[daedalus]

I have been on a journey to rethink and re-examine everything i've "learned" about trading. So much of my career has focused on getting 10-100 pip swings out of the markets, keeping optimum risk:reward setups in my arsenal, hold for gold, all of that. And if i'm honest I can't really say i'm living the life I thought I would be when I started out 5 years ago.

Now granted we all think (even if we don't want to admit it) that we'll figure this thing out in a couple months and the Ferrari will be in the new mansions garage by Christmas. I'm under no illusion that its that easy - however I do think there are a few concepts I instantly threw out of my trading ideas, and it is those concepts I want to talk about.

I apologize in advance for the length of this post, hopefully there will be something constructive in it for us all.

I guess what i'm rethinking is the idea and the application of scalping.

I stumbled onto a thread on babypips today and this was a snipped of the post I found intriguing:

I trade around 6 - 10 hours a week, A typical week would be +3 +6 +8 +2 maybe, or even +2 +1 +3 +1 +7, very very very occasionally a +1 -3 +5 +3 +4 +3, trade that on high leverage and compound the profits, you don't have to get stressed, you don't have to analyse and it makes one heck of a good return. It has been known to get 18 PIPS or so now and again, I just take the rest of the week off.

Screenshot - This is how I set up my trading station and have a buy and sell window open by the side.



And the money Management - See how effective getting a few pips are long term - That's the BIG PICTURE!



It's a little trickier than it first seems, but once you get the hang of it, you don't have to do any hard thinking, you don't have to spend much time trading, you hardly ever get a loosing trade, basically you just practice it until you hardly get any and then go live.

Basically this guys "edge" was to take small profits out of the market and just add size. Not swinging for big gains, but simply taking signals that were there and taking what the market offered, be it 1 tick or 10. I think there is a bit of contrarian genius at work here.

Now its usually at this point where someone jumps in and says "BUT WAIT!!! YOUR NOT RISKING 10 PIPS TO GET 890!!! THIS WON'T WORK!!!". In fact, I never said it but thats what I have been thinking while I read every scalping thread on trading forums. What i'm coming to terms with is that a scalping edge isn't defined by risk : reward - its defined by expectancy.

And therefore, you can't apply to same typical constructs we try to beat into trader with our typical "cut losers short and let runners work" and "you need to a minmum of a risk 1 to get 3 profile to be a successful trader". The point is, if you're scalping your edge is expectancy of returns, not the size of those returns.

This one little light clicked on in my head and got me thinking...

Now the guy who posted that initial quote of his results and compounding i'm pretty sure is legit... Another guy who uses a similar philosophy is the loved and hated Avery also known as TheRumpledOne and his Never Lose Again threads that lets be honest, have been posted on every trading forum under the sun and threads have typically gone to hell quickly due to a combination of stated success, thread title, the typical bantering about risk: reward, and avery's very combative personality.

But all of that aside - I think hes legit and is making serious money. I mean the guy got his group of disciples to meet in Monaco for the F1 grand prix this year.... I don't care which way you slice it that city is one of the most expensive in the world and the most expensive time of the year there is for the F1 race. Somehow I don't think he footed the bill from his donational indicator payments.

REGARDLESS - his edge again is quite explicitly not one of risk:reward, but simply of taking whats offered, an edge of expectancy.

Last week I was contacted by a firm about a trading related job only to find out it was a person selling MT4 operated black box systems (more or less). Now unlike the heavily advertised systems you have all googled at one time or another this lady had put this together herself and was very blatant in telling me exactly how the system was pulling in 1000-3000 pips a month (running on 4-5 pairs simultaneously 24/7). I've always thought these things were bullshit (and a lot of them are just that) but we got into talking and she put it to me point blank as I asked more and more about the mechanics in the system - she used wide stops and aimed for smaller profits (300-400 pip stops, and 40-50 pip targets).

Now even I will admit I think thats a bit on the heavy side of getting R:R... but the point is this... the equity curve of these systems slopes upward and thats because their exploiting expectancy, and not risk:reward. And quite frankly I think it probably works.

Everyone says to be a contrarian in the markets right? We are all supposed to run against the pack, yet we all go into the markets trying to exploit the same pre-conceived notion of risk:reward being the holy grail regardless of your entry signal and we all know that 90-99% of traders lose money right... so whats preventing us to taking a step back and supposing there might be a relation between the two figures? Failure and trying to trade to optimal risk : reward?

Maybe the contrarian view here has nothing to do with market analysis, but the edge we try and exploit... expectancy rather than risk & reward.

All those billions being made on black box systems and quantitative systems used by all the new trading firms - I don't know whats in them but i'll tell you what I suspect is. I suspect their edge is 1. data speed and execution, and 2. expectancy. I doubt those orders beating all of us into the markets taking advantage of the smallest pricing inequalities are doing so in a way that risks 1 and gains 2. Rather i'd wager they are built to exploit the areas where something is guaranteed almost every time.

Think of how a casino is run... yes its run on odds, but those odds aren't 1:2 or 1:10... casinos make consistent money because they have expectancy. yes there is going to be outlier outcomes that hurt the bottom line when someone hits a jackpot, but 9x's out of 10 they are taking your money from you each and every time and its got nothing to do with risk:reward - its got everything to do with expectancy.

So what do you guys think? Is it bullshit? Is there potential here? Lets dig into it.

Personally I started looking at charts today for a new kind of edge, not one where I could risk 20 pips and get 40, but one where I could reasonably expect to get a couple pips each and every time. Frankly I know what my results have been trying to do things the 'correct' way. I'm still not rolling in it. So i'm throwing that out for now and trying to look at things from a completely different standpoint.

If nothing else its exciting and thought provoking and to be honest I haven't been excited about trading for a long long time.

Cheers!

[MidKnight]

Hi daedalus,

This is a very heartfelt discussion for me - where do I begin in talking about your post as there is much I would like to talk about....

Let me start by saying I think the whole concept of risk and reward is total BS. I mean, it is something that can be analyzed and examined on PAST trade data but even then it means very little without some other stats to support it. So often you see people talking about their R/R before they put a trade on but we just don't know what will happen, so why bother. When we are entering trades, most of us wait and observe the market before we decide to jump in, the same should be done for exits rather than make up some big number to give a 10:1 reward so one can feel good about the trade prospect and put the trade on. I'm not meaning to insult anyone that does that. I just think that exits should be evaluated and assessed as meticulously as entries are - that is, as the market is unfolding we should be taking action and having a plan based on this new market information rather than a rigid exit set minutes ago if scalping or days ago if swing trading. Use the most current information available within ones timeframe.

Expectancy or, even using average trade is the way to go. About 2-3 years ago I was actively scalping the Hang Seng Futures and really doing well because the volatility was high. My approach was highly discretionary and it sounds very similar to the sort of thing you are talking about here. I would use wide wide stops and I'd also scale-in up to 5 times. Maybe once or twice a month I would catch a huge winner, but for the most part the avg trade was 39 points. This was counter-momentum trading and sometimes I'd read it wrong and eat it on all 5 entries as that HSI can really rip sometimes! The win rate was high and I had a handful of losing days a month with the avg losing day canceling out the avg winning day. Life was good. And then the volatility collapsed and I started to struggle with this approach. Maybe in part because I was not adapting to smaller targets and also in part because my entry feel was largely based on high chart emotion that had seemed to disappear overnight

As you say above, just take what the market offers - well that, my friend, is often not so easy for me to see in real-time But I understand what you are trying to convey I think. I also think an approach like this really excels with a scale-in approach (adding to losers some people call it) of which I like to scale-in with a fixed percent so that the size is growing on each successive entry and thus greatly pulling the average entry closer. I'll probably cop some flak for posting this, but this is how I like to use a scale-in approach. Perfection is not required and not possible in an imperfect market.

I personally find it easier on my mentality to go for swings larger than a couple of pips just because all that type of trading is too fast for me. How you described that girls system (maybe call this 'swing scalping') is the sort of thing that appeals to me and warrants some more examination on my part.

So after all my long-winded response, no sir, I do not think it's BS. Lets dig into it!

With kind regards,
MK

[Marko23]

Originally Posted by daedalus »

...
So what do you guys think? Is it bullshit? Is there potential here? Lets dig into it....

Of cause NOT, the casino aspect is quite right.
Detailed answer will follow, too busy now.

Please take a look at "Trading in the Zone" from MD.

[SIUYA]

yes - such methods certainly work. But I think you have to be aware that there are still many of the same issues attached that have to be taken into consideration.
These are just food for thought......
- you still need to cut your losses. If you dont have small losses to cut, does it get harder to cut larger ones, once you start doubling down... for some the answer is yes. Also as the point is not so much cutting losses, but cutting blowouts, you will need a bigger bank for this type of trading, as you will have some rather big blowouts.
- as you are basing it on expectancy - you need to make sure you have a consistent method of taking quick profits. Now this will mean that you will constantly kick yourself when you take profits early and it keeps running...this may not wok for every personality.
- entries are still important. the expectancy relies on this, otherwise, you may be constantly sitting on a lot of losses early on....this can be difficult to stomach. Also are you likely to be trying to still then chase the holy grail?
- Why does this necessarily have to be contrarian? I would suggest a better short term one looks to get on the trends still and allow quick profits. Or do many traders want to be right as a primary consideration - being that they want to pick tops and bottoms?
- consistent profitability gives a great method to simply increase from 1 to 2 to 4 to 8 contracts to massively and quickly increase absolute profitability. But are people willing to up their scale this quickly. Some traders will thrive on this - many blow up, when they go too hard too quickly - or when they massively increase their size and have a big loss and dont cut it.... other traders find it hard to increase the size.

Ultimately it still boils down to the personality of the trader, as many of the issues will remain the same.
(As an extra note, many market making firms, hedge funds, and prop houses use this method..... lots of small wins, increasing the risk for good traders, and then increasing the markets traded, the number of traders employed etc; Rather than trying to catch big trends to make more in absolute dollar amounts. Some of these traders doing this have an overall risk manager ensuring they stop them selves out and dont get too cocky and large....via risk controls and unemployment!)

[uexkuell]

Originally Posted by daedalus »

But all of that aside - I think hes legit.

Why?

The guy is putting up a subscription service.
He is recommending a specific broker.
Some people help him underscore the importance of choosing exactly the broker recommended.
Professional homepage that is directed exclusively towards selling.

... and many other points that should raise suspicion.


I don't say it is impossible but surely rather not very probable that it is possible to go for single pips.
On the other hand for a broker clients trying to use such a system would be a blessing.

[Kiwi]

Actually hes going for small stops as well, 2 points and win sizes 1-10 times that size.

His method looks reasonably solid and he actually says enough for you to figure it out. You're basically looking at a bunch of moderately correlated pairs and if you have watched the UK opening you know you get these nice periods where for several minutes you get smooth movement. He's just waiting till he gets agreement from the other three and pipping from GU. It should work quite well as long as (as he suggests) you can be patient enough to wait for smooth movement and correlations to show up.

[daedalus]

As i've been digging into this more and more i've come up with a entry trigger that seems to be >90% for at least a 2 tick move (from the fill price) sometimes much more, sometimes thats it.

My Thoughts/Concerns thus far:

- As far as the risk side of it, i'm still not talking about risking 100 pips to get 2, but i'm more of the mind of trying to risk 8-10 to get 2-4 ticks. So not devastating when a loss occurs, but a drawdown certainly. Whatever I end up on its going to have to be heavily supported with backtested data.

- The other thing I have to consider is commissions, and thus markets traded. If you're scalping for 2 ticks on the YM/NQ thats great, but then thats 10 bucks BEFORE commissions. After your ~4ish dollar commissions, 40% of your profit is gone. That's kind of hard to swallow. But if that 2 ticks is on the 6E/J/S then your profit is around 20.00 after commissions and it only eats up 20%. Obviously the 10.00/pairs are somewhere just below this. But this is certainly an issue.

- Timeframe is important. Obviously the larger timeframes have the same moves as the smaller ones but typically a bigger % moves of that reaction point can be expected. So I think its going to be very crucial (and supported with data) on which markets and timeframes you're trying to exploit these concepts. Go to small and the average move on the break won't be enough to get your couple of ticks, go to large and the risk you'll need to avoid being whipsawed out will be too large to keep things reasonable.

Just a few things I have been considering.

Thank you to everyone for their input and posts thus far. Everything has been excellent!!! Very constructive and thought provoking and its really helping me look at all the angles. Much appreciated!

[SIUYA]

its likely to be a trade off between - the number of ticks you can capture v the number off opportunities provided.
Are you better waiting for a low occurrence trade with with R:R or lots of trades.
But wait...is not this the issue with every style, hence why many go for less trades with a higher R:R? Damn these circular arguments confusing me.

What about a simple random test if you are prepared to scale in?
buy or sell risking 10ticks (say the average expected range on a day is 100 ticks), on every stop, cut and reverse and increase the position? Once in some profit, take it.
Or only go one way (determined by some trend filter) and increase the size each time?
(have not done any testing on this, but could be interesting.)