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Scalping Trading Strategy: High Leverage, Little Time and Few PIPs at a Time

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.