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Jun 22

Forex Trading Strategies Guide: Scalping 101

Posted by bo at 17:46 | Others | Comments(4) | Reads(40430)

The next logical question in our guide to scalping is how to do it. When it comes right down to the pragmatics of this strategy, what do you need to make it work, and where do you start?

One of the most important foundational issues is choosing the right broker. In some cases, a brokerage may even have a stated policy against scalping. Without the right platform and broker, you simply have no chance of success. But what should you be looking for?

The first issue is the broker’s spreads. If a swing trader opens and closes several positions every day, a spread of several pips is hardly an issue, but scalpers might open and close more than a hundred daily. If you work out the math, this is a significant loss. For instance, imagine that a trader makes 50 trades with a nice profit of 130 pips. If the spread is three pips, he would end up with a net loss of 20 pips. Since the cost of the spread applies to every trade whether it is profitable or not, this loss adds up very quickly. The conclusion is fairly obvious—if you want to make any profit with scalping, you’ll need to find a broker with the lowest spread possible. In addition to spreads, you should also check for any commissions or hidden trading fees.

But this search is not always easy. Unfortunately, many brokers have a bad relationship with scalpers. The problem is that the number of trades scalpers make can sometimes overwhelm older systems. In addition, every broker has to countertrade the orders he processes to avoid being financially liable. Receiving large numbers of orders every day doesn’t make this easy.

For those reasons, many brokers try to eliminate scalpers. Sometimes this is a stated policy, but very often a broker will simply terminate a scalpers account or slow down his processes so that scalping is impossible. Therefore, you must also find a broker with the most up-to-date technology and a toleration for large numbers of orders. Look for a fully-automated broker with no-dealing desk (NDD).

There are several other things that can make scalping impossible. If the trades take too long to process (slippage), the price difference will quickly make trading unprofitable. Therefore, you should always look for efficient execution of your orders. Similarly, price quotes must always be precise and updated dynamically. Even a small delay (latency) makes trading based on micro-volatility impossible.

Finally, scalpers should look for platforms with a workable interface. For the most part, this should include the same financial tools that trader’s want with other strategies. Of course, you should look for an interface with a full range of execution tools. But in particular, the interface needs to be fast and easy to use. This is important because of the number of rapid orders that must be made. Customization is also a big advantage, as well as automation. You should also pay attention to the visual appearance of the interface. Scalping requires intense focus, and many traders report eye-strain after a long day of staring intensely at a screen.

In short, you should consider every angle before committing yourself to a particular brokerage or a trading platform. Be upfront from the beginning with your broker. If you try to use this strategy through a system that can’t handle it, the brokerage will intentionally make trading impossible. Of course, you should also be confident that your broker isn’t fraudulent. Most of all, you should never try to use scalping through a broker with wide spreads or other excess costs. The net result will always be a loss. Done right, and done through the right avenues, however, scalping can be quite successful.
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Scalping is very good type of Forex trading I'm using it and day trading.  Thanks for this article.
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