This article is a continuation of a complete guide on usage of scalping strategies in Forex trade. Its highly recommended that you must have read previous articles to fully understand this article.
As already mentioned, forex scalping is a method which involves small frequent profits for a long time to end resulting in greater sum of profits. However, scalping is not that easy that trader just enters in market and start trading relying on his luck only. Actually, a scalper must follow a systematic approach for decision-taking and market understanding in order to be successful. He must dedicate himself fully to use various strategies in order to make profits in his trading moves. He must also understand market needs and adapt himself to take full use of market changes for his interest. Scalping involves understanding and manipulating many basic things of currency market too like basic structure and inside movements of the currency market. This strategy is different from ones used in trend following or swing trading methods which involve just major market elements.
Exploit quick price movements
There are many scalpers who concentrate on quick movements in currency market rates which occur frequently. In current scenario the target is to take use of sudden variations in market liquidity to get small profits later. This scalping involves volatility in market rather than studying nature and trending or ranging of market. The main purpose is finding the points of temporary low liquidity which is creating imbalance which in result, offers attractive opportunities.
Let’s take example of traders of EURUSD currency pair. There are tight spread in most of the cases however high liquidity of market makes sure there are frequent bid-ask spreads. But if market liquidity goes down because of any reason like news shock and there is a clear bid-ask gap the quote will split in two main parts of data. Let’s say that the bid is 1.4010 and ask is 1.4050. In a short time, there will be narrow bid-ask period and price will drop towards one side. Scalpers manipulate these sharp changes to make fast profits.
When price moves up to let’s say 1.4030, there is normal bid-ask lever. A scalper may sell at this point or wait for price to go down to let’s say 1.4020 and choose to open a long position and close the short one.
Choosing Right Leverage
In scalping, there are small frequent profits which end in earning big sum of profits. However, sometimes even combined returns of trades over a week or month even seem insufficient to the trader’s devotion and hard-work in studying and manipulating the currency market changes. The solution to this problem is to involve certain leverage while using scalping method in forex market trading.
The appropriate leverage to use in scalping is still under debate amongst the scalpers. But, one thing that they all agree to is that all beginner scalpers should set their leverage value as low as they can till they learn the conditions and strategies well. Ideally they should follow this for first three months of their trading. Taking risks is not advisable unless you know well which strategy you will be using in your trading decisions. As scalper must use predetermined stop-loss value and keep it consistent also have to make fast trades as there is not much time to spend on each individual trade so he must choose an appropriate leverage ratio which suits his quick trading. For example, traders with long term positions of up to several weeks may take longer time to give up their position even in the worse scenarios where market is making him lose his money. However, scalper will close his position immediately when stop-loss level is fulfilled and mostly this is an automated process.
Basics of Scalping Strategies
Scalping strategies will be fully discussed in later topics, but one basic thing that you need to understand now is that efficient scalping requires good strategies and analytical techniques. As one single high-value trade can annul all the gains of that day or maybe weeks, the scalper must understand and manipulate market very well and must maintain discipline while carrying out his strategies.
Fundamental analysis usually plays a very little role in overall scalping process. Scalpers prefer the market times in which there are quick and sharp movements in prices and this is almost impossible to judge the result of releasing a GDP during one-minute time frame. Moreover, there are several other events and not just events relating to major releases in market for each day. There are several scheduled as well as unscheduled events which provide activity in market constantly. Furthermore, several short-term movements also make a great impact if there is some big reason behind these movements.