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The Pros and Cons of FX Scalping Strategies

Scalping is a very short-term trading strategy used by some traders to take advantage of small price fluctuations that occur throughout the day. Scalpers typically start the day with no positions on their books and they also end the day in the same way. They incur no overnight risk by using this strategy because all of their trading activities take place at much smaller durations.

Trader’s Perspective

Scalpers make up for the fact that they don’t hold positions for long by opening and closing many of them throughout the day. The idea is to book small profits as often as possible at the most opportune times in the trading day, namely during the busiest and most liquid market hours. FX markets are regarded as ideal for scalping, as they are active around the clock throughout the working week and are also the largest and most liquid markets in existence.

For scalpers, the overall value of any single trade to their account balance is relatively small, as are the losses that are incurred when a trade is closed out at a loss. This is because they are chasing highly short term directional moves and are not shy about either taking profits or cutting losses. The central idea is that if the percentage of profitable trades is high enough, in the long run, they will make up for the trades that necessarily have to be closed out at a loss because of the strategy’s rules. Broadly, scalpers use some combination of trend following and mean reversion to identify short-term entry and exit points.


Broker’s Perspective

From the perspective of brokers, scalping has always been a thorny issue. While some brokers openly encourage scalpers and use their acceptance of scalping as a selling point, others include scalping as part of the prohibited types of trading they label as “abusive trading strategies.” The reasons for this are complex but are mostly down to brokerages wanting to prevent traders from using bots to open and close large amounts of trades at minuscule time frames.

This is because the speed at which these algorithmic scalpers operate makes it difficult for brokers to manage their risk, especially if they are using old, outdated brokerage technologies behind the scenes. Whether they’re internally netting-off client positions or hedging them with their own liquidity providers, the relatively high frequency of scalper trades, particularly those employing EAs, cause this to be a risk management problem that brokerages have to address.

The negative attitude to scalping isn’t due to it being a fundamentally abusive strategy, despite what you may have read in certain brokerage terms and conditions about “exploiting latency” and such. It’s actually more down to the logistical problem of managing the sheer volume of orders that these strategies tend to generate.


Our Perspective

While it’s not our place to endorse or condemn individual trading strategies or how brokerages choose to react to them, we believe that scalpers, like all types of traders, have a place and a function within markets. For our brokers who wish to maintain some degree of control over the types of scalping strategies that are employed on their systems, we offer our AntiScalper plugin that allows brokerages to minimise only the types of scalping strategies that are most problematic to them while allowing those that don’t pose a risk management threat.

The plugin is specifically geared at mitigating the kinds of scalping trades that brokers find most problematic. AntiScalper is quite simple in its function, allowing the broker in question to set a minimum time period that has to be observed between the opening and closing of a position. What this essentially does, is limit the possibility for the types of algorithmic scalping activities that brokers have traditionally found problematic, while allowing scalpers operating outside of those time constraints, or employing manual scalping strategies that are not affected by them, to carry on trading as usual.

When used in conjunction with other complementary risk management strategies, such as managing trading conditions around the high profile, news trading events that tend to lead to volatility, our brokers have found that they can maintain a welcoming attitude to trading strategies that take place at all kinds of durations, without having their risk management compromised.

To discuss this or any of the other products and services featured on this blog, please get in touch with us to arrange a demonstration.

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