Thu. Apr 2nd, 2020

Forex InfoBook

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Automated Forex Trading : Scalpers

The lure of winning

Scalping is a trading strategy that tries to catch small profits in the market. The market fluctuations seem to be random and it sure appears that making smaller gains is easier than finding larger gains. While this is true, there is just one problem – Negative Risk:Reward. Price moves are truly random and randomness cannot be consistently “predicted”.  Scalping while attractive, automated trading with Scalpers is a losing game.

This makes developing a system with profit target of one pip impossible when the stoploss is also at one pip. To increase success rate, a higher stoploss level is used. The higher the stoploss level, the greater the success rate. Most scalpers have stoploss levels anywhere between 4x to 10x. Scalpers without stoploss will blow the account and is not considered to be a trading strategy.

The high Risk:Reward ratio makes the strategy vulnerable to losing trades. Few loses are enough to wipe out most part of the account. Recovering from loses can be slow and the next stoploss hit hangs like a sword over the head at all times. Scalpers sometimes even resort to martingale methods after stoploss hit(s) based on the assumption that stoploss hits are rare – This is just gambling.

The lure of winning 80% of the trades and closing trades quickly for small gains is attractive for many traders. Consider the following scalping systems:

Scalper Automated trading strategy

Traders who began trading with Scalper A in Jan’17 would have been successful for about ten months. Such winning phases will be seen on most strategies. Vendors take advantage of such winning streaks and sell them as automated robots to unsuspecting traders.

Few months or even a year of live trading and curve fitted backtest results make such systems seem very attractive for trading. Scalpers simply cannot work for long since they are based on randomness of price movements. The faulted assumption is that the rules governing randomness are not random. Traders get lucky on a winning streak and ride it until it crashes. After a few losses, the vendor comes up with a better scalper and hope to catch a new winning streak once again to onboard traders.

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