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The following are just some thoughts on Trading versus scalping that I
thought some on the List might enjoy. While there are many different ways
to approach trading, scalping seems to be a very popular approach - and one
I employed with less than optimal results. But then again maybe it was just
me or that I just did it incorrectly...
In any case, somehow/someway we absolutely must allow a trade time to
develop and progress - and then try and profit accordingly so we can keep
the Math on our side. I have heard this comment/question a lot - "but what
if I am just trading for a certain daily profit objective and I get
it...what's wrong with that". For instance, I want to make $500/day and I
just had a trade that made $250, so if I take that AND then can do it again
I will have my daily objective. At first thought that makes some sense, or
does it???
It sounds right in theory, but it just isn't the way it works in reality.
Because we know that there are losses to compensate for AND commissions AND
slippage AND the bid/ask spread, not to mention your data, software, etc.
AND we know that even if a trader is good enough to make that $250 60-65% of
the time (or more), he/she will always be a marginal trader at best.
Let's use a 60% win/loss ratio along with a 2:1 dollar ratio of winning
trades:losing trades. Even though I have no idea how you could trade the
Spoos with a 1 point stop, we will use $500 on winners and -$250 on losers
just to keep the Math simple.
10 trades @ $500 profit/$250 stop = [6 x $500 = $3,000] - [4 x $250
= -$1,000] = +$2,000 - [10 commissions x $20 = -$200] = +$1,800. Now what
about the slippage on your objective - certainly something is going to
happen on 1-2 trades out of 10 where a $500 objective only gets $400 OR
a -$250 stop ends up at -$350+. Figure that 2 of these cost you ONLY
another -$200 = a grand total of +$1,600. (and considering that on 10
trades there are at least 20 transactions, that is being quite generous)
10 scalps for quick profits instead of doing what the market says you should
do. And IF you are good enough to get 60-65%+ wins and ALL good fills you
might end up with $1,600+ of profit. AND then I look at the charts from the
last couple of weeks and see all those huge swings where some simple setup
would get you in a trade and the price action kept you in the trade for over
60-100+ ND points or 10-20 SP points per contract - and all the trader had
to do was monitor the progression AND go along for the ride. And we could
have done this numerous times just in the last couple of weeks.
AND then I see where a 2-lot NQ at $20/point on these swings gained over
$2,400 with only 2 commissions AND 1 chance for something unforeseen to
happen. Or I see a 3-lot ES at $50 a point which gained over 10 points per
contract = $1,500, and you get such a graphic example of the "math of
trading" that I know exactly what a trader has to try/learn to do IF they
are going to survive in this business.
And if we accept as true that you cannot trade the Spoos with 1 point Stops,
the above 2:1 winning trade:losing trade dollar ratio would have to be
changed to $1,000:-$500 at a bare minimum and more like $1,500:-$750 to
approach reality. Hmmm...how many scalpers routinely make 4-6 points on
their wins? What if we did the above Math on a 1:1 winning trade:losing
trade dollar ratio? What if we did the above math with a 50% win:loss ratio
instead of 60%?
Regardless of what tools you use to determine entries, you still must have a
plan that once in the market allows you to capture the larger swings and
keep the math on your side.
Hope a few on the List find some value in this post.
Bob
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