Scalping is a day trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable. It requires a FX trader to have a strict exit strategy because one large loss could eliminate the many small gains that the trader has worked to obtain. Having the right tools such as a live feed, a direct-access broker and the stamina to place many trades is required for this strategy to be successful.
Scalping is based on an assumption that most Forex prices will complete the first stage of a movement (a price will move in the desired direction for a brief time but where it goes from there is uncertain); some of the prices will cease to advance and others will continue. A scalper intends to take as many small profits as possible, not allowing them to evaporate. Such an approach is the opposite of the "let your profits run" mindset, which attempts to optimize positive trading results by increasing the size of winning trades while letting others reverse.
Scalping achieves results by increasing the number of winners and sacrificing the size of the wins. It's not uncommon for a day trader of a longer time frame to achieve positive results by winning only half or even less of his or her trades - it's just that the wins are much bigger than the losses. A successful scalper, however, will have a much higher ratio of winning trades versus losing ones while keeping profits roughly equal or slightly bigger than losses.
The main premises of scalping are:
* Lessened exposure limits risk - A brief exposure to the FX market diminishes the probability of running into an adverse event.
* Smaller moves are easier to obtain - A bigger imbalance of supply and demand is needed to warrant bigger price changes. It is easier for a price to move by 10 pips than it is to make a 100 pip move.
* Smaller moves are more frequent than larger ones - Even during relatively quiet markets there are many small movements that a scalper can exploit.
Scalping can be adopted as a primary or supplementary style of trading.
Primary Style
A pure scalper will make a number of trades a day, anywhere between 10 to hundreds. A scalper will mostly utilize one-minute charts since the time frame is small and he or she needs to see the setups as they shape up as close to real time as possible. Automatic instant execution of orders is crucial to a scalper, so a direct-access broker is the favoured weapon of choice.
Supplementary Style
Traders of other time frames can use scalping as a supplementary approach in several ways. The most obvious way is to use it when the market is choppy or locked in a narrow range. When there are no trends in a longer time frame, going to a shorter time frame can reveal visible and exploitable trends, which can lead a trader to scalp.
Another way to add scalping to longer time-frame trades is through the so-called "umbrella" concept. This approach allows a trader to improve his or her cost basis and maximize a profit. Umbrella trades are done in the following way:
* A trader initiates a position for a longer time-frame trade.
* While the main trade develops, a trader identifies new setups in a shorter time frame in the direction of the main trade, entering and exiting them by the principles of scalping.
Practically any day trading system, based on particular setups, can be used for the purposes of scalping. In this regard, scalping can be seen as a kind of method of risk management. Basically any FX trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio. This means that the size of profit taken equals the size of a stop dictated by the setup. If, for instance, a trader enters his or her position for a scalp FX trade long at 1.4960 on a GBP/USD trade with an initial stop at 1.4950, then the risk is 10 pips; this means a 1:1 risk/reward ratio will be reached at 1.4970
Scalp FX trades can be executed on both long and short sides. They can be done on breakouts or in range-bound trading. Many traditional chart formations, such as a flag or triangle, can be used for scalping. The same can be said about technical indicators if a trader bases decisions on them.
Scalping can be very profitable for traders who decide to use it as a primary strategy or even those who use it to supplement other types of day trading. Adhering to the strict exit strategy is the key to making small profits compound into large gains. The brief amount of market exposure and the frequency of small moves are key attributes that are the reasons why this strategy is popular among many types of traders.
-----------------------------------------------------------------------
Learn Forex Trading from Day Trading Mentors now. Online trading is like a business. Get mentors to show you how to learn Forex, online day trading on indices and stock market trading. Visit http://www.howtotrade.co.za/ now to learn Forex.
“Trading in the Forex market is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. Nothing in this presentation is a recommendation to buy or sell currencies and www.howtotrade.co.za is not liable for any loss or damage.”
No comments:
Post a Comment