Forex Scalping: What Can We Control?
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Hello, Forex friends! Today we will pay attention to a very common Forex trading strategy – scalping. This article won’t present a shocking or bullet-proof scalping strategy. Instead, we will discuss something very simple, yet important – what can we control?
What can we control?
This is a pretty straight forward question, right? So, which elements of your Forex scaling strategy can you control? Don’t worry, we’ll help you out:
- Trading time frame – this one is easy, you can quickly swap time frames like H1, H5, H15, etc. However, for efficient scalping, we recommend H5 and H15.
- Leverage – every Forex trader knows that the bigger leverage is the bigger are both the profits and the losses. That’s why a beginner trader doesn’t need leverage bigger than 1:20 or 1:50.
- Spread – this is arguably the most important element in scalping. We made a little experiment a while ago; we asked several Forex brokers the same question: “Do you allow scalping? Trading less than one minute?” Guess what? Most Forex brokers told us that they allow scalping, but they didn’t tell us that there is a catch - they allow scalping, but the spread that they offer is too big and the trading conditions are bad. Let me give you an example. Imagine that you are scalper and you make 25 deals per day; you trade with 0.1 lots and your money and risk management is 1:2. This means that you place your take profit at 12 pips and the stop loss at 6 pips. If you use a standard account with a standard spread (for example, 3 pips on EUR/USD) and maintain a success rate of 68 %, the result will be:
25 trades = 17 x 12 pips (winning) – 8 x 6 pips (losing) = 204 $ (1 pip = 1 USD) - 48 $ = 156 $
However, don’t forget that the spread is being calculated per trade.
25 x 3 pips = 75 USD Your final gain is 156 USD – 75 USD = 81 USD
Well, Forex friends, we are not fools, right!? We want a tight spread up to 1 pip for the EUR/USD pair. Take for example the HotForex Currenex account (we actually use this account type for scalping); the spread starts from 0.2 pips, but there is a commission – 5 USD per 100 000 units traded (1 standard lot). Note that the Forex market is very unstable and no one can maintain a spread like 0.2 pips all the time. That’s why we will use 0.8 pips as a stable EUR/USD spread. Okay, let’s do the math again.
25 trades x 0.1 lots = 250 000 units = 12.5 USD (commission)
25 trades x 0.8 pips = 20 pips = 20 USD
Total spread + commission = 32.5 USD for the same trades
This means that your gain will be: 156 USD – 32.5 USD = 123.5 USD
Note that those calculations were made using 0.1 lots as standard trading size. Image the picture with 1 or more lots per trade.
- Currency pairs - major or exotic pairs? As a Forex scalper you want a currency pair with both high volatility and liquidity. The Forex market almost always has high liquidity, so this not a problem (maybe only a few very exotic pairs may suffer from low liquidity). Truth be told, there is no strict rule like “trade only major pairs” or “trade only exotic pairs”, because some traders like trend trading, while others like range trading. However, if you like range trading, choose a major pair; their movement can be predicted more easily.
That’s all for now, friends. If you like our work here, please feel free to send us some feedback (log in and use the contact button in the top panel) or you can stop by our Facebook page. We are trying to provide as objective information as possible, so we appreciate any help. Stay tuned for the next article in this series - Advanced Forex Accounts And Bonuses.In the meantime, feel free to visit our Forex brokers reviews. We wish you best of luck and profitable trading!
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.