Nathan Tucci is a young trader . His trading techniques are based on Mathematics above all else. Though he understands technical analysis and fundamentals; his personal belief is that all trading success comes down to the Mathematical principles integrated into all trading. He loves to develop and improve strategies, and is constantly looking for ways to take advantage of the Forex Markets. Trained by Casey Stubbs, Nathan shares Casey’s belief that price is the truest of indicators, and a firm understanding of Price-action is vital to trading success. Nathan loves to share his lastest ideas, successes, failures and thoughts so that other people can benefit from his scientific approach to the market. Follow his latest thoughts on Twitter.
Section 2 of the Great Debate: Scalping vs Swing Trading
Hey everyone, this is Nathan again. I wrote an article a few days ago about scalping vs swing trading, where my thesis was that it was more mathematically sound, especially for beginning traders, to take a swing trading approach to the markets.
The article received a lot of interaction which I loved seeing!
The number one thing that I noticed in the comments was that people said, in scalping, you should not use a larger risk than reward. To be honest, I was quite surprised to see this, because I have never heard of a scalper targeting 10 or 15 pips and using a 1:1 ratio. However, that must not be the case, because I got a whole bunch of comments saying that they are scalpers and do not use a bigger risk than reward.
Here are some of the things folks said:
“As a professional scalper, I have an average win ratio of 70%, I target 12 pips and use a stoploss of 12 pips including spreads, I usually make 30 trades a week. I use 1 standard lot with the occasional 2 lots but in general 1 lot.. I make a living out of it.”
“Very entertaining Nathan. But, I don’t know of any scalper who would set a 50 pip stop on a 10 pip reward. So I think you fed the wrong numbers in your equation. BTW, I’m a swing trader”
“But simply put if we are after a 20 pip gain, we simply cannot let it go 50 pips against us and stop us out”
I was happy to see a common thread, because that means that I can respond to it, now.
To be honest, I am somewhat doubting the ability to trade with a 1:1 in scalping. I firmly believe that scalping can be a very profitable way to trade, but in my experience, you need to have a larger risk than reward and win an awesome percentage or use some type of martingaling to give the strategy an edge.
Let me explain my thoughts on this, and then all of you scalpers can tell me why I’m wrong 🙂
The main objective of scalping is to win small trades consistently. For this article, let us say that a scalper is always targeting ten pips.
So, with that in mind, I had many traders tell me that they would scalp with a 1:1 risk to reward ratio. Obviously, in this instance, that would be a 10 pip target and a 10 pip stop loss.
In my opinion (and you’ll have to prove me wrong), it is virtually impossible for a trader to use a 10 pip stop loss and a 10 pip target and win the majority of their trades.
The main reason? The Spread. Assume the average spread is 3 pips, let’s examine what a 1:1 ratio would look like.
You would enter your position with a stop of ten and target of ten. However, you would start out at -3, which means you are 7 pips away from your stop loss and 13 pips away from your target. That means you are almost TWICE as close to being stopped out as you are to hitting your target right off the bat.
This quickly drops your immediate chance of hitting your target from a coin flip to less than 30 percent.
With your percentage of hitting a target quickly diminished by this much, it puts you at a MASSIVE disadvantage to win a majority of your trades.
Another huge issue with attempting to use a 1:1 ratio in scalping is the volatility of the market. On the small time frames, it is simply too easy for trade set-ups to get rejected. In other words, even if you predicted the market correctly, it can still sway a few pips in the other direction on its way to your target. With over 4 trillion dollars exchanging hands each day, a bounce of 10 20 or even 50 pips is very easy for the market to do with no warning or indication.
One of the differences between taking a trade on a weekly bar compared to a 5 minute bar is this: If you take your time and make a good entry on a weekly set-up, the market cannot just bounce against you in a few minutes and knock you out of the trade and then continue on its way to where you predicted. If the market moves enough to change the weekly trend, there is serious market action telling you that things are changing. For a 5 minute bar to get rejected; however, it does not take much. A little bit of market fluctuation and you are stopped out of your 1:1 scalp, even if it was a good trade.
So, just thinking about some of these basic ideas and the mathematical odds you will have to overcome in a scalping strategy like this, I do have some doubt about the idea of scalping with an even risk to reward ratio. If people are doing it and winning a high majority of their trades, they are going to be rich very quickly.
It is weird that I got so many comments from these scalpers who are raiding the market for pips, but hardly anyone has signed up for the Trading Competition that costs a lousy 25 bucks. If you are a scalper and you can do this successfully, I want to see you in the trading competition! It is a $2500 prize, by the way.
So, anyway, I wrote this in response to the idea of scalping without risking more than you target, and I am curious as to what everyone has to say, so please leave your thoughts!
And Follow me on Twitter for my latest thoughts.
P.S. Most of us probably think of scalping as a techincal system. Trading high-probability set-ups for small gains repeatedly… Well, I just read this article on Fundamental Scalping that was pretty interesting. He mentioned a 1:1 ratio in a scalp because of this system, and it seems like it could work in this scenario.
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