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How to Take Small Slices Out of the Forex Market

written by: Steve McFarlane•edited by: Jason C. Chavis•updated: 9/10/2011

Even though many successful traders will tell you that it is best to buy and hold, there are others who do well by taking small profits at a time. In this article we will discuss how taking small slices out of Forex market trends by using a scalping trading strategy can be advantageous,

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    Even though the forex market is a 24-hour market, many traders prefer not to hold trades overnight but instead look to make quick profits on very short-term trades. Perhaps it's the lure of making quick profits that cause traders to search for small and quick profits. Nevertheless, taking small slices out of forex market opportunities is a credible forex trading system that is often referred to scalping.

    A forex scalping trading system is a trading strategy that’s used by trader to make a profit from small moves in the market. It can be a scaled-down version of any strategy that is successfully traded on a larger timeframe, such as hourly and daily charts. Scalping often involves trading the smallest intra-day timeframes such as the 1 and 5 minute charts, from which typical profit targets may be as little as 10 pips or less.

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    Inherent Pitfalls of Scalping

    To maximize trading profits, traders may decide to use a greater amount of leverage, to magnify the effects of smaller moves. However, this can really work against the trader when he hits a loosing streak. One big loss can wipe out the fruits of several small trades, which is why a scalper must maintain good money management and follow the trading strategy. Regardless of what a scalper does, losses must always be kept small.

    It is true that a 5 minute chart will show many more trading opportunities than a one hour chart. However, a trader can protect him or herself, from the tendency to overtrade, by trading for only a predetermined length of time, preferably when the major markets are opened. The risk of making errors while scalping is especially great when the markets are flat, such as when the major markets are closed. While dramatic market swings can occur in aftermarket hours, the character of the market is to remain flat outside of the regular trading hours; it is better to trade when trade volumes are perceived to be higher.

    Missing out on significant market moves is a disadvantage of using a scalping strategy. While looking at a small timeframe, it’s easy to miss a big move. When the market it moving quickly and decisively it can look like the profit targets are already reached on the small timeframes. As a result, scalpers are predisposed to closing good trades too soon, which is a natural result of not focusing on the big picture.

    However, because markets tend to trend and consolidate most of the time, talking small profits is not a bad trading strategy. The trader only needs the discipline to periodically look at the larger timeframe to ensure that the bigger picture is not being missed.

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    Hints and tips for scalpers

    • Try not to trade just before a news release. What looks like a small downtick can easily become a big upswing after a news event.
    • Resist the urge to over-leverage, to compensate for the small pip moves you are taking. If you keep making those small gains, they will add up quicker than you think.
    • Even though you are trading small timeframes, it is wise to only trade in the direction of the trend. Look at a larger timeframe to determine the general market direction and only trade that direction until the indicators suggests otherwise.
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    While the buy and hold approach to trading and investing is tried and true, there is no doubt that traders can make some money by taking small profits when the market is flat or range bound. Traders only need to be careful not to over trade, over leverage or trade against the trend. If a disciplined approach is brought to the table while scalping, there is no doubt that good profits can be made while taking small slices out of forex market trends.

    For more tips and strategies, be sure to check out the other items in Bright Hub's Collection of Forex Trading Guides.

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    Image Source

    Scalping Forex Trading Strategy. Image by Salus. All rights reserved.