Like a lot of people who first start trading forex, I would use the market to make a few pips before leaving deal. Although this approach worked a lot of the time, in the longer-term it was unsuccessful. There were times when I wiped out my account. What I didn't know was that this style of trading is actually called scalping and my lack of experience and knowledge prevented me from using it properly. After that I decided to become a positional trader where I would open up a number of positions for a few days to try to make 100 pips minimum profit. Likewise, this would often be successful and would be effective for a few years. But all this changed once I had a met a trader who had only used one strategy to trade for a number of years. This was scalping.
The profits he was getting were much bigger than mine yet he was using the same timeframes as I was and using account sizes that matched his brokers. I asked him if he could tell me his approach and the key points he used to help trade.We met up and he told me about what he looked for that triggered him to buy or sell and when to do so. We spent three days together and what I found most surprising was how I understood all of what he told me. To be quite blunt, his trading style was basic. The system he used needed no oscillators or indicators; neither did he need to spend a long time keeping up to date with the current market conditions.After having taken in what I could in those three days, I gave it a go myself and the results were incredible.In less than three weeks, my account had grown by over three times. And I was spending no more than 4 hours per day to do this.
The advantages and disadvantages of scalping
Fundamentally, when you scalp, you only use small timeframes and make a lot of trades within a day to make lots of little profits - just a few pips. Position traders will have to undertake a lot of market analysis and preparation before starting a trade whereas a scalper just uses a single signal before they enter the market. He makes his profit and gets out just a few seconds later. What's more a position trader will keep their position open for many hours or days but scalpers will only have their positions left open for a few minutes, sometime seconds. Where this changes is that this will happen many time throughout a day. Scalping forex is known as being like picking up loose change but a lot of it. Although position traders will seek out the one big profit, a scalper goes for lots of smaller profits. Amazingly, scalpers will frequently see their profits exceed that of the position trader over the same term and would normally expect to pull in between 5% and 10% in a trading day.
So what are the advantages of scalping?
I believe that the benefits of being a scalper far outweigh the disadvantages and as such it is a more profitable and appealing choice than position trading. I would say that the specific benefits are:
1. You have larger profits than a position trader would.
2. You don't have to wait for a strong trend to start - it's just not relevant with this strategy
3. It becomes pointless trying t to analyse or forecast the market.
4. At the end of each trading day I can close up all of my open positions, take my profit and leave without having to concern myself about what the market is doing or worry whether the market will turn against me/
But what are the disadvantages of scalping?
Just like all trading systems, scalping has its disadvantages. These are quite serious so you need to pay attention:
1. When you scalp for 4 hours, you will find that your trading can be very tiring.
2. There is no room for error with scalping. You need to be able to analyse and understand a situation at once and make cold, calculated decisions immediately.
On this point, there is a significant difference between position trading and scalping.
From a risk management position, position traders will not use up more than 10% of their capital when they are conducting trades. This is not applicable with scalping and 50% or more can be used. And when you are scalping you need to be constantly monitoring how the market is reacting, make snap decisions before leaving the market. And not make any mistakes.
So what are the main indicators for entering the market?
Scalping's main issue is the ability to identify the support and resistance levels which forms the basis for the whole system of trading. From my time trading this way, I have noticed that the currencies will rebound from resistance and support levels. This won't always be by a lot and sometimes it's quite small but it's enough to make some money. But you might be wondering how this is different from position trading as defining the support and resistance levels is what position traders need to do as well?.There are lots of differences. Traders will need to build in a 2 point minimum when they define their support and resistance levels and trend channel to build a strong level while at the same time using a minimum 1 hour timeframe. The best indicator to determine trend channels is the LR-Channels Indicator.
Scalpers can ignore this because as long as they have a trading level that uses a 1 minute timeframe they can work without large bounces as they only need one point to make a profit. As the market continues to change, bringing a break in trends that means losses to some traders; the scalper takes the small profits.
Quickly identifying the required support and resistance levels is a big factor when scalping. BJF support resistance levels indicator is what I would recommend here.
Our next subject to look at is:
Support and resistance levels
It's important to remember the following: With scalping strategies, you must be precise in defining the correct level of resistance and support and on differing timeframes from one minute to one hour as opposed to following the more classic method of technical analysis. A 5M timeframe has been used here and it's clear to see that the level of support has been formed.
A timeframe of 5M has been used here and the resistance levels have formed. With both of these two diagrams, it's clear to see where the higher and lower levels have been formed. We do not need to be bothered by the fact that there is a 5M timeframe just that the levels of the timeframe have been defined and there is hardly any difference. If a larger timeframe is used then there is a direct correlation to the amount of money used to come into the market. We look at this more later. What we need to work out is how do you accurately define the support and resistance level? Our earlier graphs provide the most common depiction and any scalper will be interested in this.These next images are just like the same picture but slightly longer.
We can see that the pair of currencies did return to the support and resistance levels and then rebounded. So how is money made? Money is made by buying or selling as the support and resistance levels are approached. Referring to the resistance level diagram, it's clear that the currency is in contact with the level of resistance and then rebounds from it over the short term. Two sales could have been achieved here.
So how are the levels defined?
We now know that we must define support and resistance levels when scalping. And here is where I can give my thoughts on the methods used to define them. At the price where the bounce could go to either one side or the other is where the level is set. The direction of the next bounce has a 90% probability according to technical analysis. Here is an appropriate juncture to make another comparison between position trading and scalping. Position traders look for those instances where the price bounces by a minimum of 100 pips in the required direction - not 20 to 30 pips. But bounces of this size don't happen as often as the 90% probability of a 20 pip price jump; that will then return to the level and jump back up by another 15 pips and may then have a poor bounce or go straight through the level. The goal of every scalper is to gather up each of these bounces and put them into their account. We can determine the levels further still by looking at the criteria across a number of timeframes yet their definitions will stay the same.
Defining of 30M and 1H levels
I believe that trading with the 30M and 1H is best and you use the lowest and highest points on the diagram to do so. We will find that currencies will frequently hang in between these points therefore we need resistance and support lines drawn in order to wait for the currency pairs to make a move to one level or the other. It can appear as though the currency pair is trapped and not able to find a way out from this position and would eventually go up or down. But if the currency is over the highest point or below the lowest point you just need to mark it and wait until the currency pair approaches it.
Defining of levels on 1M 5M
The levels of 1M and 5M trade are marked differently. In this situation, the lowest and the highest points that are obtained within 3-4 hours are marked and the levels of trade are then stated at that point and any trade operations will be processed once these levels are reached.
With the 1M and 5M, you buy or sell when trade levels are reached according to if the price is nearing either the resistance or support lines. But this is different for the 30M and 1H.
This is because these have more powerful levels and are viewed by more people meaning more will be entering the market prior to the price nearing the current levels so the bounce comes too soon. So I will trade despite prices not approaching the current level and often I will close with between 5 to 20 pips of profit. There might be times when the price hits the level indicated and this is where I would open up a new position using a double lot.These images will show that the prices do not reach the level that is marked on 14 pips.
Volume of market entry
Just like when we define the trade levels, the entry volume needs to be considered when we scalp. You do need to know this but it's not complicated. It's clear that the greater the volume when entering the market, the greater the amount of profit per pip. But we cannot overlook the issues that at every unprofitable deal will make us a loss.
So we know that scalping can make for big profits and losses and needs a different approach to capital management.Obviously everyone wants to maximise their profits and minimise losses so we should come into the market with big volumes once we are clear there will be big bounces.
We be confident that 30M and 1H will tell us this and this is summarised as:
With a larger time frame comes a bigger volume and a smaller timeframe a smaller volume. We are concerned with obtaining definite figures; specific volumes within specific timeframes.
I would use these volumes in my trades if my deposit was 5K. The 1M and 5m deals would get between 10% to 20% 20% - 50% of the deposit will be used in the deals on the 30M, 1H
So what if the currency pair does not go our way?
Scalping has high risks and as such you can't relax. A position trader could take the hit of a loss but a scalper can't as the volume he trades with is a lot bigger and should a losing position remain open longer than necessary, big losses can result. A good rule to remember is to close any position with a pip loss exceeding 25 unless you used less than 10% of your deposit. You should only close these ones when losses hit 50 pips.
The scalping method means profit is make by conducting several hundred deals per day to make a smaller individual profit. So larger profits are actively ignored in the pursuit of the numerous smaller ones. I used a trading strategy for scalping the yields profits of between 5 to 20 pips and these are driven by the behaviour of the currency. If a bounce happens quickly as a specific level has been achieved my aim will be 20 pips. But I will fix the profit at five pips if the bounce is slow. How currencies can behave when specific levels are reached
If a support or resistance level is reached a currency may respond differently. There could be the smallest movement at the precise spot the level has been indicated; sometimes a quick bounce happens.So we can now claim to know about responding on each level but some more points need to be made. Following a bounce and position closure, don't return to the market straight away as there might be a large bounce. As currency constantly maintains a specific trend, we should wait until the point gets to a specific limit.
You can often repeat a bounce deal as the currency will often head towards the level it has just rebounded from again. This can be done a number of times and buying a selling will occur again and again according to the currency pair nearing either the support or resistance level.
Some vital factors about scalping
It is easy to use scalping as a strategy but some points must be remembered constantly. Before trading you must ALWAYS look through the calendar of economic events. News will have a big effect on the pairs that are traded and the bouncing strong fluctuations won't happen despite strong levels of trade.
2. Emotions are useless for position traders and scalpers. As scalpers trade with larger volumes they are most affected. The market cannot be defeated any losses will be your punishment for attempting to do so.
3. Don't start unprofitable positions so close losing ones. A lot of deals are done over the course of the day so you need to work on the view that the overall profit will exceed the overall loss.
4. Things can change instantly so never move away from your computer. You need to be around to make instant decisions.
But the simplest way to start forex trading is to use an automated trading system and for this I would recommend the Forex Robot TFOT.
Some advice when picking a broker
Scalping needs to involve a broker so look for:
1. Narrow spreads like 0.8 - 2.5 pips for GBP/USD and 0.8 - 1.5 on EUR / USD
2. A very high speed of trade execution command
Scalpers are not favoured by all brokers and you might find some that will look to prevent a people from using scalping. Some might stop fixed profits being received. Avoid them. Successful scalping will be inhibited if you do not have a fast execution when trading.