Scalper

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The scalper has the goal of a quick trade for small but leveraged profits. The scalper prefers to trade frequently for small moves instead of working for larger moves. The scalper focuses on the goal of taking profits quickly from the market and trades in a very limited time frame. Scalpers focus on the most recent price action and on small time intervals, from 10-minute candles to 1-minute candles. The trader seeing a high probable trade can decide to put on multiple lots and then attempt to obtain 5 to 10 pips or more. Parabolic patterns are excellent conditions for a scalp. After a parabolic move up, the probability of a fading of the sentiment is great. The scalper has to minimize the risk of a whipsaw. There is no perfect strategy, but the use of renko blocks

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FIGURE 14.5 Renko Blocks Showing Initiation of Bear Sentiment. Source: www.tradesignal.com.

will clarify more precisely than candlesticks when to get in and out of a scalp. Figure 14.6 shows the situation facing the euro-U.S. dollar (EURUSD). There was a parabolic move up, indicating a potential reversal. The question was when to get in and out for a scalp.

Let's see how a renko scenario would have worked. Mr. Ashkan Balour is a professional forex scalper trader who focuses on capturing moves like a hawk looking for prey. It takes experience in pattern recognition, but Ash is an example that forex trading can become a profitable endeavor. Figure 14.7 is an example of one trade he did; his own description of it follows. Ash is quite a good trader and was able to pick off 15 pips without 1-minute candles. Compare his candlestick view with renko. The newcomer to forex scalping should use renko to help out. (See Figure 14.8.)

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FIGURE 14.6 Parabolic Move Up on EURUSD. Source: www.tradesignal.com.
FIGURE 14.8 Renko Signal for Scalp.

I just finished this trade. The dollar has been weak all day. It came down from the top of about 1.9673. It did one wave down to around 1.9645, then started to form a pendant and went lower. I was looking to go long the whole time. I waited till it did a three-wave sequence down under the pendant. On the third wave, it entered an area of support in the 1.9630 area. I read a comment that there were buyers here around 1.9630, which is not my reason to trade this area but gives you some confidence. On the first up candle I was long, 1.9636; I waited until the first red candle and bagged 15pips easily. Most trades aren't this quick and easy.

SET-AND-FORGET TRADER

The set-and-forget trader is playing fundamental direction and is seeking very large moves of 150 to 300 pips. This trader doesn't want to sit and watch the screen but play the longer moves and forces behind forex. This requires trading off 4-hour, daily, and even weekly charts and setting with risk control to target a 3-to-1 ratio of pip profits over losses. Trading cross-pairs such as the euro-Japanese yen (EURJPY),

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FIGURE 14.9 Bounce Off Channel Line. Source: www.tradesignal.com.

Australian dollar-Japanese yen (AUDJPY), and euro-Canadian dollar (EURCAD) provide wide ranges. One disadvantage is psychological. Set-and-forget trades are slow and take a long time to complete. In contrast, an advantage is that all it takes is three out of seven wins to be profitable.

The trader wants to enter on the side of the predominant trend, put on the trade with proper limits and targets. Channel patterns fit this style. In Figure 14.9, we can see the EURUSD day chart was in an upward channel, and sentiment for the strengthening EUR is confirmed by the bull sentiment histogram, especially when it turned positive.

CARRY TRADER

The carry trader is interested in playing the interest rate differentials for receiving income by buying the pairs that pay income to the account. The goal of a carry trade account is to get a superior return on the equity through interest. The carry trade will almost always be part of forex as long as interest rates around the world differ. Money tends to flow where it is perceived to get the best return. The most famous of the carry trade pairs is buying the New Zealand dollar-Japanese yen (NZDJPY). The NZD offers 8.0 percent interest, while the JPY offers 0.50 percent. This means that the gap between them is 6.75 percent paid to the trader if done right. Another part of any carry trade portfolio has been the AUDJPY playing off the 6.25 percent interest rates behind the aussie. A third pair common to carry traders has been the British pound-Japanese yen (GBPJPY) using the high rates of the pound at 5.75 percent. Carry trades have been the domain of very large institutional trading, but they are available to new traders.

Carry trading has become extremely popular. A sure sign that the success of that strategy was coming to an end was a taxi driver's asking about carry trades. The risks of carry trades need to be recognized. The risks of large drawdowns while one waits for interest to be paid is substantial. Let's first take a closer look at the mechanics of the carry trade for the retail trader.

The first concept that needs to be learned is how a carry trade account works differently from a regular forex account. The account is the same, but the trader has two important focuses. The first is the balance of the account. As interest payments come in, the balance totals will increase. The second is the equity of the account. This is the liquid value of the account if everything was sold. There will be volatility in the equity because the value of the pair bought will vary. The concept is that even though there is risk of losing equity, ultimately, if you hold on, the interest rate will reimburse the account. This is a tricky trade because there can be substantial volatility in the equity values.

Figure 14.10 shows the weekly NZDJPY and GBPJPY. These are the two major carry trade currency pairs. We can see that for a substantial period of time those buying these pairs and holding them not only got high interest rates but also benefited from the fall of the yen. But as interest rates in Japan increase, the carry trade becomes less attractive and holds greater risk of losses as the yen rises against the other pairs. A carry trade portfolio looks to capture interest rates, but the equity value of the account will be volatile.

A real-world example shows this very well. The trader trading a $30,000 account had on a mix of pairs. Until a major sell-off of the yen on February 27, this account performed approximately 5 percent per month. But it incurred a loss of equity of $6000, or 20 percent, in one day. Those who held on to the carry trade positions the week after February 27 suffered further losses. But the carry trade was not eliminated. The difference in interest rates in the carry trade pairs continued to appeal, and the prices recovered weeks later. It's important to keep leverage low in carry trade accounts to enable sudden large

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FIGURE 14.10 NZDJPY and GBPJPY Are Popular Carry Trade Instruments. Source: www.tradesignal.com.

moves to be sustained. Jes Black, a forex trader and money manager at Black Flag Capital, observed that:

Typically, the carry trade is leveraged. With a $10,000 account, and trading minis, you should not exceed 10 times leverage. If you have more trading capital, you should look to diversify the various carry trades to reduce yourrisk. You could also look to do hedging strategies whereby you equalize your U.S. dollar exposure to net zero. Example: long USDCHF and short USDMEX. Both collect a carry, and you have effectively brought your dollar exposure to zero, much like a long/short equity manager attempts to do.

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