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Scalping Trading Strategy in Forex

Introduction to the Intraday Scalping Technique

Sep 24, 2008 Dario Borghino

The scalping strategy is one of the most widely used intraday trading techniques adopted by foreign exchange traders all around the world.

In forex trading, novice as well as experienced traders use the unique features of this market — particularly the very high leverage — to implement a strategy by the name of "scalping", that allows for a fast outcome of your trade without renouncing to high profit potentials.

The Scalping Trading Technique

In a few words, scalping simply consists in trading using very high leverage, compensating the risk that comes with the high pip value with tight stop loss and limit orders. This guarantees a relatively fast outcome of your trade, allowing you to place many of such trades a day and earn (or lose) a big percentage of your initial account in a short period of time with a strict control of your investments.

Supposing you have 10,000 USD in your account, you can use a very high leverage — say, 200:1, meaning your margin will be of just $500 per standard 100,000 lot — to enter the market with 5 standard lots, stop loss at 10 pips and take profit at 20 pips. The used margin for this trade will therefore be $2,500, and the pip value for our order will be $50, with a maximum loss of $500 + spread and maximum profit of $1000.

However, this is quite a risky operation, since a 10 points swing of the market in the wrong direction would mean losing over 5 percent of the account and, as many forex traders know, a similar variation can easily take place in a matter of seconds or minutes. On the other hand, if you have a solid background in technical analysis and are familiar with indicators and oscillators, you will have some decent chances of increasing your account by 10% in just about the same time lapse.

Things to Keep in Mind while Scalping

Some novice forex traders will get carried away by the possibilities of scalping trading: however, there are a few aspects that should always be kept in mind while using this potentially very dangerous trading strategy:

Don't forget about your risk management rules: you should never risk more than 3-5% of your account in a single trade and no more than 15-20% in total at any moment, or you will face a serious risk of drawdown;
Not every currency pair is the right one to implement scalping: you should always choose the pairs with very low spread — ideally less than 5 pips, although exceptions might apply under particular market conditions;
Not every broker is the right one to do scalping: some won't let you set a stop or limit order too close to the current market price, fearing that they might not be able to fill your order in time, and therefore potentially lose on the trade. Serious investors should spent a good deal of time to look for the broker providing them with the best trading conditions before experimenting this technique.

The copyright of the article Scalping Trading Strategy in Forex in Investment is owned by Dario Borghino. Permission to republish Scalping Trading Strategy in Forex in print or online must be granted by the author in writing.