Forexop - Scalping Strategies Revealed

Licensed to: vibrown854@gmail.
com: Order ID 17402 on Mar 23, 2022

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Licensed to: vibrown854@gmail.com: Order ID 17402 on Mar 23, 2022

Table of Contents
Legal Notice......................................................................................................................................... 2
1. Introduction .................................................................................................................................... 5
What are the advantages of scalping? ................................................................................................ 5
2. The Plan........................................................................................................................................... 6
What do you want to achieve? ........................................................................................................... 6
Things to consider ........................................................................................................................... 6
3. Scalping Strategies Explained.......................................................................................................... 8
A Simple Trend Scalper ....................................................................................................................... 8
The entry signal ............................................................................................................................... 8
Averaging ...................................................................................................................................... 10
Letting Profits Run......................................................................................................................... 11
Results ........................................................................................................................................... 11
Meta scalper strategy ....................................................................................................................... 14
Retracement Scalping ................................................................................................................... 14
Setup ............................................................................................................................................. 14
Entry Signal ................................................................................................................................... 15
Example Scalp Sequence ............................................................................................................... 16
Results ........................................................................................................................................... 19
Summary ....................................................................................................................................... 20
Advanced Scalping – Pattern Based Scalping.................................................................................... 20
Auto correlation ............................................................................................................................ 21
4. Execution....................................................................................................................................... 25
Trading Costs..................................................................................................................................... 25
Why Scalping is So Fee Sensitive................................................................................................... 25
The Bid/Offer Spread .................................................................................................................... 26
The Cumulative Costs.................................................................................................................... 27
Example ......................................................................................................................................... 27
Working out Spread Costs............................................................................................................. 28
Other Trading Costs ...................................................................................................................... 29
Risk Control ....................................................................................................................................... 30

Exposure........................................................................................................................................ 30
Use Leverage to Your Advantage .................................................................................................. 31
Trade Stop Losses.......................................................................................................................... 32
Diversification ............................................................................................................................... 32
Choosing your market ....................................................................................................................... 33
Intermarket analysis ..................................................................................................................... 33
Finally: Avoid the Trap of Overtrading .............................................................................................. 34

1. Introduction
Scalping was originally devised as a system for rapidly entering and exiting the market with very
small profits on each trade. The name “scalper” comes from the idea of scalping or skimming small
wins on each trade. The scalp trader doesn’t try to ride trends, ranges or to capture big breakouts.
The scalper applies a set routine to systematically skim profits out of market volatility.
There is no agreed definition of exactly what a scalping strategy is. Some talk about any high
frequency trading strategy as a scalper. Some define scalping as a strategy that makes an average of
less than 30 pips per trade. Most people though would consider scalpers to be in the 2 – 10 pip
profit range.
Whatever the definition here are some common features of scalper strategies:
 High trading frequency

 Technically oriented
 Low profit ratio per trade
 Low drawdown allowed per trade
Most scalping strategies are high frequency. The low profit margin means that scalpers need to
perform lots of trades in order to generate any reasonable profit.
Most scalpers use technical analysis. Scalpers pay little attention to economic forecasts or data
releases other than to cover their positions or to stay out of the market during such times. Trade
signals are nearly always based on technical inputs rather than fundamental inputs.
Scalpers don’t aim to achieve a high profit per trade. The aim is to realize a small profit as quickly as
possible and to move onto the next idea.
Likewise, scalpers generally don’t allow positions to fall into any significant drawdown. If the trade
doesn’t pay off quickly, it’s abandoned and a small loss is accepted.
Scalping is often automated with software. But it doesn’t have to be. There are plenty of traders
who sit in front of their desk all day scalping profits by the seat of their pants. Scalp trading in this
way does demand more dedication and patience than other strategies.
What are the advantages of scalping?

One of the main draws of scalping is that of realizing profits very quickly. The scalper doesn’t sit and
wait for days or weeks for a position to turn profitable. With the scalper, trades are turned over very
quickly so that small profits are realized little and often. Because of this, the scalper usually only has
a very small exposure to the market at any given time. This makes scalping a popular choice for
traders with smaller cash reserves.

2. The Plan
What do you want to achieve?
Before deciding on a strategy, it is a good idea to think for a moment about a plan of action. After all,
a successful trading career doesn’t just happen by accident.
You probably have a vision of what you want to achieve. So how do you turn that into reality?
A trading plan is a written document that sets out your approach to trading and how exactly you will
move from idea to reality. A trading plan will need to answer questions about your personal
approach and attitude to exposing your own money to fairly high levels of market risk. You don’t
need to get into specifics of strategy here. However before rushing into the market now is a good
time to examine your views on risk as well as your own circumstances.
Things to consider
For example when creating your plan things you should ask are:
 How much of my capital am I willing to risk?

 How much free time can I devote?
 How will I implement my strategy: Manual trading, software or something else?
 Will I use multiple strategies or a single strategy?
 How liquid does my account need to be?
 What level of volatility is acceptable?
 What will my leverage limit be?
 What will I do with cash holdings?
 Will I use compounding or withdraw my gains periodically?
 How will I measure my success: ROE, ROI, income? And over what periods?
 How will I journal my experience?
 Is anyone else affected if things go wrong?
Writing down the above or at least thinking carefully about them will focus the mind. It’s also crucial
if you want your trading activity to be sustainable over time.
A definite plan will help you to critically evaluate your choices and ultimately choose a trading
system that will give you the best chance of success. It will also tell you if your goal is realistic. For
example, if you want to earn a 75% return per year, but are only happy with 2% monthly volatility in
your account, that is probably not going to end well.

Once you’ve decided the above you will have a better idea about money management and what kind
of risk you will need to take to reach your goal. You will then have an idea if your goals are realistic
or not.
You may also need to look at hedging if your account is denominated in a different currency to that
you spend in. Now the US dollar is reasonably strong but this wasn’t always the case. In early 2000s
the dollar lost one third of its value against other major currencies. These fluctuations can bite into
your profits or in some cases eliminate them altogether.

3. Scalping Strategies Explained
A Simple Trend Scalper
Traders originally developed scalping on the idea of following strong trends. But rather than try to
capture the entire profit of a trend, which involves timing the start and end point, the scalpers
simply dipped in and out of the market. In doing this they attempt to extract small, incremental
profits in the direction of the trend.
This technique of trend scalping though simple can be surprisingly effective. It remains one of the
most widely used scalping strategies used today.
So let’s take a look at a simple trend scalper.
The entry signal

The method I describe here uses moving average indicators to measure trend. However other
indicators such as Bollinger bands, correlators or even candle methods are equally valid. It is down
to preference and the goals of your strategy.
At any point we have the following:
1. Bid price
2. Ask price
3. Fast moving average (MAt)
4. Slow moving average gradient (ΔMAt)
The moving average gradient is just the difference between two points on the moving average line.
That is:
Gradient = (MAt2 - MAt1 ) / (t2 – t1)
Here t1 and t2 (where t2 > t1) are the two points in time at which the moving average is measured.
The buy signal:

ΔMAt > 0 : The trend is bullish
Ask < MAt : The Ask price is below the fast moving average
An example buy signal is shown in Figure 3-1: Trend scalper entry signal on buy sideFigure 3-1.

Figure 3-1: Trend scalper entry signal on buy side
The sell signal:

ΔMAt < 0 : The trend is bearish
Bid > MAt : The Bid price is above the fast moving average
An example of the sell side signal is given in Figure 3-2.
Figure 3-2: Trend scalper sell signal
Intuitively speaking what I’m doing here is buying the uptrend in troughs, and selling the downtrend
in peaks. To find these troughs and peaks, I’m using a “fast moving” average line. The fast moving
average (a moving average over a shorter period) responds to changes in prices quicker than the
slow moving average. However, the slow moving average will indicate the predominant direction of
the trend.

Is there are chance that the fast moving average is actually signaling a change in the direction of the
trend? Yes of course this is always a possibility. Though trends, by their nature do tend to persist
over time. So on average, a simple buy/sell rule like this can and does work as a scalping technique
as I’ll show in the results later.
Averaging
The other point is that of averaging. With scalping, it is rarely a good idea to trade in single blocks
even though this might seem tempting at first. It’s far better to average your entry by splitting your
trade up into multiple units.
I don’t mean increasing exposure, but rather diving up the position and entering the market at
different times. So say you usually trade one standard lot (100,000 units of base currency). This
could be split into 10 smaller trades each of 0.1 lots.
Dividing your trades in this way will result in a lower overall risk (and return) because you are
averaging your entry price across several points in time in the market. It will also enable you to
average your entry costs because you reduce the chance of executing your trade during a spread
surge. With scalping, over time this averaging can mean the difference between making a profit or
ending up with a thumping loss.
Figure 3-3: Trend scalper, buy sequence

Figure 3-4: Trend scalper, sell sequence
Taking Profit and Setting Stops

I have not used a fixed take profit with this method. Instead, I check once on each bar for any
positions above a fixed profit level. Any positions above that profit level are closed at that tick. In the
examples shown, I used a take profit at or above 8 pips. This is not a trailing stop as such. Though it
does result in a higher average profit per trade. In a ten year run for example, the average profit per
trade turns out at 10.4. While the average loss was 7.3 pips per trade using a fixed 8 pip stop loss.
Letting Profits Run

If you look at the result for the EURUSD test, the stats were:
Biggest profit trade: $ 334.80

Biggest loss trade: -$ 16
Average profit trade: $22.57
Average loss trade: -$ 15.21
So the biggest profit trade is more than 20 x the biggest loss trade. This was a result of letting profits
run. Meanwhile the average profit trade is nearly 1 ½ times the average loss trade.
Allowing the profits to run this way is an essential part of this scalping strategy. It is also more
effective than using trailing stops. I find broker side trailing stops are counterproductive with most
scalping strategies for the reasons outlined here. In summary, with a trailing stop you can lock in at a
certain profit level. The problem is that you need to give up part of your profit to achieve that
certainty. And with scalping the profits are often too small for that to be viable.
Results
Just to confirm that the above trading rules do actually work as a general scalping strategy, I
performed back tests across a group of different currency pairs using Metatrader. The back tests

were done on the 5 minute chart (M5), and the time spans I used were from 2 years to 11 years.
Naturally, this resulted in thousands of trades from which we can draw some conclusions about the
long term stability of this strategy.
I find a good practice is not to tune parameters to different markets. The tests should also use the
same date range. When testing I stick by this procedure rigidly because it gives a clear picture of how
the raw strategy works and what its actual performance is likely to be.
For almost any strategy, you’ll find some set of parameters that will work and give good results in a
certain market or over a certain date range. However this doesn’t really prove anything about your
strategy or tell you if it’s any good.
Another useful way to “stress test” the strategy is to use forward testing, which is available on
Metatrader 5.
The table and charts below show the results for tests on EURUSD, GBPJPY, GBPUSD, and USDJPY.
Pair #Trades Net profit Avg. Profit Trade Avg. Loss Trade Pips/day Lots Days
EURUSD 26,574 $18,118.16 11.3 -7.6 4.5 0.2 4015
GBPJPY 8,875 $6,803.00 10.5 -7.3 9.3 0.2 730
GBPUSD 9,412 $6,777.64 10.7 -7.6 9.3 0.2 730
USDJPY 9,184 $4,987.78 10.4 -7.4 6.8 0.2 730
EURUSD 11 Year (long term) Test
Figure 3-5: Trend scalper, EURUSD 11 year test

GBPJPY 2 Year Test
Figure 3-6: Trend scalper, GBPJPY 2 year test
GBPUSD 2 Year Test
Figure 3-7: Trend scalper, GBPUSD 2 year test
USDJPY 2 Year Test
Figure 3-8: Trend scalper, USDJPY 2 year test

Meta scalper strategy
Retracement Scalping
The idea behind this scalping strategy is to catch the short wave retracements that take place when
the market reaches a peak overbought or oversold state. The method can be used in any markets
but it is best (and has lowest risk) when the market is range bound. It is a low yielding strategy. That
means the profits are not huge but they are consistent when the system is correctly applied.
Figure 3-9: A simple retracement scalping strategy
I have used this method over several months on both one-minute (M1) and five-minute (M5) time
frames. However, it can be adapted to work at higher timescales if you choose.
Unlike most other scalpers, this method enters the market on triggers from an indicator as well as
price behavior at each bar (candle). A key element of this strategy is that it spreads risk across a
number of trades to create a scalp sequence. This averaging out is essential in restricting drawdowns
and creating incremental profits.
Unlike other scalping systems, trades are allowed to drawdown. Many scalping system abandon a
trade as soon as it enters a loss. However because the exposure is spread among multiple trades the
impact of drawdown on the account’s balance is limited. Because of the need to allow trades to
enter a loss, it is not advisable to use this method with aggressive leverage.
Setup
With this strategy, I do not use more than one standard lot per $10k of account balance. That is,
there is never more than one lot of exposure at any time. Typically, the exposure is spread over 100

trades. However, with the entry signal I use there are rarely more than 10 trades open at once. It
averages around 5 trades per day and the average total profit is 25.9 pips per day. The table below
summarizes the setup:
Max exposure (lots) 1.00

Maximum open trades 100
Trade size 0.01
Averages
Trades/day 5
Pips/trade 5.18
Pips/day 25.9
You can adjust the setup for more risk or less risk as required.
Entry Signal
I use a combined entry signal that detects high probability turning points. To do this I use a
combination of the Bollinger band lines and by examining the price action at each bar.
Two conditions have to be met to trigger a market entry.
The first condition is that the price has to be at an extremity marked as one of the outer Bollinger
band lines. An overbought/oversold state occurs when the bar touches one of the outer bands.
See Figure 3-10 below.
Figure 3-10: Example entry signals for buy and sell scalp sequences

When the price is at a lower band, this meets the first condition for a entering long (buy). When the
price is at the upper band, this meets the first condition for entering short (sell).
Because the Bollinger is a lagging (delayed) indicator, a real time input is also necessary to improve
the odds of each scalp run resulting in a profit. This input comes from examining the recent candle
activity.
For the second condition, the current bar has to start retracing back towards (or inside) the band
after reaching its high (low) point. This indicates that a brief pullback is taking place after reaching a
short-term overbought/oversold state.
For example for a buy signal, the price has to start retracing back up towards the center line of the
band. For a sell signal, the price starts to retrace downwards.
If these conditions are met the trade is entered provided the total open volume is not exceeded.
Since the system works best in tight ranges it’s also advisable to use a range finding tool to prevent
(or limit) trades in trending markets.
Figure 3-11 shows a typical scalp sequence.
Example Scalp Sequence

The strategy will open trades between set time intervals until it reaches the maximum volume. As
mentioned above, I use no more than one lot per $10k so the exposure is fairly low. This is not a
frenetic, high turnover scalping system. Using these entry signals there are rarely more than around
10 potential trades per day.
The stop is set at no greater than half of the width of the Bollinger band. So for example, if the
bandwidth is 20 pips, the stop is placed half way at 10 pips.
The take profit amount is also set depending on the volatility. I set this around 5% of the bandwidth
(typically 1-6 pips) but it varies depending on how choppy the market is.
The table below illustrates this with a toy example:
Tick Price Side SL TP P/L

1 1.3500 Buy open 1.3490 1.3506 0
2 1.3503 – – – 3
3 1.3499 – – – -1
4 1.3506 Sell close – – 6
Table 3-1: Managing take profit and stop losses
At tick #1, I place a market buy to open order after the price descends to the lower Bollinger and
after the first bar starts to retrace back towards the center line. At tick #2 the price moves in the

direction of the scalp. At tick #3, the price pulls back but reverses again. My target profit of 6 pips is
achieved at tick #4.
This system is good for capturing small profits caused by market volatility. Statistically we know that
most trades will enter profit at some point owing to natural market movements. This scalper takes
advantage of this.
With this approach, the profits can run by setting a higher profit target. The trader can vary the
profit level according the strength of the current trend reversal. This is ideal for capturing the strong
retracements that happen at market extremes.
Figure 3-11: Scalp sequence showing management of exit points
Figure 3-12 below demonstrates this in a real trading scenario. This shows a small sequence of the
test run of the strategy on the EUR/USD one minute chart (M1). The chart shows the complete
sequence of four buy orders.
The spread is set at 2.1 pips for each test.
Action Order # Vol Price SL TP Profit ($)

buy 206 0.01 1.05171 1.05021 1.05235 –
buy 207 0.01 1.05163 1.05009 1.05235 –
buy 208 0.01 1.05102 1.05007 1.05145 –
buy 209 0.01 1.05128 1.05012 1.05145 –
t/p 208 0.01 1.05145 - 1.05145 0.43

t/p 209 0.01 1.05145 - 1.05145 0.17
t/p 206 0.01 1.05235 - 1.05235 0.64
t/p 207 0.01 1.05235 - 1.05235 0.72
Total 1.96
Table 3-2: Trade sequence from strategy run
The sequence starts at order #206. At this instant the price action satisfies both conditions of being
within the threshold of the lower Bollinger band (to trigger a buy order) and the bar starts to retrace
back towards the center line.
The second bar triggers another buy order as the price meets the entry conditions again. The price
then pulls lower and the first two positions briefly enter drawdown. Following this, there are two
more bars triggering entries, which results in four executed buy orders (see Figure 3-11).
The price continues to rise. After two more bars, the exit points for #208 and #209 are reached. This
captures a profit of 0.432 and 0.17.
At this point, the price moves high enough to trigger the exit for orders #206 and #207 as well. This
happens in the next bars leaving profits of 0.64 and 0.72.
The final P&L for the sequence is $1.96.
Figure 3-12: Scalper initiating a run of sell order
The chart above shows a typical run of sell orders while below shows a sequence of buy orders.

Figure 3-13: Scalper initiating a run of buy orders
Results
Example 1: GBP/USD 5-Minute Chart

The example below shows a run on pair GBP/USD (M5). The spread in Metatrader was set at 21
points (2.1 pips) again. The run completes 285 trades with a total profit of $168.85 (1689 pips).
Figure 3-14: GBP/USD M5 (click to open results page)
Example 2: EUR/USD 1-Minute Chart

The next test shows a run on EUR/USD (M1). The spread again was set at 21 points. The run
completes 394 trades with a total profit of $204.28 (2043 pips).

Figure 3-15: EUR/USD M1 (click to open results page).
Example 3: EUR/GBP 5-Minute Chart

Finally, this run shows a EUR/GBP (M5) using the same parameters. The run completes 270 trades
with a total profit of $156.84 (1568 pips).
Figure 3-16: EUR/GBP M5 (click to open results page).
Summary
This section outlines a simple retracement scalping strategy that can be used to trade ranges. This
technique does not generate large numbers of trades as do some scalping methods so it is suited to
manual trading as well as automation. This is a low yield strategy that does not work well with high
leverage. As with all scalpers, success lies in precise timing of the entry and exit points. Refinement
of these factors can make this a steady profit generator. Choice of suitable liquid currency pairs with
low spreads and low slippage is also essential to success.
Advanced Scalping – Pattern Based Scalping

There are several scalping strategies that involve more advanced statistical techniques. One of these
is called pattern based scalping. With this strategy, the similarity between candle patterns is used to
time the trade entry and exits.

Auto correlation
One way to measure similarity and dissimilarity is by using auto correlation. What this basically
means is comparing one section of the chart to another for repeating or non-repeating structures.
You can do this on the candle level, on whole sections of the chart or even on structures. It can be
done at any time scale.
With basic auto correlation, we take one section of the chart, and compute the candle deltas
(differences) between each bar. We then shift the series back by n bars. The shifted series is then
correlated against the un-shifted series. Figure 3-17 illustrates this process.
Figure 3-17: Auto correlation
Auto correlation is useful for trading similarity or dissimilarity because it tells you two things:
Firstly it can tell you if the current chart pattern bears a close similarity to what’s gone on in the
recent past. This can be handy for detecting continuations in sequences of candles. This is extremely
useful for creating scalping signals. To achieve a profit, you are only looking for trades where there’s
a high probability of at least one or two continuation candles in the “right direction”.
Secondly, auto correlation can tell you if the current chart pattern is highly dissimilar to the chart
section being compared. Both of these components are useful for example for a contrarian or non-

contrarian approach. A contrarian might decide that they want to trade against similarity and trade
on dissimilarity as an entry cue instead. A non-contrarian would do the opposite.
Autocorrelation Example
To calculate auto correlation on a chart first we calculate the delta between two adjacent bars. This
is just the difference between mid-prices; that is mid price1 – mid price2. We then create two data
series. Series 1 is the mid prices for the bars we are looking at. Series 2 is the shifted series. That is,
series 1 shifted back by n bars. In this example, n=1 but it can be any value you choose and depends
on the kind of patterns you are analyzing.
The table below shows the calculations.
Bar Delta Series Shifted

7 0 0
6 -2 -2 0
5 2 0 -2
4 -1 -1 0
3 -1 -2 -1
2 1 -1 -2
1 1 0 -1
The correlation coefficients are calculated as:
Sx = 0.816
Sy = 0.816
Covariance = -0.33
This gives r = Cov / (Sx Sy ) = -0.5
The figure below shows the chart for this example.

Figure 3-18: Example calculating simple auto correlation
What does this show? In this example, the auto correlation is negative. This means the bars are
forming a reversal pattern over the selected range. Negative autocorrelation means that the pattern
is reversing on itself. This effect can be seen in Figure 3-18.
The figures below show different candle formations and the resulting auto correlations.
Figure 3-19: Example showing high pattern similarity, low entropy (disorder)

Figure 3-20: Example showing low pattern similarity, high entropy (disorder)
Figure 3-21: Measuring candle similarity using auto correlation
The chart in Figure 3-21 shows two sections on a real chart (GBPUSD) where the candle formations
show high and low auto (self) correlation.

4. Execution
In this section I’ll cover the application of a scalping strategy and some things you should be aware
of. In particular, I’ll look at the execution side. By this, I mean how your strategy is actually
implemented and managed. This section covers:
 Trading costs
 Risk control
 Platform choice
 Choice of market
Trading Costs
As a scalper, your biggest enemy is not the market or even your strategy. Your biggest challenge and
the most significant determinant as to whether you will be profitable or not are broker fees. Unlike
other trading styles, scalping is highly sensitive to overall trade costs. For this reason this is an area
you will need to look at very carefully.
Why Scalping is So Fee Sensitive

Scalping is a high frequency, low profit strategy. And because the profit per trade is quite low,
trading fees will take up a large proportion of the total profit.
The cumulative effect of trading fees means just a small increase can mean the difference between
your strategy returning good profits or turning a loss.
Figure 4-1 shows five common forex strategies ordered from high frequency to low frequency.
Figure 4-1: High frequency and low frequency strategies
Those most impacted by fees are the high-frequency/low-profit systems. Scalping is the classic
example of this kind. As a scalper you will have the most to gain from minimizing fees. In this case
even a tiny difference in spread can mean the difference between winning and losing.

The Bid/Offer Spread
The spread is the cost you pay on every trade transacted through your broker. This is the main fee
that you need to consider, but there are also others that I’ll talk about later. Firstly let’s look at the
spread.
When you trade forex through a regular broker-dealer you are what’s called a “price taker”. You are
not buying and selling from other traders as you would on a stock or futures exchange. You are
buying from or selling to a dealer who’s making the market for you and other traders. While doing
this, he’s adding a fee – there’s a surprise.
Whenever you take a price-bid or price-offer in the market you pay the spread cost to the market
maker. Take this example EURUSD quote:
Bid 1.1030
Offer 1.1034
Spread 0.0004
In pips 4
In % 0.0363%
This quote means the dealer will sell to you at 1.1034 and will buy from you at 1.1030. The amount
between these two quotes is the bid-offer spread. Or just the spread.
The spread is in the quote currency. It’s proportional to the value of the pair you are trading. So you
cannot compare two different currencies spreads unless you convert them into a percentage or the
same currency. For example consider this EURGBP quote:
Bid 0.6564
Offer 0.6566
Spread 0.0002
In pips 2
In % 0.0305%
Here the spread is only 2 pips. Which seems low by comparison. But this is in GBP. In percent terms
it’s 0.0305% which compares closely with the EURUSD spread of 0.0363%.
To work out the spread as a percentage just use the following:
Percentage spread = (Offer-Bid) / ½ (Offer+Bid)

The Cumulative Costs
A common mistake people make when accounting for spread costs is that they only look at the
winning side. For example, a trader calculates that his average win is 30 pips. His average spread is 3
pips. Therefore he deduces the spread cost to be 10% of his profits.
This is only half of the story. Let’s say his average losing trade is 24 pips. His net gain per trade is 6
pips (assuming equal sizing and proportions of winners and losers). So this means the spread cost is
actually 50% of his profits. If his trade average on the loss side slipped to 27 pips, the fees would eat
up all of his profit.
Example
To test this I demonstrate with a typical high frequency strategy. I used the MetaTrader strategy
tester to execute approximately 7,500 trades each in three different scenarios.
The first scenario with a low spread of 1.5 pips, the second with a 2.0 pip spread and the third with a
spread of 2.5 pips. The results are shown in the table below.
Spread Profit $ $ Per 100 Trades % Reduction

1.5 7632 102.40 -
2.0 684 9.18 -91.04%
2.5 -12,672 -170.03 -266.04%
With a 1.5 pip spread the strategy makes a profit of $7,632. With a 2.0 pip spread the strategy just
about breaks even at $684. With a 2.5 pip spread the strategy makes a loss of $12,672. In all three
cases, nothing changes other than the spread.
With this strategy a 0.5 pip increase reduced profits by 91% after one hundred trades. While a 1.0
pip higher spread reduced profits by 266%. Even after a relatively small number of trades the spread
cost is significant. The more trades, the wider the profit/loss gap becomes.
The graph in Figure 4-2 shows this with the P&L charts for each of the three cases.
Figure 4-2: An example of the impact of trading fees on a typical strategy

Working out Spread Costs
The example above shows that reducing fees can potentially be one of the most effective ways to
improve your trading profits. To do this you first need to work out precisely how much you are
handing over to your broker every time you trade.
To get an idea of your spread cost, first of all you need to estimate the fee as a percentage of profits
in your chosen strategy. This should be a weighted average that accounts for positions size. For
example take the following 5 trades on a mini account:
Trade # Size P&L (pips) $Net Fee$ Gross P&L

1 0.50 16 8 1 9
2 2.00 30 60 4 64
3 3.00 -8 -24 6 -18
4 1.00 10 10 2 12
5 4.00 -1 -4 8 4
Totals 10.50 47 50 21 71
P&L $50
P&L Gross $71
Fee $21
Fee % 30%
So from this my average gross profit per trade is $14.20 and my average fee is $4.20 per trade. That
means the fee absorbs 30% of my profit on every trade. This is with just a 2 pip spread.
In other words the broker is eating up 30% of profits right off the bat. That’s before I even get out of
the red.
Let’s suppose my account starts at $1,000 and I do 100 trades over 1 year. If my trading pattern
stays the same my total fee would be $420. I need to beat the market and earn an annual 42%
return of my starting capital - just to stay afloat and keep breaking even. How many people make a
consistent 42% p.a. return? Not many.
Most professional money managers make on average single digit returns. High frequency trading
generates lots of turnover and therefore lots of fees for brokers. But it isn’t always good for those
invested in the strategy.
High frequency trading generates lots of turnover and therefore lots of fees for brokers. This is why
brokers encourage us all to trade as much as possible.
If you are using a strategy such as position trading, the number of trades you’ll need to execute will
be much lower and therefore the spread cost will be much less of a burden. For example, suppose a

position trader expects to make an average of 100 pips on every trade. With a 2 pip spread, the
spread fee (trading costs) is now only 2% of the total. The position trader has a much higher chance
of coming out ahead than does the high turnover trader.
Some brokers will charge commission per trade. This is the convention in futures markets for
example, so here rather than a spread you will need to work out your cost per trade as a percentage
of your expected profit.
Remember if you use a retail online broker (exception of a few Banks that have retail arms), they are
themselves the client of a bigger broker/dealer. Sometimes there will be several brokers between
you and the market, all taking a cut. And this makes it harder to profit.
Bottom line: If you’re a day trader, scalper or doing other high frequency trading a wide spread will
kill your profits. If your trading activity is to have any chance of success, it is essential to find a broker
that will give you as low spreads as possible. If you can’t find a broker with a spread low enough that
works with your strategy then it might be worth considering an alternative.
Other Trading Costs

For scalpers, the spread is the main cost, but there are other fees and these have to be factored in as
well.
The other significant cost is swap charges. This fee is basically a spread, not between bid/ask prices
but between interest rates on the two currencies being traded. Essentially the long currency credits
you interest and the short currency debits you interests. The difference between the two is known
as carry.
In a nutshell you receive less on interest received, and pay more on interest paid. The difference
between these two is the rate spread or rollover fee. You normally pay this fee whenever you have a
trade open overnight. To handle weekends two extra days for the week are credited or debited on
Wednesday night which is the convention in FX markets.
Most scalping strategies will not have a directional bias in favor of going short or long on a particular
currency pair. This means that the carry interest will net to zero provided the trade volumes are
similar on both sides. However, this does not mean there are no fees. The spread between the two
interest rates (the rollover fee) is still paid. That’s a cumulative cost and is something you also need
to factor in if your strategy holds positions for more than one day.
The following tips will help to keep fees to a bare minimum
 In my experience, most scalping strategies will lose money over the long term when paying a
spread much above 10% of the profit target. So if your target profit is 10 pips per trade this
means spreads need to be below 1 pip.
 Adapt your strategy so that you execute trades when spreads are lower. This rule can be
automated easily if you’re using an expert system.

 Ignore brokers’ sweeteners such as bonuses: Make sure the fees are competitive.
 Look at ENC brokers and other low fee providers
 Monitor the average spreads you are paying and switch brokers if you’re not happy. Some
brokers provide very low spreads for the majors like EURUSD because these are the ones
most new clients check. They recoup this with high spreads on others or with higher rollover
fees.
Risk Control
As traders and money managers we only have a finite amount of money to work with. This is our
working capital. The goal of any strategy is to create a profitable return on this capital. Risk control
ensures that we use an appropriate amount of risk to meet our investment objectives. You may have
a low appetite for risk or a high appetite. It doesn’t really matter. There’s no right or wrong answer
here.
What is crucial though is that as a money manager you fully understand the level of risk your capital
is (or can be) exposed to. Nobody else will do this for you.
You can control your risk through the following:
Exposure: The total size of your trading position

Leverage: The amount of margin (your money) used to back a trading position
Trade stop losses: The maximum amount of loss you will accept per trade
Diversification: The offsetting of risk through other markets
Let’s look at each of these.
Exposure
The exposure is simply the volume of your trading position. Let’s say you’ve decided that your
strategy will place a maximum of 10 trades. Each of these will have a volume of 0.01 lots. This means
your exposure at any one time will be:
10 trades x 0.01 lots = 0.1 lots volume
If you’re trading EURUSD, this means that the actual value of your position in the base currency is:
0.1 x 100,000 x EUR 1 = EUR 10,000
This means when you buy 0.1 lots of EURUSD you are in effect buying EUR 10,000 worth of currency
and selling an equivalent amount in USD at the current exchange rate.

The amount of capital you have in your account will go up and down over time as profits or losses
accrue. For this reason, some traders use what’s called fixed fractional money management. This
means they change the amount of exposure according to their balance.
For example with fixed fractional money management you could decide to allow a maximum
exposure of 0.1 lots for every $1,000 in your account. This means the exposure would look like this:
Account Balance Max Exposure (lots)

$1,000 0.10
$1,500 0.15
$2,000 0.20
$2,500 0.25
$3,000 0.30
$3,500 0.35
This can be achieved either by increasing the number of trades or the volume per trade.
Use Leverage to Your Advantage

The amount of your own money that you need to back up a position is called margin. The amount of
margin can be and often is much smaller than the size of the position that it controls. This is what’s
called leverage.
Leverage is a tremendously powerful tool in currency trading. However, excessive use of leverage is
the number one reason bar none why most independent traders go broke. Higher leverage means
higher risk, lower leverage means lower risk.
Using a lot of leverage will give you the opportunity to amplify profits and compound your returns
more quickly. But remember it also works the other way. You’ll be less able to withstand adverse
market movements against your position. Take the following example:
Balance Exposure (lots) Leverage* Loss on 100 Pip drawdown % Loss

$1,000 1 100x -$1000 -100%
$1,000 0.1 10x -$100 -10%
$1,000 0.01 1x -$10 -1%
*Assumes the margin is set in USD
Remember a 100 pip movement on EURUSD for example only represents a market move of about
0.9% at current exchange rates. This is a tiny movement in the scheme of things. However, from the
table above this was enough to bankrupt the trader using 100x leverage.
Meanwhile, the trader using 10x leverage would only suffer a loss of 10% of their account balance.
The trader with no leverage at all escapes with just a 1% loss.

Trade Stop Losses
The stop loss and the take profit for that matter both need to be weighed up in light of risk controls,
the market and the objectives of the strategy. There are articles on the website that talk at length
about this subject and most of this discussion is relevant to scalping strategies as well.
Here are some basic rules to help you decide:
Some guidance
Rule #1: Some traders use the 2% rule which means stops are set so that they never expose more
than 2% of capital to market risk. This is a good rule of thumb. Whatever stop level you use you will
need to makes sure that you are able to withstand a succession of losses. The 2% rule helps enforce
this.
Rule #2: Stop losses are only advisory. They are not a guarantee. If the price “gaps through” your
stop level, your losses can significantly exceed the expected amounts. For example, see what
happened to Swiss franc (CHF) pairs when the SNB announced the removal of its currency peg on the
euro.
Rule #3: Despite what many claim, there isn’t any golden rule regarding the ratio of stop losses to
take profits. You won’t lose out by having a stop:profit ratio greater than 1. Likewise you won’t
necessarily gain anything by having a stop:profit ratio less than 1. The expectation is the same.
Whichever ratio you use should depend on your risk controls, the type of strategy and the market
conditions. We have created an advisor that calculates optimum values.
51% Rule
What determines your overall profitability will be your long-run expectation. Remember you cannot
beat the market by choice of stop loss/take profit ratio alone. If your SL/TP ratio is 1:1 your trade win
ratio will be about 50%. If it is 20:80 your trade win ratio will be 25%. This is a consequence of the
rule of averages and efficient markets.
What many professional traders do is look for an edge so that with 1:1 odds they are losing 49% and
winning 51%. This leads to a positive expectation. A strategy that has 51% win ratio with even odds
is expected to make money over time by the law of averages. In fact this is how many hedge funds
make money from high frequency trade automation.
Diversification
Most scalp traders only work in one market at a time. If you have the resources, there can be some
advantages to trading across multiple markets. Namely:
 Diversification of risk
 Cost averaging
 Opportunity

Firstly, risk can be reduced if you are trading across different markets provided those markets are
not highly correlated with one another. This free hedging tool will compare markets and tell you
which are correlated and by how much.
Cost averaging means that costs can be reduced. Firstly because a higher number of trades means
you’re more likely to average out variables such as spreads and market volatility. Secondly, with two
markets you are more likely to be able to detect opportunity for “low spread” trades.
You’re also more likely to find trading opportunities simply due to the fact that you have more than
one market to trade in.
Choosing your market

Choosing a market or group of markets comes down to where your interests and expertise lie. With
scalping, the main concern is the trading costs so this limits the choice a bit. Nevertheless there are
several to choose from within which opportunities can be found.
Focusing on a few specific markets has benefits because it allows you to concentrate your efforts. It
will be easier to follow news reports, data releases, understand the actions and intonations of the
central banks and others that have the biggest influence on those particular markets.
The main markets are:
Majors: EUR, USD, JPY, GBP, AUD, CHF, CAD, NZD

European: EUR, GBP, CHF, NOK, SEK, DKK
Asians: JPY, HKD, SGD
Commodity pairs: AUD, CAD, NOK
High yields: AUD, NZD, CAD
Defensives: CHF, JPY, USD
Forex is a round the clock OTC market but the volumes vary significantly in each group and at differ
times. Sentiment also tends to affect all of these blocks in a similar way although each market also
has its own dynamics.
Scalping is usually more productive in the most liquid markets. And these also tend to be the ones
where the spreads are lowest due to that high liquidity. These are general the major currency pairs:
EURUSD, GBPUSD, USDJPY. Crosses such as EURGBP can also be productive markets when you
understand the dynamics.
Intermarket analysis
Intermarket analysis studies the relationships between different markets. For your chosen market
it’s a good idea to get to know which macro trends are relevant and which instruments correlate
with one another.

Finally: Avoid the Trap of Overtrading
While scalping is classed as a “high frequency” strategy, that doesn’t mean you need to churn your
account doing hundreds of trades each day to be successful. In fact, this can often be a disastrous
approach. The most successful scalpers just enter and exit the market a few times each day with
high success rates.
Brokers want and need clients to trade regularly. Every transaction is money in their account.
Whether you make a profit or a loss doesn’t matter to them. Turnover is what keeps them in
business.
But churning your account can actually be bad for your bottom line. There’s a large amount of
evidence that shows that those who work in this way are less likely to be successful.
Quality over quantity is what matters. The key is to develop your strategy, test it and refine it. This is
an ongoing process that takes much time and commitment. The market is changing all of the time
and your approach will need to continually adapt.

Forexop - Scalping Strategies Revealed

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com: Order ID 17402 on Mar 23, 2022

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What are the advantages of scalping? ................................................................................................ 5

What do you want to achieve? ........................................................................................................... 6

Things to consider ........................................................................................................................... 6

3. Scalping Strategies Explained.......................................................................................................... 8

A Simple Trend Scalper ....................................................................................................................... 8

The entry signal ............................................................................................................................... 8

Letting Profits Run......................................................................................................................... 11

Meta scalper strategy ....................................................................................................................... 14

Retracement Scalping ................................................................................................................... 14

Entry Signal ................................................................................................................................... 15

Example Scalp Sequence ............................................................................................................... 16

Advanced Scalping – Pattern Based Scalping.................................................................................... 20

Auto correlation ............................................................................................................................ 21

Why Scalping is So Fee Sensitive................................................................................................... 25

The Bid/Offer Spread .................................................................................................................... 26

The Cumulative Costs.................................................................................................................... 27

Working out Spread Costs............................................................................................................. 28

Other Trading Costs ...................................................................................................................... 29

Risk Control ....................................................................................................................................... 30

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Use Leverage to Your Advantage .................................................................................................. 31

Trade Stop Losses.......................................................................................................................... 32

Choosing your market ....................................................................................................................... 33

Intermarket analysis ..................................................................................................................... 33

Finally: Avoid the Trap of Overtrading .............................................................................................. 34

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 High trading frequency

What are the advantages of scalping?

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 How much of my capital am I willing to risk?

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So let’s take a look at a simple trend scalper.

The entry signal

At any point we have the following:

Gradient = (MAt2 - MAt1 ) / (t2 – t1)

The buy signal:

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The sell signal:

An example of the sell side signal is given in Figure 3-2.

Figure 3-2: Trend scalper sell signal

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Figure 3-3: Trend scalper, buy sequence

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Taking Profit and Setting Stops

Letting Profits Run

Biggest profit trade: $ 334.80

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EURUSD 11 Year (long term) Test

Figure 3-5: Trend scalper, EURUSD 11 year test

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Figure 3-6: Trend scalper, GBPJPY 2 year test

GBPUSD 2 Year Test

Figure 3-7: Trend scalper, GBPUSD 2 year test

USDJPY 2 Year Test

Figure 3-8: Trend scalper, USDJPY 2 year test

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Figure 3-9: A simple retracement scalping strategy