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Forex Trading Strategies: Scalping

Trader Profile: Larry Ottaway

We chat to day trader, Larry Ottaway about his strategies and tips for success.

Which markets and instruments do you invest in?
Specifically forex markets and mainly EUR/USD because it has the lowest spread, which is particularly important in forex scalping.

What is Forex trading?
Literally trading one currency against another in pairs. ie, with EUR/USD either the euro is going up and the dollar going down against it or vice versa.

Which brokers do you use and how do you rate them?
For my particular type of forex scalping, Currenex brokers are preferred as they reflect the real market. The downside is the relatively high entry level (larger account needed). My favourites are FXDD and ADM Derivatives. For a small account Oanda is a possibility BUT they are “market makers” creating their own approximation of the real market. So watch out for their infamous late fills, slippage galore and freezing platforms.

What are the pros and cons of a spread betting account versus a forex account?
Forex accounts offer greater control for the small pip targets in scalping. On the other hand spread bets are tax free ... but I never use them.

What type of investment strategies do you use?
This is where I could write a whole book ... there are two big concepts here. Firstly, as already mentioned, scalping and secondly VERY short time frames. Scalping trades are very quick dips in and out of the market often within a matter of seconds. Targets might only be 2 or 3 pips per trade (or more) and the logic is that once you become experienced it is relatively low risk because of this tiny exposure to the market. Two pips might sound ridiculous until you do the math on compounding. With a high hit rate it’s possible to trade around half a percent of account per pip. An average of 3 pips per trading day then becomes 1.5% per day or 7% per week. As to very short time frames, the myth is that any time frame less than one minute or even 5 minutes carries too much “noise” to be tradable. That’s not true. I successfully trade a one SECOND time frame on the basis that the moves are caught much earlier than the higher frames. Up to a year ago I had to use Oanda which had the shortest frame at 5 seconds. I have now replaced this with Ninja Trader software giving me the one second.

Which technical analysis indicators do you use and what do you look for?
I use weighted Moving Averages to give a very detailed picture of what the market is doing. After extensive screentime or market watching you begin to recognise particular patterns that frequently repeat and offer high probability set ups.

What would you say are the major factors that influence a currency's price movement?
Obviously standard economic and political news but also you never quite know when Toyota or Chrysler for example are going to be shunting around vast amounts of money, spinning currencies into unexpected directions in a split second. Hence once again the advantage of minimal market exposure.

How have forex traders been affected by the current economic crisis?
Experienced scalpers are pretty much immune to the crisis. Business as usual. There have been phases of increased volatility from time to time but that just means more pips. One downside has been smaller account sizes on the basis that if you don’t know which banks could go pop you also don’t know which brokers could go the same way. Another obvious, but sometimes overlooked point is that the forex market can’t crash ... as one currency is going down the other in the pair is going up.

In your opinion should traders use stop losses?
Tight mental stop losses are vital in scalping because one big loss could obviously wipe out a whole series of small gains. My stop is sometimes as tight as two pips plus spread. Preset stops can also be useful if connections fail.

What's the most important lesson you've learned from your investment mistakes?
Rigid discipline on mental stops. When you enter a trade know EXACTLY where you will exit if things go wrong. No hope, no fear.

What are your tips for trading during volatile markets?
With scalping, widen stops and widen take profit levels.

What advice would you give to anyone who is thinking about taking up FX trading?
Watch out for the sharks selling endless systems and courses. 95% of it is overpriced useless junk. Expect to be learning on demo accounts for at least a year if not two. Find a method or system that suits you and practice, practice, practice. Think of it like learning a musical instrument. You’re going to be crap for quite a while ... you’ll slowly get better and better ... and eventually you’ll be paid very very well.

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