Hi all, I would like to share something that I think that’s quite useful.
Scalping is much riskier than what people might think.
Since we are always paying the spread, the odds will always be against us.
For example, on a 1:1 risk/reward trade, without paying for the spread we would have a 50% chance of winning and losing, right?
Now factor in the spread if you’re gonna scalp 10 pips, with the spread being 2 pips, you would have a 54.6% chance of losing, and a 45.4% chance of winning that trade.
Now, with the same risk/reward ratio, if we go for a longer trade, and our target profit being 100 pips, the chances of losing is 50.5%, and we have a 49.5% chance of winning. It may not seem like a huge difference, but during the long run, it’ll definitely improve your number of winning trades.
Would you rather trade knowing that you’ll have more losing trades in the long run, or trade knowing that you’ll at least break-even?
Coupled with the proper use of indicators and a higher risk/reward ratio strategy, we can definitely push our odds beyond 49.5%!
Or you could have a scalping method that trades with 80% or more accurately and risk never exceeds more than 1%. Would you rather trade knowing you’ll make more than you lose in both risk overall and accuracy?
By no means do I advocate scalping for beginners, but to go along with what ICT said, I would like to point out a fact that you may have overlooked.
In the daily range of price, you might get 15 moves of 10-20 pips, while only one move that nets 100. And to get that hundred, you will often times have to be spot on with your entry. It’s very difficult to call the entry, and most people’s entry signals happen well after the true high or low of the day, so 100 pips are not easy to come by.
I guess he just simply assumed where the price will fall within the range is a linear distribution. i.e. Price hitting up 100 pips or hitting down 50 pips first is 66% and 33% respectively. Course i don’t think it works that way.
Not a scalper myself though, I haven’t got the time to stare at the monitor several hours a day fishing.
Of course, I am not the one who came up with this. I’ve read it in a book but I can’t recall it’s title, but I’m pretty sure it’s a good book.
I mean, it’s all theoretical, yes? Just like how you would still earn if you had more losing trades but had a good risk/reward strategy.
I’m merely pointing out that (because we’re at Newbie Island) scalping for beginners, really brings about more risks.
With the spread being 20% of your target (Spread 2, Target 10), it adds up to the risk factor significantly.
I have to agree with Master Tang. I myself am an intraday trader trader and 100 pips is definitely not easy to come by. I get 50+ pips at most on a very good trade (I’m still very new to trading!)
To everyone else, I will try to recall how the calculations are done. If I recall correctly, the author is Ed Ponsi.
I’d say scalping is a big risk for long term traders, as long term trading can be for scalpers, it’s a case of, if the cap fits.
Hardly anything can be said categorically in FOREX other than prices will go up and down, you just can’t say ‘Scalping is unnecessary risk’, you could say that - ‘Generally scalping is a higher risk strategy than long term trading’, when I see stuff that is quoted in a definite manner I tend to dismiss it out of hand.
Yep, my bad. I hardly reply to threads, let alone start one, hence the bad title. Usually, I just lurk around. This will be my one and only post anyway. Just thought that it’s rather significant. Thanks for the feedback!
I think there is one good side to the scalping strategy. On the one hand you have very tight/limited risk. Maybe you are risking 5-10pips, and if you have really drilled down to your chosen reaction zone (likely on the 5min chart) this should be a wide enough range to cover a very well-defined setup. On the other hand you have very limited profit potential, if you’re talking classic scalping. But what you CAN do is let a portion of the scalp trade run to a much larger profit target. What portion? I’d say 30%-70% would be a good range. And under what conditions might be a good time for this to actually work?
well I’d say during a high volume period (having a major session opening) as well as a strong price flow in your favour on a chosen higher timeframe. In other words, you’d have to do your homework from a bigger perspective before you would even attempt this strategy. So it would be simple if you did your homework, you’d be looking for opportunities to risk 5-10pips in a defined buy/sell only environment. You could mark out your targets for the ‘2nd stake’ by looking at S/R on a bigger scale. Could be anywhere from 10-100pips.
Imagine this: Risk 8pips. TP(50%) at +8pips. Then leave remaining (50%) to run. Long term target gets hit and you net +60pips on that stake.
The math is (80.5)+(600.5)=34 (whole) pips. If you know about compounding, that’s a good number of pips to be getting from 8pips risk (and only 0pips risk after your 1st target gets hit)
Let the disclosure be this, you have to know exactly what you’re doing whenever you are looking for this kind of entry. Trading like this all the time might skew your perspective, or worse: burn you out mentally. So if you did like the ‘scalping’ way of doing things, best save it for ‘special occasions’ I’d think.
after your 1st target gets hit)