What is Scalping? – Financial Market Terms

I have been playing around with a couple of things here, but one method has come out on top for profitability.

This is not an original strategy by any means and I have come across this in several locations in the past. It is based on the principal that price will move, not what direction (although it can be traded in a certain direction). A simple fact of the market is that price does not usually stay in the same place for long, certainly not within a 5 or 10 pip range. Another fact is that it is sometimes very hard to know if price will break a support or resistance level or bounce on it. How often have you risked 50 or 100 pips on a trade to find out if a support will hold, only to fine that it got smashed and you lost your money? Well by trading this method it does not matter what happens, so long as it moves!

I can tell you that there is NO NEED for fancy analysis to be-able to trade this method but psychology is very very important. Because there will be times when you get whipsawed and you may be stopped out several times before price moves the way you want.

Tight spreads are an absolute essential to be able to trade this method. I would say anything above 1.5 pips will be useless. That is for the eur/usd as this will be the main pair to trade. I have an account with Oanda, they are an American based broker that have a 0.9 pip spread on the eur/usd. They also have 30 second period charts which I use mainly, thats right 30 second!
There are only certain times when this system should be used. The main windows are 7am to 10:30am and 2pm to 4pm, LONDON TIME. Or around the time the London stock exchange opens and the New York stock exchange opens.
During lunch time and in the evening (London time again) I have found to be no use. Also on holidays when exchanges may be closed. We need lots of volatility for this system, this requires high volume. Therefore its not much use doing it when half the planet is on holiday.

It can also be used just after news releases as these will be a times of high volatility, but make sure the spread has come down first! The way this strategy loses is when price channels sideways, then we can get killed.

You should use 1 minute charts or below for trading but watch the 5 or 10 minute for a bigger picture. Should should alo check the economic calendar for times of news releases and dont trade before a major announcement.

So lets say for example the eur/usd has come down to strong support, say 1.2500, but we do not know which way it will go. Will it break or will it bounce? This market entry system will get you on the right end of the trade, REGARDLESS of which way it goes. So lets go long at 1.2500, but we only use a 5 pip Stoploss! If we are lucky price will bounce straight up, and we will capture some pips, it could be 15, it could be 50 pips. it depends on conditions and how good you are at letting trades run. Now when we are up 5pips, I normally take half as this means if I get stopped I will lose nothing!

Now the we got stopped. What do we do now? Well what you do is set a limit order just below your stop (1 pip) before it is hit. So now if price continues south you will be entered in a short trade. At this point you should re-establish a long order at the same level that you went long before. This way if you get stopped out on your short trade you will then go long.

So lets say you now get stopped on your short trade, but you did not have the opportunity to take profit on half the position at +5pips on either long or short. You have now lost 2 trades or 10pips total. Just after your short trade is stopped out you are entered long again. Remember this will be in the same place as your first long order. This time price rises far enough to get you out for half at +5pips. But it reverses and you are stopped on the last half. But this is not a loss this is a breakeven trade as you have covered yourself by taking profit.

We now go short again, but this time price collapses. You take half at +5pips and ride the trend and take profit at +40 pips an hour later. The results of this are 2 loses, this is -2R but then you have made 3R back again, therefore you make 1R profit. 1R means 1 times your risk. so if your losses are £10, then your profit for this trade is £10.

I must warn you that this system can produce large drawdowns. One time I was stopped 10 times, before price moved away from the area and I managed to get 6R back. Because of the large drawdown you must risk a very low percentage on each trade, the absolute max is 1%. Do not go risking 5 or 10% or your account will be destroyed! I only risk 0.5% on each attempt, this way if things go wrong I live to tell the tail!

Something I also need to say is that you do not need to trade this in both directions. If you are convinced that price is going down, you may only use a short order to enter. So again lets say supprt is at 1.2500, place ashort order just under this at 1.2495. And any time price breaks below this you will be in the trade. The risk is that it will bounce and go north without you.

You can trade this system after the news, wait for the spred to come down and then have a go with a trade which ever way you think it is going to go. You may wait for a break of a minor support or resistance, then set a limit order in the other direction so that you can get on it if it reverses. Sometimes it is best to make your stop 8 or 10 pips if volitility is high. This way you can avoid getting whipsawed but remember to recalculate your lot size!

The system itself is best used at good support and resistance levels, as at this point peoples opinions opinions about price are changing and it may turn and move in the other direction. It is best used when price is at an extreme, or market hot spot. This would be for example when price breaks an uptrend line. I will be going further into this soon.

If you would like to try this go to Oanda.com and download their free demo account called “FXgame” This way you can try this for yourself. I have a live account with them and have had no problems so far.

I will be writing more stuff on this soon and also how to use the trading platform, which is very easy! Hopefully I will be doing some videos as well! You can follow my blog where I will be posting some of the trades I am taking using this system. Hopefully you will understand the reason that it works- price movement!

I am only in the development/practice stage with this, I am only using small amounts of money. I can see potential in this system though and I feel it is good enough to give to you guys.

More info and articles coming soon!