Thursday, March 26, 2015

Short-term, high-frequency day trading

Short-term trading in currencies is unlike short-term trading in
most other markets. A short-term trade in stocks or commodities
usually means holding a position for a day to several days
at least. But because of the liquidity and narrow bid/offer
spreads in currencies, prices are constantly fluctuating in
small increments. The steady and fluid price action in currencies
allows for extremely short-term trading by speculators
intent on capturing just a few pips  on
each trade.
Short-term forex trading typically involves holding a position
for only a few seconds or minutes and rarely longer than an
hour. But the time element is not the defining feature of shortterm
currency trading. Instead, the pip fluctuations are what’s
important. Traders who follow a short-term trading style are
seeking to profit by repeatedly opening and closing positions
after gaining just a few pips, frequently as little as 1 or 2 pips.
In the interbank market, extremely short-term, in-and-out
trading is referred to as jobbing the market; online currency
traders call it scalping. (We use the terms interchangeably.)
Traders who follow this style have to be among the fastest
and most disciplined of traders because they’re out to capture
only a few pips on each trade. In terms of speed, rapid
reaction and instantaneous decision-making are essential to
successfully jobbing the market.
When it comes to discipline, scalpers must be absolutely ruthless
in both taking profits and losses. If you’re in it to make
only a few pips on each trade, you can’t afford to lose much
more than a few pips on each trade.
Jobbing the market requires an intuitive feel for the market.
(Some practitioners refer to it as rhythm trading.) Scalpers
don’t worry about the fundamentals too much. If you were to
ask a scalper for her opinion of a particular currency pair, she
would be likely to respond along the lines of “It feels bid” or
“It feels offered” (meaning, she senses an underlying buying
or selling bias in the market — but only at that moment). If
you ask her again a few minutes later, she may respond in the
opposite direction.
Successful scalpers have absolutely no allegiance to any
single position. They couldn’t care less if the currency pair
goes up or down. They’re strictly focused on the next few
pips. Their position is either working for them, or they’re out
of it faster than you can blink an eye. All they need is volatility
and liquidity.
Retail traders are typically faced with bid/offer spreads of
between 2 and 5 pips. Although this makes jobbing slightly
more difficult, it doesn’t mean you can’t still engage in shortterm
trading — it just means you’ll need to adjust the risk
parameters of the style. Instead of looking to make 1 to 2 pips
on each trade, you need to aim for a pip gain at least as large
as the spread you’re dealing with in each currency pair. The
other basic rules of taking only minimal losses and not hanging
on to a position for too long still apply.
Here are some other important guidelines to keep in mind
when following a short-term trading strategy:
Trade only the most liquid currency pairs, such as
EUR/USD, USD/JPY, EUR/GBP, EUR/JPY, and EUR/CHF.
The most liquid pairs have the tightest trading spreads
and fewer sudden price jumps.
Trade only during times of peak liquidity and market
interest. Consistent liquidity and fluid market interest
are essential to short-term trading strategies. Market
liquidity is deepest during the European session when
Asian and North American trading centers overlap with

European time zones — about 2 a.m. to noon Eastern
time (ET). Trading in other sessions can leave you with
far fewer and less predictable short-term price movements
to take advantage of.
Focus your trading on only one pair at a time. If you’re
aiming to capture second-by-second or minute-by-minute
price movements, you’ll need to fully concentrate on one
pair at a time. It’ll also improve your feel for the pair if
that pair is all you’re watching.
Preset your default trade size so you don’t have to keep
specifying it on each deal.
Look for a brokerage firm that offers click-and-deal
trading so you’re not subject to execution delays or
requotes.
Adjust your risk and reward expectations to reflect the
dealing spread of the currency pair you’re trading.
With 2- to 5-pip spreads on most major pairs, you probably
need to capture 3 to 10 pips per trade to offset losses
if the market moves against you.
Avoid trading around data releases. Carrying a shortterm
position into a data release is very risky because
prices can gap sharply after the release, blowing a shortterm
strategy out of the water. Markets are also prone to
quick price adjustments in the 15 to 30 minutes ahead of
major data releases as nearby orders are triggered. This
can lead to a quick shift against your position that may
not be resolved before the data comes out.


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