admin on August 25th, 2008
The technique of scalping is a very popular one among forex traders, one loved and encouraged by online brokers, and which is made possible by exploiting the high leverages that are typical of this market.
What Scalping Is and How to Scalp
Scalping consists in using very high leverages — typically 200:1 or 400:1 — to open trades on pairs with a low spread, aiming at a small target in terms of PIPs, usually compensating the higher risk exposure with tighter stop losses.
Because of its unique features, a typical scalping trade lasts a few seconds to a few hours, allowing traders to place more trades and invest more capital during the course of the day. Stop losses and take profits are usually quite tight, which makes it easy for the pair to reach one or another in a relatively short period of time.
This technique is quite easy to use and, when mastered, it certainly allows investors to earn (as well as lose) a very consistent percentage of their equity in a single day by placing multiple trades, but still controlling their risk exposure in a very precise way. For instance, it’s not uncommon to see traders earn or lose up to 15-20% of their equity in a single day by placing several trades of this kind, although professional traders don’t usually risk that much unless conditions appear particularly favorable.
Why Online Forex Brokers Love Scalpers
Online brokers love scalpers and encourage the use of this technique in their traders because, as you already know, forex brokers are being compensated with the difference between the bid and the ask price. This means that their earnings are proportionate to the product of spread and your current exposure and so, the more you trade, the more they earn.
However, it has to be said that not all online brokers have the ideal conditions for scalping, which are very high leverage (100:1 to 400:1) and reasonable spreads (no more than 2 PIPs on EUR/USD and other main pairs).
Moreover, not every broker allows you to place your stop and limit orders exactly where you want them, especially if you want to place them very close to the current pair price, say, at a distance of only 5 or 6 PIPs.
This partially limits your possibilities as a scalper, but it also has the very positive effect of protecting you against the high volatility of this market. Placing a stop/limit order at just 5 or 6 PIPs is typically not something you want to do, especially when you factor in the spread which can already be 2-3 PIPs: this would mean that, if the pair went just another 2 PIPs down, you’d trigger a stop loss and lose on a potentially profitable trade.
When you use scalping, you typically want to give the pair a little more room to swing back and forth a little before it has the possibility of reaching your take profit objective. Many investors use stops at limits from 10 to 20 PIPs each, which are still considered quite tight compared to other trading strategies, especially those in the long term.
admin on August 14th, 2008
In forex like in other forms of investment, deciding beforehand exactly how much you’re going to risk in a trade and when you’ll be getting out is something of the utmost importance. In forex more than in other markets, though, novice traders tend to avoid this fundamental step completely.
Money Management as a Part of Your Trading Strategy
You can’t trade without a strategy, and you can’t have a strategy without strict money management rules. One of the reasons why newbies tend to make the mistake of trading with excessive confidence, convinced that they’ll just “know when to enter/exit”, is due to the proliferation of demo accounts in online brokers, which let you invest their “fake money” under favorable conditions (more on that in one of our next articles) to get a feel for how it’s like to trade on their platform and convince you to start investing real money with them soon.
Trading a demo account is like a big game, very useful to learn the basics and test a certain platform, but also quite dangerous in a way. It’s not a big deal if you lose $100,000 in fake money, so you tend to be bold and risk more, trying to guess when to enter and exit and often being right.
What these brokers won’t tell you, though, is that trading your own money is a completely different story. You’ll feel really attached to your own money and start never wanting to close a trade: you’ll get greedy if you are gaining, enormously agitated if you’re losing. Emotion will play a huge part in your trading experience.
Controlling Emotion in Forex Trading
How can you possibly take good, informed decisions when you’re overwhelmed with emotion, be it greediness or false hope? What did you say? That’s right, you just can’t! You’ll need to learn how to control your emotions: it’s not easy, but you just can’t do without it. This is why we have a section on our eBooks page dedicated exclusively to the trader’s psychology! We suggest you read them (we currently have only two psychology-related books, but we’ll add more soon as we gather more author’s permissions).
With experience, you’ll really understand that what helps you the most with keeping emotions out of trading is having definite rules on how to enter, such as your risk/reward ratio or stop/limit/trailing orders to control your losses or save your profits. If you know you’ll lose x in the worst case and win y in the best one, you’ll have one more huge question mark out of your head.
An Example of Money Management Rules
An example of such rules could be the following:
- only risk 2-3 % of your equity for each trade;
- place your stop/limits at no more than X PIPs for the Y pair, at the Z candlestick graph;
- if you lose more than X % in a single day, stop trading and don’t try to risk more by “getting back” to the market the next day;
- etc…
hopefully the previous list has clarified what money management rules are. We purposely kept the rules vague because we don’t want you to follow them blindly if you haven’t understood what is behind them: good rules come with time, and largely depend on your own trading strategy. However, the first point is commonly seen as a good trading rule to defend you from the risk of a substantial drawdown should anything go wrong.
