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Wednesday, July 14, 2010
Forex Special - In the old days of commodities, the scalper was the king of the exchange trading floor. He was the friend to the order filler, and if he wasn't the market he was always in it. It was a game of instincts. There were no charts, there was no news, there were no reports. It was here and now and if a trade was left untouched for more than five minutes it was considered position trading.
Those days are pretty much done and the old scalper has either retired or changed his ways. Not that they don't exist anymore. They exist in the Forex market as well as any other market. Generally speaking, though, they don't exist successfully. The human emotion and sensitivities that made the scalper successful don't exist in the Forex market. You can't read people's faces on the computer screen (it's too easy to bluff on Skype).
Forex oftentimes acts like a magnet towards the person with a minimal amount of attention deficit. There seems to be always something happening and so many variations on a theme that it becomes an obvious attraction to those otherwise easily distracted. There's always a shiny object to follow.
So, for the Forex trader, it seems wise to take a few PIPs when you can and then jump right back in. It's a great idea if it weren't for that nasty profit/loss ratio that is the bane of mankind.
The problem for the Forex scalper is usually thus. The scalper has no problem entering the market. He goes in at the market price – by definition there will always be a buyer or seller. The problem comes when it's time to get out. That usually has to be at a set price or goal. So, once in the market, the Forex scalper needs someone to trade with when he's made his five PIPs. The lack of the other side of the trade can not only wipe away the small profit desired, but can turn a profit into a loss. There is a lot of energy involved in this, and that's not even taking into account the intense staring at the computer screen.
Then there is the age old problem of minimizing your loss. If your target profit is, let's say, five PIPs; then your acceptable stop loss would certainly be no more than five PIPs. Right? That just wouldn't make sense. However, what happens when the Forex scalper is convinced he's right. Shouldn't he wait to see if that sixth PIP moves against him? He'd sure hate to see the market move in his favor for the sake of one PIP. And so goes that old demon, the profit/loss ratio. Next thing you know, he's stuck in a losing trade and is chasing it to get out; wiping out any profit from the day and perhaps more.
Discipline. The key to successful Forex trading. Easy to say. Tough to do. Take out your charts and pick your spots. Use a published or unpublished strategy. Ride trends. Forex scalping is exciting and exhilarating. But then again, so is skydiving without a parachute. Until you hit bottom.