Friday, December 13, 2013

FX Investing Made Simple - What Is "SCALPING" in Online Trading - Maverick Investing Series

What is "SCALPING" in online trading?

Scalping, when used in reference to trading in securities, commodities and foreign exchange, may refer a legitimate method of arbitrage of small price gaps created by the bid-ask (also called "Buy" and "Sell") spread.

In this instance the investor is engaging in arbitrage, the taking advantage of a price difference between two or more markets, meaning striking a combination of matching deals that capitalize upon the imbalance, the profit derived from the difference between the market prices.

We refer to scalping in online trading as legal. Though we aren't lawyers, and not giving legal advice, we are presenting the accepted meaning to this term among contemporary traders. We explain this because there are instances where scalping can be considered illegal, at least in the United States, Australia, and other countries. For instance, if a large investment group pooled their funds and permitted an administrator to invest a large lump sum for the purpose of market manipulation, this could be a problem for them. Not to suggest investor pools can't consolidate funds to make investment purchases, but one needs to be careful not to fall into a negative regulatory issue.

Basically, scalping is an attempt to act like traditional market makers. Generally, foreign exchange trading firms, and banks, are considered true market makers. The market maker buys a financial instrument and then sells it in quantity to its clients. The brokers are compensated by means of price differentials for the service of providing liquidity (and access to the market), reducing transaction costs and facilitating trades.

If you are trading through a broker, you'll see a "Buy" and "Sell (or "Bid and "Ask") price difference between the two. " There is a point "spread" between the buy and sell price. For example, in Forex a currency trading, to make the spread means to buy at the Bid price and sell at the ask price, in order to gain the bid/ask difference.

This procedure allows for profit to brokers even when the bid and ask don't move at all, as long as there are traders who are willing to take market prices. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.

A currency pair may be $0.8055 buy price and $0.8052 sell price. The $.0003 difference is the brokers commission (based on the spread) for each unit bought buy the client. Generally in Forex (day trading currencies) there is no actual fee per trade like you typically see in stock trading.

The broker makes his commission on the spread. The same is true when you sell. The broker earns a commission on the sell price differential which is lower than the current buy. So if you invest $2,000 and say your commission is $40 (or 2 points) you will need to wait for your chosen investment to rise that amount to break even because of the spread.

The scalping process

scalper may make a trade, say in Forex, hold the "buy" for a minute or two, several hours on even days in order to show a profit. Generally, I hold purchases for minutes to hours and I'm satisfied with receiving quick reasonable profits, rather than waiting for high profits.

Today I started with $16.235.00 in a practice account. I use a practice account to try out new tactics in my investment strategy. Currently I have $21,687 in my account just over the last 3 hours of trading. I've made $5,452.00 in under three hours. My minimum daily goal is $1,000.00 minimum, but I've been averaging over $3,000 per day on an initial $10,000 investment.

Don't get discouraged

When I first started practice investing, I lost $6,000 in just a few days until I completely understood the process and developed my own strategy. Now I haven't lost much.

I was buying silver when the market actually crashed in late May, 2013. Really, just bad timing on my part because silver and gold were doing so well. I was so confident that silver would rise, I set my stop loss (the amount I was willing to lose for this specific investment) at 0 balance, so overnight I lost my complete investment since silver dropped in value so far down.

I'm glad was a practice account with virtual money and not the real thing. Now I would set a stop loss so I wouldn't lose more than 25% to 30% of the amount invested, preserving the bulk of my investment capital.

Don't get the wrong impression. This IS high risk investing, but my system AND my knowledge of the current market has postured me into a (generally) successful wining position. I'm doing this through scalping. If I was more conservative, I would likely doubled my profits today by setting a higher sell price. But the longer you hold an investment that is performing well now, the greater the risk it could go down as well as up in value.

But I move fast and I want to limit my risk, so I sell when I feel the time is right. This type of investment approach isn't for the faint hearted or ultra conservative. I'm considered a radical in my approach but I do considerably better than most investors in my marketplace with similar investment amounts.

In scalping, I don't rely on long term historical charts, or even care if most of the investors are buying or selling at the time. I don't use robots, or complicated formulas. My personal approach is to know my market AT THE TIME (over the last few days) and especially for the current day. Once I decide to invest in a Forex pair, I then watch the 1 minute and 5 minute charts. I do keep abreast of current world events that influence much of my strategy. There are many other factors in my decision process, but I'm in it for the short time fast profit.

I don't necessarily wait for the Fx pair to hit the bottom price before buying. There's no way to know this. But I do hedge when I make a buy and the investment keeps falling. I'll explain hedging in an upcoming article.

I endeavored to make this brief article simple. That's hard to do when explaining investment techniques. I do answer questions from readers to help clarify the subject or provide more detailed information when asked.

Set up your own practice account and start developing your own investment techniques. Then consider scalping if you are among the strong hearted, and willing to take calculated risks for fast profits.

Bob "MAVERICK" Stanford is the CEO of Stanford Investments and Financial Services. We are educational trainers and a primary resource center for beginning, intermediate, and advanced online traders. Get your questions answered, the best trading platforms, lowest price quality services, and the world's largest social trading platform enabling new Forex traders to watch experienced successful people in real time. Copy their trades without learning the entire complex market.

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