Scalping is short-term trading taken a step further. Whereas day traders might be looking towards taking positions that deliver sufficient returns over the course of the trading day, scalpers are looking to trade over the micro-term – often around an hour – with a view to taking a quick profit. Scalping is for many reasons a preferred strategy as far as most beginners are concerned. Beginners tend to see scalping as the lowest risk strategy, with profits being banked virtually as soon as they arise. For 1 or 2 PIPs here and there to work, however, you need to seriously increase the number of trades you engage in in order to compensate for smaller daily returns, and for that reason, many successful scalpers quickly graduate up to arguably more involved, research-intensive strategies.
When it comes to identifying trading opportunities for scalping, you need to be looking for markets that are liable to move in the immediate future – as in, within the next couple of hours. This usually means looking to news items and goings on that might indicate a potential market movement soon. Remember, you’re not looking for the home run trade, or anything near it – you’re simply looking to find an opportunity to deliver a couple of PIPs, and as a result there are many opportunities you can find. The trick is to ensure that through your research efforts and input you are able to identify these opportunities, and in sufficient number to return a profit.
Scalping is definitely suitable more so to the beginner than the experienced trader. There are costs associated with trading on the ultra short-term in terms of broker fees, and so the more you trade the more costs you have to bear. As a result, more experienced traders tend to eventually favour less work for greater returns through an alternative strategy, although that does incorporate a greater risk profile. Generally speaking, if you are beyond the stage of being a beginner, you’re probably better off searching for strategies that are less hard work and frankly less challenging, although marginally more risky.
The core strength of scalping as far as forex is concerned is that it all happens very quickly. Less time in the market means a less serious market risk – that is, the risk of being exposed to the market for that period of time. Furthermore, when profits do appear, however briefly, you can grab them with a view to amassing a stockpile of smaller earnings that add up to provide your overall yield. From this perspective, it can seem attractive for traders looking to get started with the lowest possible amount of risk. That said, there are drawbacks.
Firstly, scalping is a lot of work, because there is the need to constantly research new positions, and the returns you get from each position you take are so minimal that at times it can seem like more effort than its worth. While you do have lower risks on individual trades, it is often more difficult to get there overall without larger returns on trades.
Trading on support and resistance is a common strategy used in situations where the market moves within defined cycles. Generally speaking, it takes some extra circumstance to push a currency pairing past a previous high or low point, and in using these as markers for determining the relative value of a currency pairing, you can better judge what the market is likely to do next. The idea is that when the market is approaching its high price point, or the point of resistance, where it is considered to be overpriced, the market will soon fall.
Likewise, the reverse is true for support levels, which are when a currency trades down so low as to be considered underpriced. When a currency pairing is approaching its resistance or support level, it’s worthwhile keeping an eye on the market to jump on board as soon as there is a market reversal. But the benefits of getting in at the ground floor on a price correction can be potentially hundreds of PIPs, depending on the width of the cycle and the duration over which you intend to hold the position.
What You’re Looking For
If you’re looking to trade on support and resistance lines, you need to firstly establish where these sit for your chosen currency pairing. This relies on the ability to frame and understand technical data through looking back to find previous highs and lows, and requires an understanding of the time period over which you’re examining. For shorter-term trades, looking back at weekly highs and lows might be enough, or possible even daily highs and lows depending on how short-term you’re prepared to go. For longer trades, it’s important that you look at price performance over a wider period of time, in order to best get a picture for whether you’re nearing an actual point of resistance or support or just a temporary snag in the market.
Which Trader Does This Suit?
Support and resistance trading relies on a basic understanding of technical analysis. While this certainly isn’t beyond the scope of new, inexperienced traders, it tends to be regarded as the preserve of the more experienced, although as strategies go it tends to please all. Essentially, all you need is a basic grasp of price highs and lows, and the ability to zoom in and out of relevant charts to determine whether the current market is moving close to or around the critical price points.
Strengths and Weaknesses
The key strength of support and resistance trading is that when you stumble across an actual support or resistance trade, it can be worth a lot of money to you. Catching the correction at its highest or lowest point means you are virtually guaranteed a profit of some sort, and assuming your research has turned out for the best, can allow you to trade over the full arc of the price correction.
Simultaneously, the extent of market movement that is its greatest strength is also this strategy’s biggest downfall. There are no rules suggesting that markets can’t move outside the parallel links of high and low, and as a result you may find yourself getting involved in a position that looks like a correction but in actual fact turns out to be a blip en route to setting a new price high or low. In this respect, it’s advisable to wait until you actually see the reversal taking place around the support or resistance level before staking your capital.
Swing trading is a technique that looks to exploit the cyclical nature of the market and take advantage of turns in the cycle to maximise profits. Given that currencies are constantly traded throughout the day, these cycles more naturally reflect the underlying value of the currency pairing being traded than markets which open and close, and the sheer depths of liquidity mean it can be a fast moving market, if not somewhat lacking in volatility. The swing trade seeks to identify a high price point that’s set for a reversal or vice versa, and aims to jump in at the very start of a price reversal after momentum shifts from one direction to the other. At the point at which market momentum shifts, this is the most profitable time to enter a trade to enable you to maximise the full extent of the trading cycle.
What You’re Looking For
When it comes to swing trading, you need to be looking to identify momentum in the market and pricing data that indicates previous highs and lows. Take a wide view of the market for the currency pairing and note the market high and low points. How is the price sitting compared to these points at the moment? The natural cycle of value tends to centre around actual value as conflicting optimism and pessimism push prices into the territory of being overpriced or underpriced. Prices usually correct in the markets eventually, but in jumping in as quickly as possible at the point of correction, you can maximise the price arc over which you’re trading.
Which Trader Does This Suit?
Swing trading suits the trader who is adept at handling both technical analysis factors and momentum. Having an understanding of both of these skills is of paramount importance for executing the strategy correctly. For this reason, it doesn’t tend to be implemented by complete beginners, but that’s not to say it can’t be learned as a first point of call. For any trader prepared to learn these skills, the financial benefits of catching swings, or reversals, on time make it all worthwhile, but its important to recognise that without recourse to a mixed bag of skills, it can be a difficult strategy to pull off in practice.
Strengths and Weaknesses
The real strength of swing trading lies in catching price reversals at the right moments. In instances where you get it spot on, you can just sit back and watch your PIPs grow as the market adjusts with you on board for the ride, which is fantastic for trading morale and your account balance. At the same time, it’s a strategy not without its risks, and the real danger here is that you leap in too early to a market that is having a minor blip but is otherwise trending away from the position you’ve backed. For that reason, it’s important to make sure you have thoroughly done your homework and researched your positions before you get going on a trade, to avoid the often-significant pitfalls of jumping on the wrong signal.
For the experienced trader, or for the newbie with a hunger to learn, swing trading can deliver a decent return over the medium term. Be that as it may, it nevertheless requires extensive research behind the scenes before you decide exactly how to trade, in order to make sure you’re on the right side of the market before staking your capital.
Why Strategy Matters
Strategy matters a great deal in forex trading, and it is what distinguishes the successful trader from the sporadic, hit and miss investor. It doesn’t matter what strategy you use, so long as you have a firm idea in place of how you’re going to trade, and you have at least a loose blueprint for the management of your portfolio. Strategy is like a road map – without it, you could easily get lost. Having a strategy in places shows you what you need to research, how heavily you need to invest and how well you’re doing day to day.
But it also brings in the often-understated advantage of accountability. You can test different elements of your strategy and your trading behaviour by looking back at you results once they’re in. Note which days brought you the highest returns, what you did on those days, and whether there are any strategic modifications you make to improve your returns more consistently. Having the strategy in place gives you the framework from which you can make these types of decisions.
Settling on a strategy is also imperative for keeping sight of the bigger picture. Sometimes, when you’re up to your eyes in data, markets, interest rates and the finer points of global macro economics, keeping a handle on what’s going on long term can be difficult at the best of times. With a strategy, it takes out much of the structural long-term work you would otherwise need to do. Coupled with targets for performance and objectives you’re aiming to reach with your trading, your strategy can effectively become the framework off which you can hang individual positions and grow the fruits of your research labours.
For the effort and time investment required to devise and settle on a functional strategy, the benefits it will bring to your forex trading are well worth it. A strategy that works for you could end up serving you long term, and pending a few tweaks and tune-ups along the way to improve performance, can bring long-term stability and consistency into the way you trade your capital.
Devising A Trading Strategy
Knowing you need to have a trading strategy is all very well and good, but actually finding and settling on a strategy that works for you can be an altogether different story. Devising a suitable strategy and trialling it out can be a trying phase, yet provided you know where to look and you give sufficient intellectual and practical testing to your theories and potential strategies before you plough your capital into them, the rewards for finally reaching the right solution for you will be significant.