Tips and Facts about Scalping in Forex
BrokerGuru September 13, Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. Scalping can be fun and challenging, but it can also be stressful and tiring. So this brings us to the final question. Not every broker is accommodative to scalping.
Which is a significant gain. A nasty surprise awaits our hypothetical trader in his account. The number of his profitable trades were twice the number of his losing ones, and his average loss was about half his average gain. And in spite of that remarkable track record, his scalping activity gained him a net loss. To break even, he would need an average net profit of 9 pips per trade, all else remaining the same.
The 5 pips per win, and 3 pips per loss the same scenario which was examined in the beginning with a one-pip spread would bring us an outcome of. Why is there such a large discrepancy in our results? And that is the problem. A scalper must scrutinize the account packages of different brokers thoroughly before deciding to become a client of one of them. What is a scalping policy? Although the majority of well-established firms with a history and a significant client base have an official policy of allowing scalpers freedom with their decisions, some brokers quite simply refuse to allow scalping techniques for clients.
Others process client orders slowly, and make scalping an unprofitable endeavor. What is the reason? Since forex brokers are liable to liquidity provider banks for the profits or losses of their clients, they would have faced periodic crises of liquidity and even bankruptcy. In order to prevent such a situation from arising, brokers net-out the positions of clients by trading against them. That is, as a client opens a long position, the broker takes a short position, and vice versa.
Well, not so much. And the small remaining net position the net long short or position that remains after the broker has netted out client orders against each other , is usually a losing position which can be counter-traded by the broker safely, because it is a well-established fact that the overwhelming majority of forex traders lose money.
Now that we understand that scalping does not necessarily constitute a problem for a competent broker just like the occasional winners are not problem for casinos , we are ready to understand why some brokers dislike scalpers so much. As we said, the broker needs to net out trader positions against each other to guarantee that its liability against banks is minimal.
Scalpers disrupt that plan by entering trades all over the place, at awkward times, with difficult sizes which not only forces the broker to commit its own capital at times, but also ensures that the system is bombarded with crowded trades. Since scalpers enter many small, rapid positions over a short period of time, an incompetent broker is unable to cover its exposure efficiently, and sooner or later kicks the trader out by terminating his account, or slows down his access to the system so much that the scalper has to leave by his own account, due to his inability to trade.
All this should make it clear that scalpers must trade with innovative, competent, and technologically alert brokers only, who possess the expertise and the technical capability to handle the large volume of orders arising from scalping activity. A no-dealing desk broker is almost a must for a scalper. Since trades are mostly automated in the system of a no-dealing desk NDD broker, there is little risk of external tampering as the system is left to sort out client orders on its own still profitable of course.
Scalping involves technical trading. In the very short time frames preferred by scalpers, fundamentals have no impact on trading. And when they do have, market reaction to them is erratic and entirely unpredictable. As such, a sophisticated technical package which supplies an adequate number of technical tools is a clear necessity for any scalper.
This approach, to be sure, is not for everyone, but it is certainly a worthy option. Finally, scalpers should always keep the importance of consistency in trade sizes while using their favored method. Using erratic trade sizes while scalping is the safest way to ensure that you will have a wiped-out forex account in no time, unless you stop practicing scalping before the inevitable end.
Scalping is based on the principle that profitable trades will cover the losses of failing ones in due time, but if you pick position sizes randomly, the rules of probability dictate that sooner or later an oversized, leveraged loss will crash all the hard work of a whole day, if not longer.
Thus, the scalper must make sure that he pursues a predefined strategy with attention, patience and consistent trade sizes. This is just the beginning, of course, but without a good beginning we would diminish our odds of success, or at least reduce our profit potential.
Our suggestion is that you peruse all of this article and absorb all the information that can benefit you. How scalpers make money: Choosing the right broker for scalping: Not every broker is accommodative to scalping.
Sometimes this is the stated policy of the firm, at other times the broker creates the conditions which make successful scalping impossible. Best currencies for Scalping: There are currency pairs where scalping is easy and lucrative, and there are others where we advise strongly against the use of this strategy. Best times for Scalping: There is an ongoing debate about the best times for successful scalping in the forex market.
Strategies in scalping need not differ substantially from other short-term methods. On the other hand, there are particular price patterns and configurations where scalping is more profitable. Some traders consider ranging markets better suited for scalping strategies. Trend Following while Scalping: Trends are volatile, and many scalpers choose to trade them like a trend follower, while minimizing the trade lifetime in order to control market risk. Disadvantages and Criticism of Scalping: Scalping is not for everyone, and even seasoned scalpers and those committed to the style would do well to keep in mind some of the dangers and disadvantages involved in using the style blindly.
Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.