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CFDs are complex instruments. You can quickly lose your money due to leverage. Please make sure you understand how this product works and whether you can risk losing money. CFDs are complex instruments. You can quickly lose your money due to leverage. Please make sure you understand how this product works and whether you can risk losing money.
Scaling in forex trading is a style that involves opening and closing multiple positions in one or more forex pairs over the course of a day, usually within seconds or minutes. Rather than opening and closing a position at the beginning of a course, scalpers will open and close several positions during the course of a course.
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Forex scalpers aim to earn only a few pips at a time and look for multiple small wins rather than less big wins. A pip is a common unit of motion measurement in forex trading that indicates the change in price to the fourth decimal place. For example, if the quoted price of a forex pair fell from 1.3980 to 1.3979, it fell one pip. There are some exceptions, such as the Japanese yen, which is quoted to two decimal places.
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Scalpers often use derivatives such as CFDs to trade forex pairs that are rising or falling in value. If they think the price will go up they open a position to ‘buy’ (go long) and if they think the price will go down they open a position to ‘sell’ (go short).
Leverage products like this also allow traders to open a depository position called collateral. This can increase profits, but it can also easily increase losses because your profit or loss is calculated from the full value of the position. That’s why it’s vital to have an appropriate risk management strategy, whatever scaling techniques you use.
Before you adopt a forex scalping strategy, it is important to understand currency liquidity and volatility and the pros and cons of this trading style.
About $ 6.6 trillion worth of forex transactions are processed every day, making it the most liquid market in the world. Liquidity refers to the ability to buy and sell quickly without affecting the price of a market. Hh liquidity makes forex a good market for scalpers who need to enter and exit their positions quickly – sometimes in seconds.
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The liquidity of a currency is not fixed; The time of day will vary depending on a number of factors, including the number of traders active in the market at any given time, and broader economic conditions such as the inflation rates of countries (GDP). The most liquid forex pairs tend to be the most traded, such as EUR / USD, GBP / USD and USD / JPY.
In highly liquid markets such as Forex, despite the large volume of auction positions, bid-bid becomes commonplace, making transaction costs affordable. Smaller spreads yield more profits because the payouts are incremental.
In other markets, liquidity usually means stability, but forex is highly volatile. This means that large short-term price movements can occur at any time, causing the value of currencies to rise and fall in seconds. The volatility offers opportunities for larger profits – this is another reason why scalpers often prefer forex. Conversely, however, this may also lead to an increased exposure to risk.
Volatility is convenient when trading derivatives, because it allows traders to benefit from rising and falling market prices. However, it is important to have a risk management strategy to minimize losses, especially when using leverage to open a position. Because scalping is most successful when markets are volatile, the best time to open a position is at the opening and closing of the session.
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Some forex pairs such as AUD / JPY, GBP / EUR and USD / MXN are more volatile due to their dwindling liquidity as well as economic factors such as trade deals, exports and natural resources. Also, with our appliance named Weekend GBP / USD, Weekend EUR / USD and Weekend JPY / USD offers, you do not have to wait for the markets to open on Monday to take your position if the volatility is Saturday and Sunday ss.
When learning how to scalp forex, it is important to keep the following pros and cons of this trading style:
Many traders use Bollinger Bands to indicate areas of market volatility. Bollinger bands are based on a simple moving average (SMA) with one standard deviation set above and below to show how volatile a market can be.
Traders assume that broad standard deviations indicate increased volatility in the underlying market. Conversely, narrow bands can mean that the underlying market is stable.
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When standard deviations (bands) increase, traders call it a “bollinger bounce” – it is considered an indicator of an impending pullback. Narrowing bands are known as ‘bollinger squeezing’ and this is taken to indicate an impending breakout in the underlying asset.
A moving average is a mathematical formula that is represented as a single line that shows the average, which is used to identify common trends that occur in the markets. There are two types of moving averages – simple moving average (SMA) and exponential moving average (EMA). Moving averages are popular indicators in most forex scalping strategies because they are easy to read.
An SMA adds a set of numbers and divides it by the number of values in the set. For example, a scalper might sum up the cost of a currency pair at five minute intervals over an hour and then divide the total number by 12.
Forex scalpers will look for the point where the five-period moving average rises above 20-periods and opens a position in the direction of the trend. This is indicated by arrows.
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The Exponential Moving Average (EMA), on the other hand, is trying to react to more recent price changes. In the same currency pair, in the example below, we can see how each moving average – in periods three, 12 and 100 – stacks up as the data show more recent activity.
Any forex scalping strategy should include solid risk management with stops that are vital to avoid larger losses that can quickly erase many small gains.
A stochastic oscillator is a technical indicator that compares the current value of a forex pair with its range in recent times. Scalpers can use the Stochastic Oscillator to predict when a trend may be bullish or bearish.
In a stochastic oscillator, when the solid black line called the% K line crosses the dotted red line called the% D line, it means that a change in market direction is imminent. The ups and downs tend to occur in the extremes of a recent price range.
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If% K goes above% D, this is a buy signal, and if% K goes below% D, this is a sell signal. You can see this in the chart below:
In this example, looking at USD / CHF on a three-minute time frame, the arrows point to a buy signal, so a scalper may consider opening a long position at that point. They then close their positions when the% K line falls below the% D line at the upper end of the range.
Conversely, a scalper opens a short position when the% K line falls below the upper% D line and closes when it crosses above the% D line at the lower end of the chain.
The Parabolic SAR is a technical indicator that is shown as dots above or below the market price. Scalpers use it primarily to detect potential reversals to discover the best times to enter and exit a market.
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When the red dots are above the current price, they act as a selling signal, indicating that a bearish market is imminent. When the green dots are below the current price, they are seen as a buy signal, indicating a potential bullish market. For example, after a series of red dots, swimmers get the appearance of the first green just followed by a series of reds as the start of an uptrend – opening a long position in the process. Conversely, if a red dot appears after the green dots trend, a trader should choose to open a short position.
In the AUD / JPY example below, the arrows indicate points where a scalper would open a position, long or short depending on the reversal of trend.
The RSI is a momentum indicator that uses a range between zero and 100 to assess whether an underlying market is about to reverse its current direction. It uses support and resistance levels 30 and 70 respectively, to determine when the market trend is about to change direction.
When the RSI rises above 70, it may indicate that the market is overbought and a trader may benefit from opening a short position. If the RSI falls below 30, it indicates that the market is oversold and a trader should open a long position. In our example of the GBP / JPY pair, you can see how the RSI climbed above 70 and it was a close trend reversal.
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