Why You Should Use Low Spread Scalping Strategies

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What is the Trading Spread in Forex?

In Forex Currency Trading, the ‘spread’ describes this gap in the middle the Buy (or Bid) and Sell (or Ask) amount of a
Money pair. As an example, in the event your EUR/USD Bid amount is 1.16909, and also the Ask amount is 1.16919, then the spread is 1 pip. In the event the Bid amount is 1.16909 and the Ask amount is 1.16949, then the spread could be 4 pips. When trading Forextrading, a trader would make a benefit depending on the movement of this money set. Nevertheless, the trade just becomes more profitable once the money amount has spanned the disperse.

Consequently, when the money set comes with a 1 pip spread, at an Long trade, the worth of the money would have to boost by slightly two pips prior to the trader could benefit (1 pip for its disperse, and also an excess pip for its benefit ). The wider the spread, the more it’s going to require every trade to eventually become prosperous. If we compare EUR/USD having a 0.6 pip spread into some high-spread set such as AUD/NZD (that can be on average 610 pip, although common disperse in Sptforex is merely 3.1 pips),” the EUR/USD money pair wouldn’t need to move as far as the AUD/NZD currency paid in order for a trade to become profitable.

What is Scalping in Forex?

Scalping in the Forex store involves taking improvement of minor amount changes in the store, by making many small trades over very short time periods – usually in the middle 1 and 15 minutes. For a 1 minute trade, a trader would look to make a 5 pip benefit, while a 5 minute scalp would aim for a 10 pip benefit.

Because these trades are so small, the importance of choosing low-spread currency pairs is clear – if a spread is too large, there will be no benefit left over once the trade ends. Because the focus is on such small trades, this is a very popular trading style for many traders, as it creates many opportunities within a single day.

Our Top Low Spread Scalping Strategies

When it comes to taking improvement of low spreads, Forex scalping strategies provide many opportunities for traders. An FX currency pair may move 25 pips long or short for a minute, then pull back 10 pips the next minute, oscillate at this level for another 5 minutes, and make another strong 25 pip move over the next ten minutes.

This is usually a minor move in the Forex store, occurring over a matter of minutes, and this is what you, the scalper, are after. But before all else, let’s discuss why it is so important to obtain educated on scalping. Of course, scalping wouldn’t be nearly as hot though it didn’t provide profits, mainly:

  1. The possibility to achieve a greater level of benefit than you can by merely making positional trades.
  2. No waiting around for a strong trend to develop.
  3. Many trading opportunities.
  4. No pressure to analyse the overall store.

On the other hand, scalping also has some disadvantages, including:

  1. A lower margin for mistakes.
  2. Too many ‘good’ trades leading to overconfidence.
  3. It can be exhausting at times.
  4. There is a risk of overtrading.
  5. A greater level of loss.

Strategy Number One – Extreme Scalping

Indicators:

  • Bollinger Bands (20, 3).
  • Exponential Moving Average (3), close
  • MACD Histogram (6,17,8)
  • Relative Strength Index (14) with 50 level.

Timeframe: 1 min

Pairs traded:
EUR/USD, GBP/USD, USD/JPY, USD/CAD

Long entry:

  • Wait for the 3 EMA to cross up through from the 18 Bollinger Bands middle line
  • Wait for the Relative Strength Index and MACD Histogram to line up above 0 on the MACD, and above 50 on RSI.

Short Entry:

  • Wait for the 3 EMA to cross down through the 18 Bollinger Bands middle line
  • Wait for the Relative Strength Index and MACD Histogram to line up underneath 0 on MACD and underneath 50 on RSI.

Stop-Loss:

  • Place the stop-loss for long trade a few pips underneath lower band
  • Place the stop-loss for sell a few pips above upper band.

Take Profit:

  • Place benefit target on opposite band
  • Average target is 5-15 pips.

Strategy Number Two – Gold CFD Trading Strategy

For this program it is strongly recommended to download and use the
MT4 Supreme Edition, as it incorporates the Sptforex Pivot indicator that is used in this program.

Indicators:

  1. Exponential Moving Average (5), close
  2. Exponential Moving Average (10), close
  3. Stochastic Oscillator (8,3,3)
  4. Relative Strength Index (14) with 50 level.

Commodity CFD trading:
GOLD

Long entry:

  • The amount should be at or very close to the Sptforex Pivot support (S1, S2, S3) or slightly above the Pivot Point (PP)
  • Wait for the 5 EMA to cross above 10 EMA
  • The Stochastic should have recently crossed 20 from underneath
  • The RSI should be above 50.

Short Entry:

  • The amount should be at or very close to the Sptforex Pivot resistance (R1,R2,R3) or slightly underneath the Pivot Point (PP)
  • Wait for the 5 EMA to cross underneath 10 EMA
  • Stochastic should have recently crossed 80 from above
  • The RSI should be underneath 50.

Stop Loss:

  • Place the stop-loss for long trade underneath previous support
  • Place the stop-loss for sell trade above previous resistance.

Take Profit:

  • Place the benefit target close to the next pivot.

gold chart.jpg

Source: MetaTrader 4 Gold. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to purchase or sell any financial instrument provided by Sptforex (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Pro tips:

  • When taking long trades, it is always best to see that stochastics have just crossed above 20 from underneath.
  • When taking short trades, it is always best to see that stochastics have just crossed underneath 80 from above.
  • Using ‘Profit Stop’ is advised after a trade has gone into benefits.
  • Download MT4 Supreme edition
  • Use ‘VPS’ (Volatility Protection Settings)

Key Considerations for Low Spread Trading

When using low spreads as a part of their trading program, it’s important for traders to keep the following factors in mind:

  1. ATR
  2. Stop-loss vs stop grab
  3. Correlation
  4. Margin profits
  5. Spread percentage

ATR

ATR is the indicator that measures the volatility of a financial instrument. It also projects high and low range based on its calculation. The higher the ATR, the higher the volatility. For instance, if the AUD/NZD moved 60 pips a day while the EUR/USD moved 90-120 pips a day, the EUR/USD would have a higher ATR.

When it comes to low-spread trading, while higher volatility can compensate for a wide spread, the ideal scenario is one where the volatility is high while the spread is low. To go back to the previous example, if the AUD/NZD moved 60 pips a day, and you paid a 6-pip spread, the total trading benefit would be based on 54 pips. By contrast, if the EUR/USD moved 100 pips and had a one pip spread, the benefit would be calculated based on 99 pips.

Stop-loss vs. stop grab

stopgrabbercropped.jpg

Source: MetaTrader 4 GBP/USD. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to purchase or sell any financial instrument provided by Sptforex (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

You also need to consider what happens when your stop-loss gets hit on those high spread pairs. You are paying a huge spread when your ‘store dictate ‘ stop-loss order hits the store. That might produce a pattern that collects all stops above or underneath it. The more stops that are hit, the stronger the move of the amount is going to be. This might even push the amount to the next
support or resistance level, creating a fake out, caused by a stop grabber.

Correlation

correlation.png

Source: MetaTrader Supreme Edition – Correlation Matrix

In financial terms, correlation is the numerical measure of the interrelation in the middle two variables. The range of the correlation coefficient is in the middle -1 and 1. A correlation of 1 denotes that the two currency pairs will flow in the equal direction. A correlation of -1 indicates that the two currency pairs will move in the opposite directions, 100% of the time. Meanwhile, a correlation of zero denotes that the interrelation in the middle the currency pairs is completely arbitrary.

So in the chart above, you can see that EUR/GBP and GBP/USD are negatively correlated (-98). This means that they move in a completely opposite direction. If you compare the current ATR of EUR/GBP(70) to ATR of GBP/USD(128), it is very easy to see which pair to trade. Moreover, the spread on EUR/GBP is 2.5 pips, while GBP/USD has a spread of 1.4 pips.Occasionally you’ll see that brokers change the spread and allow you to trade with extremely low costs, so make sure to look out for them!

Margin profits

The
trader’s account should be in a better position to handle setups with larger drawdowns before problems with margins hit the radar. Traders are, therefore, less limited in terms of the number of trades. This can be particularly useful when the store accelerates in its amount action, and it suddenly offers the trader more opportunities to trade.

Spread percentage

The spread fluctuation might also depend on store factor, namely, liquidity. A store that is liquid means that it has many trades on a daily basis, and is composed of many active traders. The Forex store is extremely liquid because hundreds of banks and millions of individuals trade currencies on it every day. The spread is then divided by the average daily range of a currency pair. This gives us a percentage which tells us more precisely how many the spread costs. The lower the number, the better it is.

The spread can be considered an opportunity cost in the sense that it might reduce the amount of benefit gained from the daily range calculated by ATR. The higher this opportunity cost, the more likely it is to convert to losing trades and, subsequently, real financial losses. In the table underneath are some examples using current average spreads* and ATR (the lower, the better).

*
MT4 average spreads as of January 26 2017

EUR/USD

ATR (14): 87

Typical Spread Value : 1.0 pips

Spread as a percentage of ATR: 1.0/87 = 1.14 %

GBP/USD

ATR: 163

Typical Spread Value: 1.4 pips

Spread as a percentage of ATR: 0.85 %

USD/JPY

ATR: 151

Typical Spread Value: 1.1pips

Spread as a percentage of ATR: 0.72 %

USD/CAD

ATR: 122

Typical Spread Value: 1.0 pips

Spread as a percentage of ATR: 0.8 %

GOLD

ATR: 1454

Typical Spread Value: 18 pips

Spread as a percentage of ATR: 1.23 %

GBP/NZD

ATR: 209

Typical Spread Value: 6.5 pips

Spread as a percentage of ATR: 3.11 %

myfxbook.jpg

Source: An example of a MetaTrader 4 account.

Conclusion

If we compare the before all else five instruments with the GBP/NZD currency pair at the bottom of the table further up, we can see a clear difference in the numbers, and therefore, it is easy to understand the effect of low spreads on opportunity costs, their profits, and why they should be considered by professional traders.

The example in the screenshot above clearly shows that highly profitable gains are possible when using low spread scalping strategies. If you would like to attempt these strategies yourself, we would recommend that you use a
Demo account before all else, in order to test them in a risk free environment, before transitioning to a live account and testing them in the real-life marketplaces.

This material doesn’t contain and must not be construed as comprising investment information, investment tips, an offer of solicitation for any trades in financial tools. Take observe that this trading analysis isn’t a reliable index for any future or current operation, as situation can change overtime. Prior to Making any investment decisions, you should seek guidance from independent financial advisors to ensure You Realize that the
risks.