How to Make Small Profits With FOREX
Foreign currency or FOREX traders use a method called "scalping" to eke out many small profits throughout the trading day. Scalping refers to making rapid trades in a market with lots of activity and bids. The duration of a scalped position is measured in seconds and minutes. The aim is to trade a currency pair frequently, make a small profit on each trade and minimize losses. A currency pair, for instance EUR/USD, is composed of the base currency you buy (in this case, the euro) and the counter currency you sell (here, the U.S. dollar). FOREX price movements are measured in pips (percentage in points) which are equal to one hundredth of a percentage point. On a standard $100,000 position, a movement of one pip is equal to $10.
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Instructions
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Select a FOREX broker that allows scalping. Many brokers have "anti-scalping" protocols that do not provide access to the small changes in prices scalping requires. You will need an electronic communication network (ECN) broker that has direct access to FOREX market makers. You can find scalper-friendly brokers through Internet searches and trading forums. Most ECN brokers provide an online trading environment that allows a scalper to rapidly enter and exit orders.
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Await a fundamental signal to start trading. To be of value to a scalping trader, the signal must generate volatility in the FOREX markets. A fundamental signal is generated by some news event that affects the price of a currency pair. For instance, governments often schedule announcements regarding interest rates, inflation, trade figures, etc. Any surprise stemming from an anticipated announcement can generate a fundamental trading signal, as can sudden political or economic events.
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Identify your first trade based on technical signals. Scalpers use technical analysis -- the use of previous prices to predict future ones -- to detect price trends and support and resistance levels. When prices of a currency pair become volatile due to some fundamental event, a technical analysis method should correctly identify trend direction and suitable points to enter and exit positions.
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Enter trades. Each trade order has an entry price (the price you are willing to pay), a take-profit price that closes the position for the specified profit amount, and a stop loss which quickly closes out a losing position. Scalpers are looking to earn a modest profit on each trade, perhaps five to 10 pips. They must earn enough to pay for any spreads or commissions charged by the ECN broker. A scalper aims to enter a sequence of trades that each generates a small profit. By using leverage -- borrowing from a broker to finance most of the trade -- scalpers increase the amount they can trade and thus boost returns; however, risk is also boosted by leverage, so stop loss orders are essential for downside protection.
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Tips & Warnings
Many scalpers use sophisticated trading software programs, called FOREX robots, to execute their trading strategy. The robot applies the trader's technical analysis rules to generate trading signals and then automatically enters online orders. FOREX robots can respond much more rapidly than human traders, and are devoid of the greed and fear that can trip up mortals.
Even if you use a FOREX robot, scalping is not for the faint of heart. It can be hard to accept losses, so traders must be psychologically prepared to maintain their composure even in the most volatile markets. Most software can be run in a training mode where all the trades are hypothetical. Traders should first gain confidence and expertise through training before committing funds to the real market.
References
Resources
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