Scalpers,
So I’ve been working on the past few months on a few short term trading systems based on various sources around the net. There are so many sources, but they all say different things. I’m a huge fan of scalping, and I understand how heavily the odds are against me. I also understand that scalping in itself is a different beast all together.
Tick charts, 1m, 2m, 5m, and even 15m are said to be scalp-able. And many different strategies are viable. I have attempted to outline some different ideas, with pros and cons, but obviously these are my opinions only and not facts. I’m sure other beginners were in my same position with similar questions before, but may not have been able to find an answer. What do you trade, recommend, or believe would be the most beneficial for a beginner interested (and set) on scalping Forex, and why? I know there is never a best answer. I am more interested in hearing your thoughts and ideas on these topics to help guide me (and others) to customize their plans best to their needs.
[B]Risk vs Reward[/B]
Many traders say to never enter a trade unless you have at least a 1:1 risk:reward ratio. Ideally a 1:2, 1:3, or even 1:5 or greater. Since, you can have a lower-than-50% win rate, but still profit with proper money management. It’s good advice in my opinion, but how does it work for scalping? Random walk theory suggests that having anything more than a 1:1 R:R will actually severely reduce your chances of winning, but if those winners are big, it doesn’t really matter.
I’ve also seen other systems where people mention an inverse risk:reward. For example, they will risk 20 pips for a TP set at 8-12 pips. Others use a mental stop loss (which seems like a pain to deal with with proper %per trade risk). This helps to filter out stop hunting and random whipsaws which will take you out in the smaller TFs. You will likely have a much higher win-rate, but one loss will destroy many of your small wins. Don’t forget the spread/commission which make these winners smaller and those losers bigger.
What do [I]you[/I] think is the best R:R strategy? Do you prefer the proven and solid 1:1+ R:R with big winners and small losers, or do you play the high win% game with small winners and big losers?
[B]Protecting Trades, Exits, and Taking Profit[/B]
Anyone who has entered a trade has had the experience of having it go our way right from the get go. Most trades, however, do not. An even worse feeling is watching a profitable trade suddenly go red. Many traders recommend scaling out of trades, R:R based TP’s, and protective stops. In the scalping world, where a pair can move 10 pips in a minute the exact location of your exit can make or break your trades, and even be the difference between a winner and a loser. There are a number of ideas on how to best exit the trade.
[U]Simple TP[/U] based on R:R or S/R levels means you either win or lose. You enter the trade and let it run its course. The advantage of this system is it’s quite easy to manage. You could walk away from your screen after hitting that buy or sell button. Disadvantage of this is that it’s possible that you leave profits on the table, or have a trade almost hit your TP before it whipsaws and hits your SL.
[U]Break-even (or BE+ a few pips) protective SL[/U] helps with a simple SL and TP target. Again, this could be completely automated depending on your platform, making it easy to manage. Advantages include locking in profits once the trade goes your way. It may not be as much as your TP level, but profit is profit, even Donald Trump cashed a $0.13 check. The potential downside of this (especially in scalping) is that these protective stops [I]will[/I] be hit more often, resulting in very small profits (or losses depending on slippage/commission etc). You will have more winners, but they will be smaller.
[U]Scaling out[/U] of a trade as it progresses is a great way to protect your trade and lock-in profits. These profit levels depend on the trader, but can be done to do things like cover the commission cost and move the SL to BE. Scaling out reduces your exposure and risk to the market, reducing moves against you. But this also reduces moves in your favor. If you trade with a TP of 10 pips, and take of half at 5 pips and the other at 10 pips, it’s the same as if you just got out at 7.5. You take full losses, and you take smaller, but more consistent wins.
[U]Trailing stops[/U] could also be used in a scalping strategy. While I haven’t personally seen much reason, the benefits of a trailing stop allow you to “let your winners run.” Ideally, this would make some really big wins if the market moved in your direction. The major downside to a trailing stop in scalping is that it is very difficult to give your trade breathing room while allowing it to develop. Again, these charts can move 10 pips in a single bar, and when we are aiming for small moves from 5-30 pips, your trailing stop will trigger often.
[U]Monitoring your trade to choose where to exit[/U] is great if you have a lot of time, solid concentration, and nerves of steel. This style probably has the most potential if you have psychic powers and can predict the market. Pros of this include exiting the trade right before it reverses against you, or nailing that perfect top/bottom to close your position for maximum profit. Cons of this system is that it is the most difficult by far: your emotions or fear and greed will be stretched to their limits. If you aren’t some kind of wizard, you [I]will[/I] ruin a great trade which would have gone perfectly had you left it alone.
What do [I]you[/I] think is the best way to exit your trades? What system do you actually use? Of course, each system has it’s own strengths and weaknesses, and they can always be combined to create a balanced system.
As I said previously, there is no best answer to any of these questions. A lot of it comes down to the individual trader and his/her trading plan. What do you think are the best practices for scalping?
Please share your comments and ideas.
Good luck and happy trading.
-Z