BPA trading room discussion: July 28, 2015
Given the many questions about 1-point scalping strategies in the trading room, BPA forums, course feedback, and elsewhere, Al took the chance to discuss topic during the daily webinar. A follow up comment two days later is also appended to clarify the 1-point scalp topic with an example of one of Al’s 1-point scalp trades!
Audio duration: 12min 54sec — Scroll down for images
Why a 1-point scalping strategy is a loser
Traders are always interested in scalping. I’m interested in scalping. Probably most of the trades I take end up as scalps, even if I initially take them as swings. Now, I want to say a few important things about scalping. (I) addressed this a little bit in a comment on the Brooks Training Course website yesterday or the day before. I had some questions about it recently, so I decided to talk about. I also am talking about it more in the new edition of the course.
Now, I think it’s okay to scalp. I do not think it’s okay to scalp full-time for a living. It’s really tempting to do it because when traders start out, they work so hard to get money that will allow them to trade, they just don’t want to take a chance of losing any. And the best way to do that is to focus on risk. And when you trade, you have to be thinking about three things; risk, reward, and probability. You can favor one over the other. For example, you may favor low risk; you may favor high probability; you may favor big reward. But it’s a mistake to just look at one and pretend that the other two do not exist.
Starting out: Focusing on risk only not good
When a trader starts out, usually the trader only thinks about one thing: Risk. “I worked so hard to get this money. I really don’t want to blow my account. I’m going to trade with the tightest stop that I possibly can,” and that is okay a lot of the time. But sometimes, the price action does not allow for the kind of stop that you’d like to use. So your choice is either to increase your stop — to use an appropriate size stop — or not trade. However, most traders when they start out come up with a third choice, and that third choice is, “I’m going to stick with the stop that I have to use. I definitely want to trade. I realize that the bars are big and I probably need a bigger stop, but I really can’t afford a bigger stop, so I’m just going to take my chances and use my usual stop.” And that is what I mean by ignoring probability and reward. You got to think about the entire package. You can’t simply focus on a stop — your stop size and say, “I really need that minimum risk, and the most I can risk is 2 points. I’m just gonna take my chance.” By taking your chance, I think what you’re saying to yourself — and you realize this — is that you know the probability is not as good as you would like it to be. So what you’re saying is, “I’m gonna ignore probability and — and just trade on the basis of risk alone. And that is a losing strategy.
Now, as far as making a living trading for a 1 point scalp, I always say that 1 point is the smallest scalp that I ever plan to take in the Emini. So if I’m taking a trade in the Emini, and I think there’s very little profit potential but I think there’s high probability of that profit, the smallest profit I’ll ever plan to take going into a trade is 1 point. Sometimes after I go in, I’ll get out with a 1 or 2-tick profit or a 1 or 2-tick loss, but when I put the trade on — the smallest trade I’ll ever consider is one that will get me at least 1 point. If I’m trading stocks, the smallest profit that I’ll ever consider in the stock is 10 cents. If I’m trading ForEx markets, the smallest profit that I’ll ever consider is 10 pips.
All I need is a ‘D’ to pass, right?
All right. Now, so those are the minimums. Now, think about it — let’s say you have a son or a daughter, and he or she is in college, and she comes to you one day really, really excited and says, “Dad, Mom, guess what? All I need to do is get a D to graduate. That’s the minimum that I need. And, you know what, Mom, I can get a minimum wage when I graduate, too. And, I can therefore not worry about starving, and I can get a college degree,” right? And you just think about that. There are minimums for everything in this world, and if your child comes up to you and says, “I’m excited. All I have to do is get a D and I can graduate from college.” That is true, but then try to get into business school, or law school, or medical school — you’re not going to do it. And then your child says, “I want to earn the minimum wage,” and that’s fine if you’re 16 years old, but if you’re 30 or 40 years old, that’s just not good enough, right? You will not be able to have a very good life. If, as a trader, you go in thinking that “I’m gonna trade for 1 point scalps all the time, or I’m gonna trade for 10 pips scalp in the ForEx market all the time,” you will lose money. And it’s because of what I just said a few minutes ago. I’ll talk about that a little bit more in a moment.
Successful traders do take 1-point scalps, but…
Now there are a lot of successful traders who take a lot of 1-point scalps. However, all of those successful traders take those 1-point scalps when it’s appropriate. They don’t go into every trade thinking I’m going to go for a 1-point scalp. This one requires a 5-point stop. I’m gonna go for a 1-point scalp, okay? Now, I’ve met a lot of traders in my life. I’ve been doing this now for a long, long time. I have never met a trader who was making a living only going for minimum scalps. I’ve met a lot of traders who have tried to make living going for minimum scalps — in other words, every trade, I’m gonna make a 1-point scalp. Or every trade, I’m gonna make a 10-pip scalp in the ForEx market. And I’ve met many traders who have done well periodically doing that, so they might make money every day for a week, or two, or three. But then, they start losing money, and I get an e-mail, “Al, I won 25 of the past 26 days, and I don’t understand it — I gave it all back in the past three days.” And it’s because those 26 days were all small-range, tight trading range days, and they were suitable for 1-point scalps, and then the market changes; the price action changes, as it always does. It never stays one way. And it called for bigger stops and bigger profit targets. And if you continue to trade it as if it’s a 1-point scalp market, you are going to lose.
So, there are other problems with 1-point scalps. The reason why you have minimums, is you have problems with overhead. Why go for a 1-point scalp and not a 2-tick scalp? I had a friend who traded for 2-tick scalps in the Emini, and he was doing well, but I don’t know if he was doing well long time, and the problem with going for a 2-tick scalp or a 5-pip scalp is overhead. You get the problems with spread, commissions, slippage, and then a very important problem — mistakes. And when you consider all of that, if you’re trying to make money trading for a 1-point scalp or a 10-pip scalp, you probably have to be right 90 percent of the time, and you have to be doing it consistently for years.
Now, is that possible? Yes, it is possible, and I know traders who do that, and I know traders who are right 90 percent of the time. I don’t know traders who are right 90 percent of the time and only 1-point scalp. Most of those traders who are right 90 percent of the time, win on 90 percent of the trades are not going for 1-point scalps. A lot of the trades that they take, they go in hoping for a swing — 4 points, 6 points, 8 points. And occasionally, they stay in the trade and make their 4 points, 6 points, or 8 points.
Sometimes, they go into a trade looking for a swing — a 10-point trade. And it turns out the price action does not unfold the way they expect, and they end up scalping for 1 point, and that’s okay. But most of the traders who take a lot of 1-point scalps and who are consistently profitable are not going into all of their trades looking for 1-point scalps. A lot of the trades, they are looking for 1-point scalps when the market’s in a quiet trading range with small range, and they can scale in and use wide stops, swing stops. They can get 1-point scalps and they can do well, but that is not how the market always is. Sometimes, the bars are big, the ranges are big, the stops have to be far away, and if you do not use the appropriate stop, you will lose money. So if you apply a 1-point scalp approach to every day, no matter how the price action is, you’re going to lose money because your risk will have to be so far away that a 1-point profit target would require a consistent winning percentage of 90 percent or higher, and that is really hard to do. It’s possible, but it’s really hard to do.
Paul Rotter—The Flipper
Now, you’ve heard me talk about Paul Rotter, and if you look him up on the Internet, you can get some information. He was a scalper, and based upon what I’ve read about him, it appears that he was scalping for 2, 3, 4, or 5 ticks in the Eurex market trading large positions, and doing it for years, and he was making about $60 million a year doing it. And the reason why he’s in the news or the reason why I know about him is because what he did was extremely exceptional. I’m mentioning him because he’s extremely exceptional, and he’s probably the only guy in the world who’s doing that. So what’s the chance that you or I are going to be able to do that? The chance is not very good.
Making a living on 1-point scalps?
So back to 1-point scalps. I don’t have a problem with 1-point scalps. I take 1-point scalps every day, but the price action has to be appropriate. And if you’re planning on making a living going for 1-point scalps, and you are successful, please let me know because then I’ll say for the rest of my trading career, that, “Hey, I knew this guy or this gal who is making a living trading 1-point scalps.” I have never met a person who has been able to do that. It’s probably disheartening to hear, but that is the reality. So 1-point scalps are fine if the price action is appropriate, but so much of the time the price action is not appropriate for a 1-point scalp that if you only use that approach to trading, you’re going to lose money. You cannot ignore risk, and you cannot ignore reward. So 1-point scalps, they have a place, but if you’re starting out, I think that is not the direction that you should take. The direction you should take is to look for swings and wide stops; it gives you more time to think. Yes, you have to risk more, and sometimes the stop is so far away that you cannot do it. You cannot take the trade.
So for example, let’s say you buy the 18 close here. You have to be risking about 8 or 9 points, and if you cannot risk that much, do not take the trade. Or you can say, “Well, I can buy the 18 close and I can put the stop below 17.” That’s true. That probably will be acceptable, but it’s not as high a probability bet as putting a stop below 12. So sometimes, you can use a tighter stop and still be okay, but you have a higher probability of success using the appropriate stop.
Can you buy above 26 and put a stop below 26 or 25? I think you cannot do that. So if you buy above 26 for a 1-point scalp and put a stop below 26 or 25, you’re going to lose money (*see note at end). Even on a day like this, it’s just really easy to do. You buy the 35 high, or the 35 close and put a stop below 36 — you’d lose money. So you can lose money on a very strong bull trend day buying. You can be buying all day long and lose money if you’re not willing to use — or if you’re not able to use the appropriate stop.
So if you cannot find a stop that is appropriate that makes sense, you cannot take the trade. So it’s okay to focus on risk, but only take trades if you can assume the appropriate risk. If you cannot use the appropriate stop, don’t get determined to take the trade even though you have to use a tighter stop — just don’t take the trade. Just wait for a trade where you can use the appropriate stop. So I hope that’s clear.
All right, enough for the lecture. I hope everybody has a good night. Tomorrow, Thursday, and Friday I think will be really, really interesting days.
Follow up comment: July 30, 2015
I’ve taken several buys. I’m currently flat. My last buy was the 31 low, and I scalped for 1-point.
I talked the other day about 1-point scalps, that I do not know of any trader who is making a living with the intention of taking 1-point scalps. But I know many traders who take a lot of 1-point scalps. So what’s the difference? The difference is that a lot of traders take 1-point scalps when they’re appropriate, but they try to get bigger trades whenever they can — 2 points, 3 points, 4 points, 10 points. I think most successful traders do that.
If you’re good enough to make a living with 1-point scalps, you’re certainly good enough to also take 2, 3, 4, 10-point trades as well. So most of the traders who do take a lot of 1-point scalps do not restrict themselves to 1-point scalps. They’re good enough to make more than that with a lot of trades. So no successful trader goes in expecting to make a living with 1-point scalps even though they end up taking a lot of 1-point scalps. If you’re good enough to make a living with 1-point scalps, you’ll make more if you’re flexible enough to take bigger trades when they are appropriate as well.
* Taking a 1-point scalp above 26 does work, but unstated point is that one winner does not offset the many losers a 1-point scalping strategy will suffer.