Choose a forex broker
This article is one of the articles which are written in series to provide you complete guidance on scalping. You must read the previous articles to understand this one better.
It is very important for scalpers to focus more on their individual behavior like his preferences and attitude and then pay attention to other key concepts like spreads and leverage. Moreover, the most important factor in getting efficient and profitable scalping is the broker which will be determining factor in deciding whether scalping strategies of scalper will work well or not. A scalper can control factors like profit orders, stop loss, scalping strategies, trading time frame but he cannot control the factors like spreads, server stability and broker’s attitude towards scalping.
There are numerous brokers working in the forex market these days. Each of them is designed to provide certain business model and capabilities which suit certain traders. These small differences have little or no difference on long-term traders. However, scalpers and day traders have to keep care of these factors as they decide the success of your trade.
Low Spreads are beneficial
Traders who are not involve in day-trading or scalping positions will just open positions and close positions at most once or twice a day. Even though the spread cost is a key variable, an active and devoted trading style also makes some profits. However, conditions are very different for scalping traders. As the scalpers open positions and close them quickly, his cost of trades will have bigger difference on his own balance sheet.
For example, a certain scalper opens and closes 30 positions in EURUSD currency pair market in a day with spread of 3 pips. Let’s also assume that he performed trading in constant trade sizes and his average profitable trader ratio is 2/3 with average 5 pips profit for each trade. Also assume that his loss was average 3 pips for each trade. You can calculate the net loss/gain without the spread cost included by the following equation:
Net loss/profit = (Black positions) – (Red positions)
= (5 * 20) – (3*10)
= 70 pips
70 pips is considered a good gain amount. Now you can also calculate the net loss/gain including the effect of spread cost using following equation
Net loss/profit = (Black positions) – (Red positions + Spread Cost)
= (5 * 20) – (3*10 + 3*30)
= 20 pips
The theoretical traders will be astonished with the changes in their account. The profitable trade ratio is double than loosing trade number and the average gain was double than average loss. Even with such tremendous record, the scalping activity still resulted in net loss. To get to break-even point, he must get net profit of 9 pips for each trade with all other conditions being the same.
Let’s use the same methodology of calculations with another broker where spread cost is just 1 pip for the EURUSD currency pair market. There are average 5 and 3 pips for each win and loss respectively. Now, using the same approach:
Net Profit/Loss= (20*5)-(10*3+30*1) = 60 pips
60 pips is a good amount of profit. Let’s discuss now why there is such huge difference in results of both brokers. This is because of one simple reason i.e. we have to pay our broker for each opened position whether it is a win or loss.
Importance of the Scalping Policy
It is very important to know what is meant by scalping policy. Even though many old and well-organized brokers will allow their members to choose scalping techniques with freedom, some other brokers will just refuse to allow this for their members. Several others make client orders process very slow resulting in unprofitable scalping. Let’s see the reason behind this.
To understand the reason, it’s important to discuss first the way brokers leave their positions prior to passing on to banks. Let’s suppose that majority of clients of the broker are losing money in their trading, what would be the result if these losses reached a large size at a time and caused margin calls which could not be fulfilled. As forex brokers are accountable for liquidity-provider banks for loss/profit of their members, they may face time-to-time liquidity crises and worse, bankruptcy. The brokers net-out their member’s positions by playing against them in order to avoid these situations. In other words broker will open short position if member takes a long position and vice versa. As the both orders results are in opposite directions the overall market exposure is nil, liquidity problem is solver and firm is unaffected by loss/profit in member’s account.
Strong technical tools are very important
Technical trading is very important in scalping. The basics do not affect profitability in trade in a very short time period. And when they have an effect, reaction from market is very unpredictable. A good scalper must have professional technical tools and knowledge in order to perform well and gain profits.
Timely execution, No misquotes, No slippage leads to profits
As already mentioned, scalper should always find a capable, well-known, modern broker so that he can successfully execute his trades according to his trading style, habits and preferences to make more and more profits. However, keeping precise quotes and executing trades in timely manner are also very important to have good profits in scalping method.