Once you establish a broker, there are several other things you should know about scalping.
First, you should wisely pick currency pairs that will work well with the strategy. The best thing is to start out with the basic pairs, and move to riskier pairs as you become more experienced.
The most stable and liquid currency pair is certainly EUR/USD. Other majors have a similar stability, such as GBP/USD, USD/CHF and others currencies from the major world economies. All of these currencies change very slowly. Even major events will not produce significant jumps in these pairs, because of the volume that is regularly traded.
But isn’t the goal of scalping to profit from volatility? So it seems as though more volatile currencies would be better. The advantage of the more stable currencies, is that directional changes are much easier to predict. Remember that even small fluctuations can be magnified through leverage. This means that a trader can generate very large returns from these pairs, if he is willing to accept the risk.
Another group can be called carry pairs. These currencies are liquid, but much more volatile than the majors. A good example here is the Japanese Yen. Interest rates are very high on the Yen, and many investors also use the currency for risky assets. One of the results is that market shocks will have extreme results that might result in very wide spreads. Within a scalping strategy, this might result in extreme losses that a stop-loss order cannot protect from. Furthermore, excessive volatility can be quite unpredictable. Therefore, it is generally best for beginners to stay away from pairs that involve the Yen (JPY) or other carry pairs.
Finally, exotic pairs involve small or developing nations with a low volume of trade. Examples might include the Norwegian Krone (NOK), the Turkish Lira (TRY), the Brazilian Real (BRL), or any of the developing currencies. These pairs are quite unpredictable, and often run into significant liquidity problems. Trading with one of these is a significant risk.
Any experience trader also realizes that the markets change during the course of a day. So when is the best time to trade? From 7:00-8:00 (EST), markets are quite choppy, because worldwide traders anticipate the opening of the New York market. Late morning brings higher volatility, but also great liquidity. Many announcements also direct the market during this time. Early afternoon tends to be quite choppy, with higher risks but potentially greater profits. Late afternoon sees the closing of most large banks in developed countries, and the market becomes its quietest.
Really, your preference for each of these times depends on your style. In choppy conditions, scalpers should look for shorter trades without concern for directionality. Of course, during the time that the markets are open, there should be more attention to larger trends, and the possibility of more extended trades.
All of these factors are significantly influenced by your particular style and your experience. Risk may be just the thing if you know how to handle it, and experienced traders often had straight for more volatile times and currency pairs. If you’re only beginning, the key is to stay with major pairs and avoid times of wild fluctuations. Learn how to predict the market with low leverage and minimal risk. Once you’ve seen and handled various market conditions, you can consider taking bigger risks, and pursuing larger profits.
Please read the part I, II, III, and the left of this series at Forex trading strategy.
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