Scalp Trading Systems and Strategies

What is Scalp Trading?

Scalp trading is a strategy used in the Forex markets whereby traders make extremely short 2 – 4 minute trades to take advantage of small movements in currency pairings.  For example, a trader might open a trade on the GPB/USD at 7pm when the US banks have closed and aim to make a small 5-10 pip profit.

The advantages of scalp trading are that you can reduce the risks by only keeping positions open for a few minutes at most.  This contrasts with day traders or trading on futures/options for example, where great losses can be realised over time.  Even though Forex traders may still lose 1/3 of the time, the average size of losses are limited a) by stop-loss orders and b) the short length of the trade.

Forex scalper’s makes fundamentals and news alerts irrelevant for the most part.  Although technical analysis is important in determining trend patterns and price movements, shorter trades mean that you can afford to pay less attention to the data.

An example of a scalp trade could be someone investing in the EUR/USD currency pairings.  This is one of the most liquid markets in the world and is volatile/choppy enough for scalp traders to make a good profit.  Let’s say that the bid is 1.4015 and the offer is 1.4035.  The spread that the broker charges is a decent 0.002.  You then keep the trade open for 4 minutes (along with dozens of others just like this throughout the day) and close at 1.4040.  You’ve then made 0.0005 profit multiplied by the size of your order.

There are also a number of systems that are specifically designed for scalp traders.  Although a forex scalping system isn’t 100% automatic, you can use it to input calculated stop-losses and limit orders in for you to make it less hassle.  You’ll also find many scalp trading strategies on the internet which are fairly easy to learn.


Disadvantages of Forex Trading and Finding a Broker

The obvious disadvantages to Forex trading are that it’s very time consuming.  Rather than going long and placing 2-3 trades per day like a typical day trader, scalpers will be placing 20-30 trades per day, making a minute profit on each trade.  It’s only when you add all these trades together that capital profits can be realised.  Further more not all Forex markets are conducive to scalp trading.  B and C type markets such as the USD/JPY for example are generally seen as too unpredictable, illiquid and over responsive external market factors.  You’ll also be limited to specific times of day to practise trading.

Secondly, not every Forex broker on the internet will allow scalp trades.  This is generally based on two reasons.  First of all, the huge volume of scalp trades can crowd the markets and system.  Add to this the fact that the Forex broker will have to process all of these trades and counter trade each of their client’s positions can make it too much hassle for some companies.

As a scalper yourself, you also need to be careful choosing a broker that offers razor thin spreads, as little re-quotes or slippage as possible, and high leverage (50:1 or greater).  All of these conditions are essential for profitable scalp traders even though the majority of non-scalp traders can live without them).  Most importantly, the size of the spread needs to be extremely tight (preferable less than 0.004) since because you won’t be making huge margins on any of your short term trades you need as tight spreads as possible.


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