One of the top questions scalpers want an answer to is whether their broker allows scalping. Among scalpers, it’s constant fear that if their profits swell to significant amounts they’re going to get black listed. But the real question is can you scalp trade without your broker noticing? Theoretically, yes; but in practice it’s not quite that simple.
Why Hide Your Scalping?
The problems you may have with your broker when scalping is not necessarily your worst fear come to life. That, of course, is your broker finding out you’re scalping and cancelling your withdrawal privileges. Poof! The “million dollars” you successfully scalped is now stuck in limbo.
The reality isn’t quite so harsh. Your broker may do one of two things. He may widen the spread if it’s a variable spread you’re paying. Or, if it’s a fixed spread, be prepared for hidden slippage every time you close a trade.
Now, many times slippage is not intentional, but you can never really know, can you? After all, slippage by a few pips here and there or widening the spreads a bit is common practice. It’s also quite legal for a broker to do.
So if you are scalping on big amounts you probably won’t know if you’ve been “filtered” as a scalper by the system. That may explain why you experience some “minor” issues that bite into your profit. Or perhaps it’s just how the broker’s liquidity is on a big trading position. Sometimes, though, it might be worthwhile to try scalping under the radar.
How to Avoid Detection
The way most brokers filter scalpers is simply by duration of trades. If a trader trades at very short intervals (less than 2 minutes, say) he’s often identified as a scalper. But what if you fool your broker into believing you trade on longer durations. Then your trades couldn’t be “filtered” as scalping.
How would you do that? By opening two accounts that will each cancel out the other.
Let’s say you have one account with one broker (Broker A) and another account with another broker (Broker B). Now you’ve opened a trade on the EUR/USD for +100 lots long with Broker A. But you trade by the minutes and after 2 minutes you want to close it. So what do you do?
You open a short position with Broker B. The two trades will cancel each other out. Essentially, you have “closed” your first position with Broker A. You can then close the two positions at the end of the day when your duration is a few hours.
And the result? In each account your average duration is several hours. And neither Broker A nor Broker B has a clue that you are a scalper that actually holds trades by the minute.
How to do it Properly
Of course, there are three problems you might face. First, you might end up paying double the spread. Second, you might find it hard to open the opposite position in Broker B quickly enough. Third, you have effectively less margin because now you have your money divided into two accounts.
How would you handle those problems? Well, right off, as you might have expected, there’s no getting around the third problem. But what about the others? Here’s how they could work to your advantage:
If you open an account with brokers that have variable spreads often the bid of one will overlap the other’s ask. How can you close two opposite trades when the spread you effectively pay (i.e. the distance between the bid and ask) is minimal? You need a trading algo. Yep; as I said previously, this is not a simple thing to implement. For those of you that are familiar with the concept of triangular arbitrage this method might be simpler for you to grasp.
Nonetheless, a rather simple algo can compare price quotes of the two and decide when to close. Of course, as you might have figured, if your broker has fixed spreads this will not work well. Moreover, brokers with fixed spreads do tend to have slippage.
Of course, this may not be worth the effort. And the reality is that in most cases it’s not. Naturally, there are exceptions to every rule that could make this worthwhile. Especially if you’ve got a very good scalping strategy but suffer from slippage or widening spreads.
Big scalper says
I like your article. The ultimate setup would be to use this strategy to mask price latency arbitrage from your broker. Using 2 accounts with the same broker under different traders names. When a delay is detected in the price feed from a faster feed open a position with one account and lock in the profit by opening a position in the opposite direction on the other account. Orders can be left open for a few hours to mask arbitrage.
Shaun Overton says
Hi Alex,
Yes, that’s very true. And clever. The main issue is finding a trading partner that you trust.
–Shaun
Big scalper says
That would be my Wife or Mum lol! Do you have anything available that could do what I just described or could you develop it?
Tariq says
Hi Shaun,
It’s always nice to read your articles and learn something new on each read. Thank you so much for sparing time.
Can someone explain how it is hours scalping?
I have many account all over the place from Peppers, LCG, IB, FXCM, Ninja(formerly Mirus) and Questrade. My auto-strategies run on all of them except Questrade.
And yes, I sure do need trading partner in my live web meeting room or join someones so I am not completely in the dark.
Shaun Overton says
Hi Tariq,
I’m glad that you’re enjoying the articles.
Can someone explain how it is hours scalping?
Can you rephrase this question? I didn’t understand what you mean.
-Shaun
Tariq says
I was confused by your example where you say “close the two positions at the end of the day”. I was referring to – “you trade by the minutes and after 2 minutes you want to close it.”
your example as quoted below:
“You open a short position with Broker B. The two trades will cancel each other out. Essentially, you have “closed” your first position with Broker A. You can then close the two positions at the end of the day when your duration is a few hours.
And the result? In each account your average duration is several hours. And neither Broker A nor Broker B has a clue that you are a scalper that actually holds trades by the minute.”
Giovanni Biondi says
Hi everybody,
Interesting article. I wonder if there are published reports of brokers freezing accounts and withdrawing privileges. That sounds very sketchy and it should be widely known in the community.
Do you have specific info?
Theoretically and legally there should be no reason why I should not open a position and close it whenever I want.
And if this is the case why aren’t more people trading with a regular futures and Fx broker like Interactive Brokers (for instance) where something like this is unheard of? I have no relationship with IB except for two accounts I have with them, by the way.
I have recently opened an account with FXCM and I wonder if they are involved in anything like you describe.
Thank you,
Giovanni Biondi
Shaun Overton says
Hi Giovanni,
I don’t have any reports available. There’s no reason why brokers would share that data.
FXCM is a reputable broker. They let you scalp as much as you want, as long as you’re truly scalping and not arbitraging them.
–Shaun