Tuesday, December 23, 2008

Forex Scalping

Forex Scalping can also be called a quick trading. It is a method where traders allow their positions to last only for a matter of seconds, to a full minute and rarely longer than that.
(As a rule if a trader holds to a position for more than a minute or two it is considered no longer a scalping, but rather a regular trading.)

The purpose of scalping is making small profits while exposing a trading account to a very limited risk, which is due to a quick open/close trading mode.

There wouldn’t be any point in scalping for many traders if they weren’t offered to trade with highly leveraged accounts. Only ability to operate with large funds of, actually, still virtual money, empowers traders to profit from even a 2-3 pip move.

How do they do it? Suppose a scalper opens a trading position of 100 000 units with EUR/USD. For each pip he will now earn $10… Closing in with only a 3 pip profit brings it up to $30 — not bad for less than a minute of work.

Now, you would probably ask what Forex brokers think about it, because if a scalper constantly wins, the broker would obviously sustain some losses.
That is why the other popular discussion topic is always at scalpers’ attention: What Forex broker would allow you to scalp the market?

Obviously, dealing desk brokers would not agree with scalpers’ trading style and most likely will ask a trader to change his/her trading habits or to find another broker. But, even if a scalper stays in, there is another method to slow scalper's performance down and it is to set delays between an initiation of the order and its actual filling. The reason behind it is that dealing desk brokers need time to countertrade/process each order to prevent own losses in case a trader closes in profit.

The broker that will not object to scalping is the one that has the best trades processing automated platform. Using straight through processing there is no intervention between a trader and a market maker — the software is taking care of the whole business process. So, it’s more likely a broker with a “slow” business processing platform would object to scalper’s trading style.

Related Posts :

  1. Tips and Facts about Scalping in Forex

Sources :
  1. Forex Scalping | by Edward Revy on April 22, 2007 - 09:28.

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Tips and Facts about Scalping in Forex

The only way to make small account big in a short period of time is through the use of really high leverage. But wait, do not jump of the cliff right away. Start with reasonable leverage for scalping, for example 20:1 or at most 50:1, then move on as you see scalping skills improve. But even before that do not be lazy to demo trade your scalping system – make sure it will not disappoint you later.

The only way to trade with high leverage without risking blowing up an entire account in only 10-15 trades is by trading with a tight stop loss. Trading without stop loss will "kill" your investment in no time.

It is wise to decide on the size of the trading lot and exposed risk in advance. Do a simple math: calculate the worst possible situation, e.g. 10 consecutive losses in a row; then see if your account will survive and if there be something left to move on. And, although 10 losses in a row is a very unlikely scenario, you cannot deny it.

Although Forex is active 24/7, not every hour is suitable for scalping. No scalper wants to sit in front of the monitor for numerous hours bored and disappointed with the "sleeping" price as it literally moves nowhere.Scalpers hunt for volatile, liquid market. There are 4 major market sessions: London, New York, Sydney and Tokyo session. To trade effectively scalper needs to learn behavior of a chosen currency pair and define most active sessions, even particular hours for this pair to be able to catch good price moves.

Another thing to keep in mind is spread which brokers charge for different currencies. The higher the spread the harder it will be to collect desired pips (because once trading position is opened, trader must cover spread cost – earn pips for broker first – and only then collect own pips). And, of course, the lower the spread the easier/faster it is to accumulate pips.

Another factor to consider is an average daily range of the price for chosen currency. The wider it is the more realistic is an opportunity to profit from price moves. One of the scalpers’ favorite currency pair is EUR/USD with its low spread and good daily price range.

While using high leverage combined with high frequency trading, scalpers should be very cautious about the cost of actual trading, as each pip here makes a dramatic difference after a large number of trades. This means being very careful with entries and exits, stops and limit orders, and also be very realistic about profit targets.

Once in the trade, scalpers should manage trading risks by:

  1. Moving stops to break-even as soon as situation permits;
  2. Taking profits at a logical levels: at round market price numbers: 00, 10, 20, 50 etc., at previous support/resistance levels, at Fibonacci levels etc.
  3. Getting out of the trade if the price freezes for longer time than expected.
Scalp-trading is very demanding and requires a lot of concentration, constant monitoring of the price and very quick decision making. Also, short time frames used in scalping strategies, require a good grasp of trading complemented with sound technical analysis skills. It is not a place where beginners feel very comfortable as it demands from traders a good chunk of experience.

Scalping involves substantial risks
A lot of beginners have common problem when trading highly leveraged accounts – they tend to maximize profits by trading with full capital at once. Do not do that! Maximizing chances for higher profits goes hand in hand with maximizing risks! The size of positions opened must be calculated very accurately so that your entire account will not be wiped out with just one(!) very unfortunate trade.

Another factor that increases risks for scalpers is the spread traders pay when open a trade.
Each time a new trade is open, the spread cost is paid to the broker, thus opening 10 small trades instead of 1 long term trade increases the cost of trading in 10 times. If to measure risk/reward ratio of such scalping activity it may show very risky and potentially losing trading.

With GBP/USD currency pair a scalper sets profit target of 10 pips and stop loss of 10 pips. So far it is 1:1 risk/reward ratio.In the next step, when the spread is added, the picture changes. For example, the spread his broker charges for GBP/USD is 4 pips.When scalper opens a position he is -4 pips (the spread has been charged). Now in order for him to reach the target of 10 pips profit, the price has to move +4 and +10 pips = 14 pips. On the other hand, in order to trigger his stop loss the price should move -4 is already in place. So, only -6 pips and he will be stopped at total of -10 pips, the risk-reward ratio has changed in over 2:1, not very promising situation indeed.

To understand the full challenge of scalping as a trading style, consider this: hard work and small gains accumulated over a decent period of time could easily be wiped out with one large loss. Finding a balance between profit levels and size of acceptable losses presents the most difficult challenge to scalper’s strategy.

Sources :
  1. Tips and Facts about Scalping in Forex | by Edward Revy on April 22, 2007 - 11:49.

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Monday, December 22, 2008

Trend Following Forex - 3 Simple Steps to Catching Big Profits

If you want to catch the big profits in forex trading you need to trend follow forex trends which are longer term. Here we are going to give you a 3 step simple method which if you use it correctly, will help you catch every major forex trend and lead you to long term currency trading success.

Most novice traders don't bother trying to trend following forex longer term - instead they try forex scalping or day trading. These methods focus the trader on small moves and they hope to catch small profits however as most short term moves are random, this leads to equity wipe out.

The other choices are swing trading and long term forex trend following and this article is all about the latter method. If you look at any forex chart, you will see long term trends that last for months or years. These moves can and do yield big profits - here we will outline a simple method to catch them.


By far the best way of catching the big moves is to use a forex trading strategy based around breakouts. A breakout is simply a move on a forex chart where a new high or low is made and resistance or support is broken.

It's a fact that most major moves start from new highs or lows.

While it might appear that you are not buying or selling at the best level, you are in terms of the odds of the trend continuing. Most forex traders make the mistake of waiting for the breakout to come back and get in at a better price but these traders never get on board. The reason for this is if a breakout occurs, then you have a new strong trend and a pullback is not very likely to occur.

Most traders don't buy or sell breakouts and that's exactly why it's such a powerful method.

The only point to keep in mind is a support or resistance which is broken, should be valid and that means at least 3 points in at least 2 different times frames. The more tests and the wider the spacing between the tests the more valid the level is.


Of course not every breakout continues and some reverse, these are false and can cause losses. You therefore need to confirm each move. All you need to do to achieve this is to put a few momentum indicators in your forex trading system to confirm your trading signal.

These indicators give you an idea of the strength and velocity of price and there are many to choose from. We don't have time to discuss them here (simply look up our other articles) but two of the best are - the stochastic and Relative Strength Index RSI

Stops and Targets

Stop levels are easy with breakouts - Simply behind the breakout point.

If you have a big trend then you need to be careful you can milk it, so don't move your stop to soon and keep it outside of normal volatility. If it is a big move, trailing stops should be held a long way back and the 40 day moving average is a good level to use.

You have to keep in mind that when the trend does eventually turn you are going to give some profit back. You don't know when the trend is going to end, so don't predict.

It's ok to give a big back, as that's the nature of trading forex. Keep in mind if you got 50% of every major trend you would be very rich. When you are long term trend following you have accept giving a bit back and taking dips in open equity as the trend develops - this is noise and does not affect the long term trend.

The above is a simple way to trend follow forex and catch the high odds moves that yield the big profits. If you are learning forex trading and want a simple method that is robust and will help you catch every major move, then you should base your Trading on the above method.

Related Posts :

  1. Support and Resistance Level
  2. How To Identify Forex Market Trends

Sources :
  1. Trend Following Forex - 3 Simple Steps to Catching Big Profits

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Sunday, December 21, 2008

Reading Price Action

Reading Price Action means different things to different traders, just like “going long” means different things to a trader than a porn star. Price action can talk in several layers (like onions, not everyone likes onions, cake! .. everyone likes cake! .. cakes have layers). The talk comes from the macro level of price patterns and formations, to the micro level of single bars or candlesticks. Looking at what micro level price action is telling you gives you hints on when macro level patterns might play out.

Reviewing each type of macro pattern is beyond the scope of this article (and beyond the knowledge of this author), but some specific patterns will be addressed in later articles. Instead we can look at the micro level from a days action on the currency markets.

The concept for me for micro analysis is quite simple. Look for where buyers are, where buyers were and vice versa. A chart is nothing more than a story of buyers and sellers battling it out for supremacy, with their blood trails left behind for us all to see.

I will caveat this analysis with one thing, when it comes to forex analysis, single candle analysis (note not candle formations) on a daily or a four hour chart is pointless. The currency market is a market with no daily close except for the friday weekend close, which even in itself is slightly different for all.

A daily close is essentially invented by which session we deem most important, but this can change between markets and between currencies depending on the happenings at the time.

A four hour candle depends entirely on when your broker starts the day off for you. Mine might open Monday markets at 7am Sydney time, your at 8am, that would mean my four hour candles close and hour before yours, how can we tell which close means what?

So why not exclude the hourly or the weekly from this single candle analysis? The weekly close does make sense, the retail currency market across the globe closes at approximately the same time on a Friday, so a weekly candle close has some significance. True it is approximate, but in a weekly context it is certainly close enough.

An hourly chart also makes sense. An hour is an hour is an hour, doesn’t matter if it is the 3pm or 10am, it is still the end of an hour everywhere, so everyone is seeing a close of an hourly candle at the same time, giving it some meaning.

An example of one days action on a 15 minute chart is below. This is one I prepared a few days ago (when I originally intended to write this article) on the EURJPY spot currency cross (click to enlarge):

There is an aweful lot of annotations there I know, so I will let the picture do most of the talking. There are a couple of things to note however.

Firstly, trader pain is important, sellers and buyers out of the money are going to look to close at break even more often than not, especially those that get caught out by strong moves with no stops. So watch for a sign of buyers or sellers being reversed upon quickly, chances are they are in panic mode and wanting to close.

The next thing is to ignore colours, in this chart a black candle is one with a lower close than open, a white candle with a higher close than open. They should not be called bull or bear candles based on their colour. The close vs open relationship does not necessarily indicate whether that period was dominated by the bulls or the bears. A candle with a long upper wick yet a slightly higher close (doji) is a bearish candle not a bullish one. It is why the old timers always seem to have better price reading skills (I am talking the pre-computer old-timers). They had to hand draw charts, and so colour was not necessarily a factor and they didn’t have technology to make them lazy.

Don’t let the convenience of technology make you forget that there is a story being told. It is too easy with automated systems, computer generated indicators and complex charting techniques to forget that we are still trading the discrepancy between supply and demand, nothing more.

To be a professional trader, you need to work out how to take money from the ametuer traders, as there is not enough to go around for everyone. If you learn (from yourself and others) what the ametuer trader would do (i.e. no stops, late buying and selling, panic and elation) then you can take advantage of those reactions when reading the charts and refining your entries. Be the exception, not the norm.

Related Posts :

  1. Buyers vs Sellers
  2. Trading Support and Resistance

Sources :
  1. Reading Price Action | Written by Akuma99, October 31st, 2008 at 10:26 am.

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Buyers vs Sellers

In the land of the squiggly line, it is becoming easier to find someone who thinks George Bush is intelligent than it is to find traders online who read price action for a living. I preface it with the online because I know there are still many professionals out there who trade with minimal or no indicators, but the are usually too busy making copious amounts of money to be hanging around the online world.

A recent article in Technical Analysis of Stocks & Commodities featured an interview with Jack Broz. Jack is a member of the Chicago Board of Trade (CBOT), and trades Bonds and Dow futures in the pits, and from the screen. In this interview he made some interesting observations of floor traders, but it was this paragraph that warmed my heart:

"… The bias of the floor. Are the floor traders trying to buy dips, or are they trying to sell rallies? Are they bullish or do they want to buy strength? What levels are they using? One thing I have noticed as I trade more is that nobody in the pit uses indicators."

Nobody uses indicators in the pit, which of course seems obvious in hindsight considering the chaos that is the pit of CBOT:

Not really a place for the squiggly line is it. The speed and frantic nature of the pits ensure that trading is done with the minimum of frosting.

What I think is forgotten at times is we are trading financial markets. It is called a market for a reason, it is no different than your local farmers market or super market, it is still a place for someone to either buy a product they need from someone who want to sell it to them, or vise versa. It doesn’t matter if you are buying an apple, shoes or gold, either way the process is the same, you buy from someone who wants to sell.

The most successful technical traders are those that know what this might look like on chart. If you have a long bias on an instrument, i.e. looking to buy, who are you buying from? Sellers, stating the obvious I know, however the amount of traders I have worked with that seem to forget this simple fact indicates that perhaps it is not as obvious as it seems.

If you are at a market, that market has fruit and vegetable stalls, arts and craft stalls and hardware stalls and you want an apple, chances are you are going to look for the physical characteristics of someone selling an apple. You might be looking for a Greek man with an apron, a fruit van or other similar products in the general genre of apples. If someone has a stall with pears, chances are their are apples there as well. Certainly a much better chance than if they were selling hammers.

Back to our buying idea, there are two things we need for price to go in our direction:
  1. Someone to buy from (sellers)
  2. Other buyers to support the purchase (momentum)
Knowing where new buyers are can be difficult to spot. In the majority of cases they are the silent minority, they have left little or no footprints as they are not in the market as yet. In fact, you, as a potential buyer, are one of those exact buyers.

Potential sellers however have left tracks, they are already in the market, and so spending your time looking for where they were could be a much more productive use of your charting time. The most desperate sellers are those that are feeling the pain of a losing position. We all know the feeling, when we are holding a losing position and are going through the “if it just comes back to break even” game.

This scenario is most commonly called reverse polarity. This is where support becomes resistance and resistance becomes support. Visually this usually looks like:

So if we are buying, looking for sellers at previous resistance (i.e. where sellers last came into the market), in this instance looks like a fantastically easy way to find who you are going to buy from. Naturally things aren’t always that clear cut, for example:

While there was one polarity change here, we had a couple of turns that seem to turn in mid air. Some might put it down to a mysterious ratio found in the ancient pyramids, sunflowers and the patterns in the hair on my left arm (you know who you are). While others might look for reasons in price itself.

The theory of sellers in a panic wanting to offload them to buyers can take a different visual form. To the left is a close-up of one scenario. Here we have six blue candles, which at first glance makes you think six bullish candles.

Candle three however is anything but a bullish candle. It’s long upper wick indicates this is very much a bearish candle, with heavy selling coming in at the top of the range. Another instance of reverse colour blindness.

The next three candles however returned to strong bullish candles. There must have been a strong reason to be going short in an uptrend. After the close of candle three, those sellers would be feeling rather chuffed at their intelligence, thinking they have picked the top. The next three candles reverse those feelings quickly, and that comfort now turns to panic, and they are now more than happy to offload their positions to anyone wanting to buy.

Let’s go back to the previous chart with this in mind and look at those mysterious turns again:

Not so mysterious .. certainly no ancient mathematics involved in these cases. You can see in the zoomed in versions that each case this time had sellers being reversed on quickly, providing some very eager sellers looking for others wanting to buy what they have (see the link to the farmers market … knew I would get there).

There are many variations on the theme, but breaking things down to the core of market behavior; buyers and sellers, can sometimes clear the brain enough for you to make some money. Have other visual representations of this scenario? Let us know.

Related Posts :
  1. Trading Support and Resistance

Sources :
  1. Buyers vs Sellers | Written by Akuma99, December 16th, 2008 at 10:05 pm.

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