Scalping Strategies

Understanding Scalping Strategies

Due to the fact that many of the FX trading systems utilized in the managed accounts offered by Cayo Flow consist of various different scalping strategies, we thought it would be both beneficial and educational for our investors and prospective investors alike to understand a little bit about this trading technique.

Scalping strategies typically attempt to capture profits on small price changes across various currency pairs. Systems which implement scalping strategies will usually place anywhere from 5 to 100+ trades in a single day in the conviction that multiple small moves are easier to catch than large ones. The main goal is to place a number of trades which meet certain parameters, and then quickly close them at a few pips higher (or lower) for a profit. Many small profits can easily compound into large gains if a strict exit strategy is adhered to in order to prevent multiple large losses from occurring.

The premise behind most scalping strategies is that of the “dine and dash” principal - get in quick, grab a fast, albeit small profit and then get out unscathed. The less time you spend in the market the less risk exposure you have to adverse price movements or long-term trends. What this typically means is that the overall equity gain in profit comes from the accumulation of many small wins over time. Unfortunately with scalping strategies there’s also the inevitable large losing trade that we need to deal with from time to time.

As mentioned above, most classic scalping strategies accumulate many small wins over time, and then eat the occasional large loss. While losses are rarer than winners, unfortunately the loss is often many times larger than each individual small win and can have a sizeable impact on the system’s overall performance. Because of this, profitable scalping equity curves often look something like this…

Now, in a successful system the small wins over the long run will in fact win out over the less frequent large losing trades. When scalping is done correctly it can be one of the fastest and most profitable trading methodologies one can employ to increase the equity in their account. It’s also a strategy which is a lot of fun to watch, and is often very exciting to trade. The high frequency of trades and the high accuracy rate of these systems make for an entertaining trade session. However it must be understood and accepted by all investors, that with all scalping strategies, inevitable large losses will occur from time to time resulting in large dips in equity.

Those who understand this concept, and let their accounts trade through the peaks and valleys are often rewarded with excellent long-term performance. It is however very important to understand the underlying strategy and how drawdown is encountered and handled.

In our opinion, successful scalping strategies need to employ both fundamentals and technical’s, they must establish high-probability trading times, they must be able to filter the good trades from the poor ones with various technical indicators, and they must have a strong exit strategy for “runaway trades” which may end up in a stop loss.

The good news in relation to the inevitable draw downs with scalpers is that their accuracy rate is usually excellent! So draw downs are made back very quickly, sometimes even in the same trading session. For those who are participating in any of the Cayo Flow scalping FX systems, you will see that over a given period of time, these systems have the uncanny ability to predict rapid moves in the markets with very high accuracy, while always protecting the downside and quickly recovering from the inevitable losses which occur from time to time with these powerful strategies.

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