Scalping - Risk/Reward 1:1

Beginner Questions
1

I want to put this out there and know your opinion/thoughts. Let me paint the picture …

Scalping the Cable using 15, 5, and 1 minute charts. 15 minute chart for trend, 5 minute chart for short term trend, and 1 minute chart for entry and exit. Using Bollinger Bands to trade fades (bounces from outter Bands to the SMA and/or through SMA). RSI is there to show likely reversals when 30 or 70 is touched

We use a Stop Loss set at -10 pips, including spread. We use a Target Profit set at +10 pips. Being a true Risk/Reward ratio of 1:1. Each time the price moves 5+ pips in our favour, we move the Stop Loss 5 pips in the same direction. So once we hit +5 in the profit, we move our Stop Loss to break even

Right now, in this example, we are at break even. We have two choices. First choice, while the price is at +5 do we move our Stop Loss to +5 and settle for the smallest pullback to trigger our Stop Loss, with the possibility it will continue to our +10 pips Target Profit ? Or second choice, do we risk breaking even while waiting for the price action to hit our +10 pips Target Profit ?

I guess it depends what suits us best at the time. If it was a recovery trade from a -10 pips loss, it could be sensible to settle for +5 pips instead of waiting for +10 pips. If it looks like a clear winner, then go for the +10 pips. If it was +5 pips away from our daily goal, settle for +5 pips. If the trade looked promising on entry then slowed right down, could be sensible to settle for +5 pips. If the trade is in a fast and volatile market, +10 pips could be easily gained

We would need to determine our Win/Loss ratio to ensure that this is a profitable method. For now, we’ll just say it is

Does anyone have experience relating to this ?

Thanks for your time

2

while i spend hours scalping my MAIN positions, i have a slightly different manner, using a “tick” chart, one minute chart and a 3 minute as a trend (yeah, i look at the 9 and 15 also, depending on the behavior of the prices at that point (if theres a reversal, i use short term charts for trend to see if its possible to play the reversal or not)

BUT HERE IS MY SECRET ---- i determine the trend on the long term, i determine the trend on the short term, i also use bols and a few little “sneaky” chart overlays to show momentum strength with anticipated tp AND i use the LRC to SEE exactly how the price is moving, where it will move to and what direction its moving IN.

doing this, i will take (lets say) a long, and then we suddenly get a short situation which i immediately trade if i see enough pips to cover spread. Meanwhile i have NOT gotten out of the LONG, and since i use NO STOP LOSS, i dont have to worry about it !

Because i was working with the TREND, as you do, i take profit on the SHORT and still have the long, which i might add to when we get the reversal from the DIP that i shorted.

I think stop losses (other than a mental one) on scalping plays is more dangerous than a help, as you observe ----- if you ALREADY know the TREND, have a pretty good idea of your tp point, then STICK WITH THE PLAN AND DONT ALLOW A SL TO TAKE YOU OUT OF IT !

the KEY is to KNOW inside yourself what will be happening, such as seeing a “prior low” below your present price, and seeing the price dropping — its a slam dunk to place your tp for the short down at the previous days LOW because THATS where they will drop it for support — sometimes, depending on the time of day, they will take out everything right down to the PIVOT, but you have to judge that strength with your indicators and support and resistance lines plus fibs (which are NOT quite as important now, because of the influx of equity traders who use s+r and NOT fibs)

of course, if a fib and a s+r point AND a MAJOR EMA live at the same place, GUESS WHERE THE PRICE IS HEADING !!!

enjoy and trade well

mp

[I][B]Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence – BUT I KNOW WHERE THEY HID THE KEY !!
[/B][/I]

3

I answered this matter also on another thread.

Risk/reward ratios must not be taken in isolation.

They are closely correlated to win/loss ratios.

For you to win at forex, the following equation must hold true…

[B]risk/reward x loss/win >1[/B]

If the above =1, then you are breaking even.

If <1, you will lose at forex trading.

4

Thank you mp6140 and tymen1 for both of your helpful feedbacks

If I was to introduce the Stochastics indicator alongside the RSI to help confirm entry and exit, what settings should I have it at ? I am able to display the Stochastics on-top of the RSI in the same indicator chart, so it’s not taking any extra room from my trading window

This I like

Many thanks

5

for the stochastic, for the purist, it will change per the timeframe used, but for all practical purposes i use an “averaging” value of 8/3/3.

one can go down to 5/3/3 which can get jumpy on the shorter timeframes and works BETTER on the longer ones (15 mins and above).

now for even greater fun, try the DSS or “double smoothed stochastics” which is just what the name implies.

and one more, which is already on your “indicators” list in MT4 is the “accumulation/distribution” indicator, which performs much like the stochastic but is incredibly “smoothed” — it is one of four indicators i trust completely, showing TRUE overbought and oversold conditions ESPECIALLY on the longer timeframes ---- if holding a swing position, its great fun to see it slowly progress UP, day by day — creates a warm and fuzzy feeling even during drawdowns.

being the exceptionally grand person that i am, i will even eliminate the google search for the A/D, by attaching it at the bottom.

even a chart showing (the white arrows) how it compares to the stochastics which are also shownl.

the BLUE line, moving up and down in nice swoopy cycles is the DSS — wont take a genius to figure how to use it for entries and exits and to follow the trend.

FOR FREE — you cant beat my deals with a stick, or even a 457 magnum !

enjoy and trade well

mp

[I][B]Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence – BUT I KNOW WHERE THEY HID THE KEY !!
[/B][/I]

A_D INDICATOR.jpg651×700 115 KB

DSS Bressert.zip (973 Bytes)

6

Brilliant, thank you for sharing mp

I will take my time to study your generous reply and will come back with questions no doubt

I like your style

7

oh btw — either out of stupidity, lack of time or an inherent hatred of things mathematical, i NEVER figure “risk/reward ratios” or things like that ---- I simply TRADE to make profit, and my manner is to stick with the trend or go counter trend if i see a decent move.

while thinking mathematically might be a good way to begin trading, i concentrate on the trades themselves, and not the accounting !

enjoy and trade well

mp

8

I have learned that the risk reward ratio should be 1:3 or higher. Anything below that number is too risky for a beginner.

However I still don’t understand how you calculate the “reward”… The risk is the amount of money needed to enter the trade, that is clear. But how do you calculate the reward? I see people always talk about “risk:reward” like if it was something easy to calculate like leverage for example… I mean, it’s impossible to know the reward, because we don’t know what is going to happen in the first place. It’s supposed we need to work to make things happen, and later think in the reward… But they talk about risk:reward like if there was a formula. That’s why I still don’t understand the concept of “risk:reward” although I have read about it. Maybe someone can clear it up a bit?

9

“I have learned that the risk reward ratio should be 1:3 or higher. Anything below that number is too risky for a beginner.”

Ha, you may be here for a while if you want a definitive answer! In short, R:R can only be defined if you have a set stop loss and a take profit (the reward part). And yes you can set a TP or you could not. Trend followers tend not to set definite TPs, whereas in a ranging market, you should most definitely.

And 1:3 isn’t a golden formula (discussed elsewhere here); it all depends on your win rate (expectancy). A 40% win rate on a 1:3 will make you profitable. a 99% win rate on a 1000:1 strategy will make you poor in short order.

My only advice is to get in there, try it out, find your own way. You’ll soon see what’s profitable and what’s not. Using low leverage is more important when you’re starting out (in short, if your palms are sweating, trade lower amounts).

10

I not at all understood the wish to scalp. Sitting there the entire day snagging 4-9 pips, even 22 pips. The killer is upside down Risk to Reward. I mean why risk 22 pips or inferior, no discontinue, to create 5-8 pips and you have to hit the spread each time you re-enter the marketplace.

11

I like scalping because it fits my personality. I want a minimum of 25-30 pips a day, 5 days a week. The method I’m creating works well with this. You don’t necessarily have to watch the price action every second you’re there to trade. I do other stuff like watch TV with the wifey, browse the web, you can do almost anything as long as you are near the computer and can check it on the regular. And remember, if you miss a trade, there’s another one forming in the near future

My average scalp gain per trade is approximately 10 pips, depending on the market. Therefore I could set my Reward side of the ratio at +10. But, I’ve had another thought on this Risk/Reward side of trading

Say if our risk is at 2% each trade, 10 pips including spread, why not use a Trailing Stop without a Target Profit. This would remove the restriction of only gaining a potential +10 pips, and would open the possibility of larger gains while still risking the same 2%

To me, the Risk is the most important componant here. Why limit yourself with a +10 pips Reward on a short term scalp method if there’s potential for more. Using a Trailing Stop will still protect our gains. Why not scrap the Target Profit, or ‘Reward’, side of trading ?

Thoughts anyone ?

MP, still studying your last posts. Will come back with thoughts/questions

12

I am new so take it as you may.

I use a lot of MP’s tricks for scalping. My entrance seems to be different as I look to the 15m dss to decide direction and the 1m dss for entrance. I keep an eye on the ADX to ensure agreement and make sure to keep an eye on the other time frames. I have been in situations where everything is pointing up, DSS on both time frames is heading up, and then voila a market turnaround because of some resistance or support on another time frame.

As for MM, I do not use stop losses in the normal term, they are way out there at major S/R on the higher time frames. They are strictly manual unless I am away from the terminal during busy trading hours. It does get hairy, and have had to cut my losses at 8-10 scalps worth, but this is one out of probably 20-30 trades. For me, lot sizes are scaled based on my account but in general the base lot size would be for long time frames, double lots for medium size trades, and triple lot size for scalps. I guess my long term Risk/Reward is 8/1 and my win/loss is 20/1.

For number of pips, I go with 5 pips on the EU and a triple lot. 5 pips is pretty danged easy and I get the bang by utilizing the larger lot size. Another little exercise that I formed on my own, but confirmed by another MP method.

I should note that my scalping usually keeps my longer term trading supported. Basically I make the money scalping and loose it long term trading. This will change as I build my style and trust in my T/P points.

13

in agreement with husky and others, stop losses on scalps are a bit of fluff that i dont have time for

now what i do may be different, as i only have “proper” entrances once im locked into following a price through its one minute moves and it hits tp then DROPS — i can pick up the entry off the resistance bounce, but thats because im now watching more closely.

I cant possibly explain how i trade, because there is NO logic to it, but i simply enter a trade if i see it (VERY easy after a few years) and only if i can see that the present tp point will cover my spread. Once im “locked on” to the trade, there will be a few considerations based on the trend, which i get off the 5 minute and 9 minute charts, with a peek at the 15 as husky does.

during the adventures of the 15 timeframe, shall we say, there will be many an up and down on the one minute ---- if using the 15 minute as a TREND indicator, there is ABSOLUTELY NO SL NEED as long as you trade with THAT TREND — whatever you may miss on one trade will come back and be hit in just a few mins, if that long. What must be watched is trading COUNTER to the trend, because then you dont have a net until the price REVERSES at either noon or 5pm (est)

i love the longer timeframe trades also, and set one every evening before the sandman ventures near, but one must TRUST their tp points and thats just a matter of TIME and experience !

risk/reward is something that i dont understand and have never studied — while i speak for myself, if the trade is good enough to take, then risk is NOT an issue and not something i would ever consider — slows you down way too much and trading is NOT run by accountants but by TRADERS !

but all of this takes a bit of time to understand and impliment — but down the line, as you grow into the role, youll be able to wear the mantle of “trader” and have doxens of war stories to tell at ****tail parites and “traders expos”

enjoy and trade well

mp

14

sam

there are probably as many reasons for “scalping” as there are scalpers, but for me its pretty clear.

first off, I am a TRADER, and by the definition of the word, I TRADE for a living ! Now, i can be an “investor” in which case i take a trade and look at it every night when i come home from work, and have my wife ask “darling, hows our INVESTMENTS coming along ?”

there is NOTHING wrong with being an investor (well, recent market activity has its OWN opinion of that statement) but I AM A TRADER, and so, sitting in front of my monitors each day I will have exciting periods and dull periods and the whole range in between ---- during the exciting times (news for instance) I stand to accumulate a LOT of profit which would not happen if i were not trading, and during the SLOW times, i can add to what i make by scalping for the smaller amount trades.

now, depending on the time of day, one can make some 100 pip runs, which started as a simple scalp and just developed, kind of like a “tsunami”, but if i was NOT there, that little windfall would belong to someone ELSE

If an “investor” had taken their position early in the day, they would have probably made those 100 pips also, BUT THE NEXT REVERSAL, with its resultant drawdowns, would have eliminated that profit in an hour ---- when i scalp I GET TO KEEP THE GOOD RUNS, as well as the longer timeframe, “investment” type trades I make on the 30, 60 and H4 charts.

i guess thats the simplest — i make a LOT more trades than you do, while working within the same support and resistance areas simply because im THERE and can follow along with the fun.

as far as risk/reward, as ive said consistently, i havent a clue as to what it is or what it means ------ every trade carries “some” risk, but i try to minimize it (actually its such a part of the trade that there is NO consideration — its either a good trade in your mind or NOT, nothing else !) and take my trade, be it long term or short.

so it simply boils down to WHO you are and WHAT is your interest in forex – do you wish to be a trader, with the implications of “hands on” always, or an “investor” who simply sets a tp point and waits while the trend runs the price up.

With “trading” while your price is being “run up”, im takiing advantage of every move the price makes, which is not always simply 5 pips, but in the end, once ive reached the same tp point as you, ive probably made an easy 10 times more than you would, because its my JOB !

enjoy and trade well

mp

[I][B]Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence – BUT I KNOW WHERE THEY HID THE KEY !![/B][/I]

15

Well said MP

16

Hi Friends
Can someone tell me about the Risk/Reward Ratio and how does it affects the trading configuration…

17

Practically any trading system, based on particular setups, can be used for the purposes of scalping. In this regard, scalping can be seen as a kind of method of risk management. Basically any trade can be turned into a scalp by taking a profit near the 1:1 risk/reward ratio. This means that the size of profit taken equals the size of a stop dictated by the setup. If, for instance, a trader enters his or her position for a scalp trade at $20 with an initial stop at $19.90, then the risk is 10 cents; this means a 1:1 risk/reward ratio will be reached at $20.10.

18

I’ve moved on from this thread, and am now scalping with the MP Method (as I call it)

You can find me, and many others, at: MP some of his Becoming-MORE-Secret secrets

Peace

19

Forex scalping is the art of using high leverage and a large number of short term trades to steadily increase an account. Usually, only 1 to 5 pips are targeted for each trade. This type of trading appeals greatly to day traders and those looking to minimize the risk involved in trading currencies. Next to money management, “risk control” is the single most important trait to a surviving (and thriving) currency trader. The small amount of time that is spent in the market limits much of the risk in exposure in comparison to a longer term system. Also, the freedom involved in a speedy Forex scalping system in such a liquid market is a “magnet” that drives many traders from other markets to try their hand in currency. A disciplined and steady scalper could seamlessly double or triple an account, and spend only a fraction of the time in the market as a common day trader.

If you found this introduction interesting read the rest of the article Forex Trading Methods - Scalping

20

I think the word “scalping” has many definitions. There may be one out there that the word orginated from, but I’ve seen a few different meanings. To me, scalping is trading off the 1M and 5M charts. I don’t maximise my leverage, at all. I simply love trading for short periods of time. It suits my style. And it’s working well