Here is a general overview of what scalping is like.  I’ll talk in generalities here but will certainly go into specifics later in this eBook.  This section is just to give you a taste for how a typical trade goes.

You watch your charts for specific market conditions to occur.  Once you see a potential opportunity you begin to watch your charts very closely for the right moment to act.  Once the desired circumstance occurs you pounce to enter a trade.  Your trade is entered with a stop set at 10 pips below your entry price.

If all goes poorly (it happens often when scalping) you’ll lose your 10 pips.  If things go well (as you hope) then ultimately the market will move in your direction (it might have first dipped back a bit before proceeding).  Once it moves sufficiently far you promptly replace your stop to your entry price to prevent a loss.  Now you are in a “free trade” so hopefully you can make a profit without any further risk.  Hopefully the market doesn’t pull back to stop you out, and once it moves sufficiently far enough you again replace your stop so that you are now secured with a 5 pip profit.

What comes next will depend on current market factors, and you’ll have to make a judgment call about how you will proceed with the trade.

If by your assessment of what you see on your charts you think that the market is about to pull back you could simply exit the trade at the current market price to get the most profits out of the small market movement.

Alternately, if you believe that the market may retrace a little but is likely to resume in a micro trend then you might choose to remain in the trade, trailing your stops as taught in “Forex Surfing” and either exiting by getting stopped out for a nice profit or by scalping your exit (explained later in this eBook) at the appropriate time for an even greater profit.  The advantage of letting your trade run (when appropriate) is that you can potentially score some very significant pips in a single session.

STOP FREQUENCY

You’ve probably guessed by now that getting stopped out is common when scalping.  It can get aggravating at times so you need to be mentally prepared for experiencing frequent stops.  Sometimes I swear it’s like I’m psychic or something for setting my stops to the exact pip to get stopped out just before the market dramatically turns around and soars into the profit zone.  When you first start scalping you’ll likely find that these stops may drain you emotionally but after a experiencing them quite a few times you’ll learn to not get upset by getting stopped out for loss.

You need to develop the skill of ascertaining when to enter a trade that will likely go in your favor.  Then the objective is to quickly move up your stops to reduce loss and then to secure a profit ASAP.  Often you’ll be stopped out or will voluntarily exit for small 5 pip profits.  What you strive to do is to be cunning and when appropriate leave the trade enough breathing room (not suffocating it by trailing your stops too closely) to potentially catch some larger pips (for scalping I consider anything over 20 pips to be a large trade – scoring 100 pips on a single trade is spectacular).

When looking at risk/reward ratios it soon becomes apparent that on trades that exit with a 5 pip profit your risk/reward is 2:1.  Obviously this isn’t desirable.  If all you feel you can capture is 5 pips (or you simply get stopped out for 5 pips) then let that be good enough, but what you need to strive for are sufficient amounts of larger trades (20+ pips) to account for the bulk of your profits.  Needless to say that some days will be better than others (and some days you’ll even end up a net loser).

EQUITY MANAGEMENT

I won’t stress the importance of equity management principles here as I have written sufficiently about this subject in my other eBooks.  I strongly encourage you to reread those sections in the other eBooks and be sure to adhere to the guidelines presented.

In scalping it is best to maintain a maximum risk of 2% on any single trade, however when starting off it would be even better to reduce it to just 1% at least initially while you are still learning.  If you are following the “Forex Freedom” plan your risk levels will be higher, and the justification for this is explained in my eBook “Forex Sailing”.

To help you quantify this here is a chart of how many lots you could trade depending on how much you have in your trading account.  If you have already figured out how many lots you can trade doing “Forex Surfing” techniques (2% at 20 pip stops) then simply use the same amount of lots as it’ll automatically maintain the proper proportion for your 1% since you are trading with typically half the stop size.

This chart shows appropriate lots amounts (based on the 10 pip stop) against various margin account sizes.  Keep in mind that once your account surpasses $100k you should scale your maximum down to 1% to even 0.25% (not shown) when you reach a million to preserve your equity from substantial drawdowns.  This chart shows the maximum “Amount(K)” you can trade based on the 10 pip stop.  Remember, 10K = 1 mini lot, and 100K = 1 regular lot (or 10 mini lots).

Account Size    1%    2%
$300    <10K    <10K
$1,000    10K    20K
$2,500    20K    50K
$5,000    50K    100K
$10,000    100K    200K
$25,000    250K    500K
$50,000    500K    1,000K
$100,000    1,000K    2,000K
$250,000    2,500K    5,000K
$500,000    5,000K    10,000K

KAMIKAZE SCALPERS

I think that is it worth mentioning here that there are people that I would label as “Kamikaze Scalpers”.  This IS NOT something that I would endorse for you, but will mention it here because sooner or later you will be tempted to start thinking about it, and there are many people who do it.

Because scalping involves tiny trades (in duration and amplitude) many scalpers trade significantly larger amounts of lots (regular or mini) to leverage the tiny pip gains into more substantial profits.  The “Kamikaze Scalpers” might thus be risking far more than the suggested 1% to 2% per trade.  I urge you to consider against becoming a “Kamikaze Scalper” simply because the higher your risk percentage per trade the greater the risk that a draw-down series of loosing trades can significantly impact your trading account negatively and make it difficult to recover to a breakeven point.

Obviously one would only consider trading like this once one is extremely confident in their skills.  Again, I recommend AGAINST you being a “Kamikaze Scalper” but if you decide to go against my advice (which from my experience people tend to do – and even I do from time to time) please absolutely limit yourself to 4%.

There is another breed of what I would also call a “Kamikaze Scalper”, that seems to have the mentality of “I’m sure I’m right”.  What I’m about to explain to you here is something that I would ABSOLUTELY NOT recommend.  I have spoken to several traders who do this and am aware that there are trading schools that teach this approach, and despite the fact that they claim to have overall good results with this method I’d still warn you to stay away from doing this.

The premise behind this second kamikaze method is that most often their assumptions of what direction the market will move in is correct but they believe (rightly so) that a tight stop will result in stopping them out before the market moves in their direction.  What they often do is they’ll set their stop loss order to be 50+ pips away to allow enough wiggle room to happen, but they take their profits typically at around 5 pips.  People who are very good at these methods claim to catch 20, 30, 50, sometimes even 100 (very rare & exceptional) successful trades in a row.  What is the downside to this?  Obviously one loss will wipe out a bunch of hard earned gains.  To the people who employ such trading methods (you know who you are), if you have been trained to do so and as long as it works for you then feel free to continue, but for the rest of you reading this just simply DON’T!!!

Folks, don’t be a kamikaze trader.  Play the game safe and you’ll last for the long term, but if you take big risks then you soon kill your career as a trader.

CURRENCY PAIR CHOICE

Above we listed the currency pairs you should limit yourself to scalping based on the criteria of their pip spreads.  There are a few other factors that are worth looking at.

In my other eBooks I have repeatedly alluded to the fact that each currency pair exhibits it’s own personality.  It is important to be familiar with the “personality” of the currency pair(s) you intend to trade so that you can develop an almost intuitive feel for how it tends to behave.  The only way to cultivate this recognition is to study the charts of the currency pair for a while (at least a month).  I can’t stress enough to you the importance of keeping your eyes on the charts to become familiar with the pair’s behavior.

At the time of this writing (remember that when you read this the Brokers might have already changed the spreads) there are two currency pairs that have a 3 pip spread; EUR/USD and EUR/GBP.  Due to the fact that they have the lowest spread makes them the ideal candidate for scalp trading.  There is however a significant difference between them that makes one more ideal than the other.

If you watch the charts of EUR/GBP you’ll quickly notice that it’s “personality” is that it usually moves by very small increments.  In general I’d say that this pair is relatively stable (compare to most other pairs).  Many times it seams to bounce around in very tight ranges, often within 5 pips.  Looking at the one-minute charts it appears “fuzzy” due to frequent bouncing within a tiny range.  This makes EUR/GBP difficult to scalp.  There are a few instances when it is worth trading (like when either EUR or GBP has just released a Fundamental Announcement), but as a general rule (meaning there are exceptions) it is simply best to avoid scalping this pair.

EUR/USD also has a 3 pip spread, but it is far less “fuzzy” in comparison to EUR/GBP, and it tends to trend very nicely (even compared to the other pairs).  For these reasons EUR/USD is by far the single best currency pair to scalp.  Most of your scalping should be restricted to this currency pair.

What about the other pairs?  You can certainly trade them too.  Become familiar with the personalities of each one and you’ll soon discover that you have personal preferences for one or two pairs more so than the others.  This becomes a matter of personal preference usually based on which one(s) appeal to you more and because you have “figured out” their behavior patterns enough to more consistently be profitable with those pairs.

So your primary scalping pair is EUR/USD, but pick a couple of the 4-pip-spread pairs to be your secondary scalping pairs.  In certain circumstances (which will be elaborated upon later) you could scalp some of the 5-pip-spread pairs, but these won’t be part of your usual routine.  In virtually all circumstance you should completely avoid scalping any of the larger-pip-spread pairs.

THE TECHNIQUES

In this major section of this eBook I’ll cover many specific techniques.  Some are more directly related to “how to scalp”, whereas several of the techniques are more to support the other concepts.  This section presents a collection of “tidbits” that will later come together in the next major section of the eBook titled “The Opportunities” that makes use of the techniques presented here.

TRADING MECHANICS

Before we delve into the scalp trading opportunities, setups, and techniques we first need to discuss how to do the mechanics of entering, modifying and exiting trades.

In “Forex Surfing” I explained how to place “Entry Orders” (setting up a trade to occur once a specific price is hit), so I won’t be discussing that here.  What I will cover is how to manually enter a trade at current spot price, modify your stop, and manually exiting a trade at current spot price.  These skills will be explained with “scalping” in mind.

First of all it is important to note that most of the time you won’t be using entry orders, only market orders (getting in at the current market price) to place trades.  Why can’t you use entry orders?  Simply put you must place entry orders at least 5 pips or more from the current market price, but as a scalper you want to enter the market at the best price possible, which is at the current market price once you believe it is time to enter into a live trade.

Please note that the following images show FXCM’s trading software.  If you use some other broker then be sure to be familiar with their software.  Also remember that in the future FXCM may change the look & feel of their software so by the time you read this these images might be invalid.  These images are simply shown for illustration purposes – you need to be very familiar with whatever trading software you actually use.

If you have ANY questions about how to use your trading software then contact your broker’s FREE online help desk.  Don’t be scared to contact them because they are there just waiting around to be of help to you.  They will gladly answer any questions you have and it is EXTREMELY important that you know how to use your trading software proficiently.

While actively trading you need to be able to “push the button” at a moment’s notice.  The simplest way to enter an order is to click on the “Buy” or “Sell” side of your desired currency pair in the “Advanced Dealing Rates” window.

Once you clicked to either “Buy” or “Sell” a particular currency pair the “Market Order” window will appear.

What you do is you set your “Amount(K)” to however many lots you intend to trade, and you check the check-box to activate a stop.  Your stop should be set 10 pips away from the current “Rate”, however if it is not the appropriate 10 pips then don’t worry about it now (unless you are not in a rush to enter your trade) because you will be able to correct it immediately after your trade has been activated.  When you are ready to enter the trade live you simply click the “OK” button.

Here is an important tip:  Unless you have enough funds in your trading account to trade 6 or more regular lots (and not trading less than 6 regular lots) using proper equity management principles then use a “Mini account” rather than a “regular account”.  Currently (this is a relatively recent change) FXCM (and other brokers to be competitive) now offers the same pip spreads for mini accounts as they give to regular accounts.  Furthermore, with a mini account you can be much more flexible as you can trade fractions of regular lots and thus more closely follow your 2% limit.  You can trade up to 50 mini lots in your mini account.  To do this simply select the “Amount(K)” window and type in the number of “K” you want to trade.  10K is one mini lot, 100K is 10 mini lots or equal to one regular lot, and 230K is twenty-three mini lots or equal to two regular lots plus three mini lots.

Often when I am expecting to be entering a trade soon (but not immediately) I’ll have the “Market Order” window open with all my trade details set and just sit there (watching my charts) with my mouse on the “OK” button ready to deploy at a moment’s notice.  When doing this the “Rate” field will automatically change to reflect the current market price, but the “Stop” price won’t change.  If the stop price becomes incorrect I simply fix it immediately after the trade becomes activated.

After you have entered a trade live you will want to immediately reset your stop to be at 10 pips (unless otherwise desired).  In the “Open Positions” window right-click your mouse over the “Stop” and select the “Stop/Limit” option.

You will then be able to change your stop in the “Stop Order” window to 10 less than the “Open” price (the price your trade got entered at).  Don’t worry about adding the broker’s spread, you simply want your stop to be 10 pips from your entered price.

Later when you change your stop loss order to a breakeven point (stop = open price) or when you start trailing your stop to protect your gains you’ll simply repeat the steps above to change your “Stop Order” as appropriate.

If you were to want to create a “Limit Order” (to exit your trade at a predetermined price for a fixed profit) you simply right-click your mouse over the “Limit” field in the “Open Positions” window.

A “Limit Order” window will then pop up and you can then set your limit price to whatever price you consider appropriate based upon the scalping strategies you use.

When you want to exit a trade manually (for reasons that will be explained later in the eBook) as opposed to exiting by getting stopped out then simply right-click your mouse on the trade in the “Open Positions” window, select the “Close Position” option and the “Close Position” window will appear.  Simply clicking on “OK” will close your open position at the current market price.

It is useful to have this window open during your active trade so that you can click “OK” instantly (without fumbling around to get to this window) when you need to get out of your trade ASAP.

Here is an extra tip that you’ll want to know:  If you are trading multiple lots (regular or mini) then you don’t have to exit all of them.  By selecting the “Amount(K)” to be less lots than you have engaged then you can select how many of the lots you have open that you want to close.  This is useful as sometimes you’ll want to take some profits while letting a portion of your trade remain active so that you could potentially score even more pips.  Usually you would have your stop set for breakeven or at a profit before using this technique.

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So now you know how to use the broker’s trading software to engage into trades, modify existing trades (the stops & limits), and to manually exit trades when needed.  Please remember that if you have any questions about how to do any of this then contact your broker for guidance.

I’ve mentioned it above but it bears repeating incase you are one of those people who skipped reading the above (because you think you already know how to do all the above stuff).  When you think that you might soon be entering a trade have the “Market Order” window open with all your options set to the appropriate figures and have your mouse over the “OK” button ready to click to enter the trade instantaneously when needed.  Same thing for getting out of a trade.  When you are in the trade have the “Close Position” window open with your mouse over the “OK” button ready to click to exit the trade instantaneously when needed.

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