price slippage, i.e., price movement during the interval between order placement and execution. Ideally, a scalper would like a broker to charge a minimum spread, such as a commission of one or two pips (one hundredth of a percent) per trade. However, an inexpensive spread may indicate a "dealing desk" broker. This type of broker nets buy and sell orders together before submitting them for execution. Since order netting takes time, slippage is more likely. A non-dealing desk broker may charge a little more but should also provide instantaneous execution.
Discipline
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Because scalpers seek many small profits, one sizable loss can wipe out a day's worth of profits. Successful scalpers set the exit conditions of their trades at the time of trade entry. Thus, each trade attempted by a scalper has three prices: the entry price, which is usually close to the current bid or ask spread; the stop-loss price, which is the maximum loss the scalper will tolerate before exiting a position; and the take-profit price -- the price at which the profit objective is reached.
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Timing
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Scalpers benefit from quick sudden price changes. Volatility is a function of external news events, but is also related to the time of day. FOREX trading occurs around the clock, but certain times of day are more volatile than others. These volatile times reflect the market switching its focus among New York, London and Tokyo throughout the 24-hour trading cycle. For example, market volatility tends to increase around 8 a.m. in New York as the U.S. market prepares to open.
Currency Selection
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The most liquid currency pairs tend to have the tightest brokerage spreads, making them the most desirable for scalping. These pairs include the euro vs. the dollar, the British pound vs. the dollar and the dollar vs. the Swiss franc. The dollar/yen pair is also liquid, but is extremely volatile due to comparative interest rate factors. This extreme volatility means that price spreads can be so wide that a stop-loss order may still result in a substantial loss.
Psychology
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It can be very difficult to scalp trade, as it takes courage to enter new trades after experiencing a loss. Yet it is often imperative to keep trading despite being fearful in order to recoup losses and reestablish profits. Some scalpers who lack the proper internal fortitude rely on FOREX robots to automatically place orders according to the trader's specifications. A scalper programs robot software to look for certain price movements and trading conditions. When triggered by the proper circumstances, the robot will automatically place orders, including stop-loss and take-profit orders. Extensive testing using hypothetical trades is recommended before unleashing a FOREX robot onto the live market.
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