Profitable Scalping for the Retail Trader

Disclaimer: This was my second FAILED attempt to show that scalping on very short time frames can be profitable for the retail trader.

Posts #1 though #49 track my progress in taking a $400 account up 104% within 3 months and then giving back almost all the profits in the first few days of December 2010. I discuss the methods I used, which consisted of discretionary stop-losses and counter-trend trading.

Subsequently… having changed to MB Trading from Oanda, scalping actively to take advantage of their ‘Pay for Limits’ program,
I am experiencing renewed success.

I think there is opportunity at MB Trading.
They have been ’pioneers’ and I don’t feel that much competition on their ECN (yet).
As always, I continue to aim for +20% per month.
My risk per trade is about 3% currently.

I am not net profitable (yet), but for the two and a half years that I have traded forex… my losing months on average are less than what I’ve paid for my cellular phone bill.
I’ve kept it small.

You can read about my adventures in this thread.

Take whatever from here that may be useful to you.
Trade the ideas better than I have.

Table of Contents

1. My Journey
2. My Rules
3. My Trade Selection
4. Notes
5. Influential Ideas
6. Addendum

(Author’s note: Most of this writing was composed on August 20, 2010 before starting to trade a new account. Edited items and deviations from original plans are highlighted in blue text.)

I have been trading Forex every day for over a year. From March to August 2009, I completed about 50 trades total. Career changes in October 2009 allowed me to trade a couple of hours each day. Since then, I’ve made many adjustments and switched styles often. Every time I have made changes, I withdrew money and started again with a SMALLER account size. From May to the end of August 2010, I’ve been almost breakeven.

I have no problems making money. I have problems keeping it. Since February, I have each profitable month followed by a losing month. I have put up 10% gains or better, only to give it back the next month.

In the past year, I studied many different scalping methods combined with different indicators. If it is posted on Forex Factory and it involves scalping, I have read about it at least once. My first unsuccessful attempt at showing that scalping can be profitable is this thread http://www.forexfactory.com/showthread.php?t=219984. Since then, I have come “full circle”, back to the 1 minute time frame. Though for the short-term scalper, there is tremendous value in the higher timeframes, namely support and resistance plays. I look at the 1 hour, 15 min, 5 min, and 1 min timeframes for support and resistance. Mainly, I am looking for simple, obvious support and resistance levels.

I don’t think that any of the methods I’ve used so far in my Forex career were terribly bad. I have been known to countertrend trade too much.
My serious flaw, my weakest point, is lack of discipline.

Discipline. Not removing my stop-loss on any individual trade. Not trading past my daily stop-loss equity limit for the day. Not trading against the obvious trend. These all require discipline.

Looking at my results on Myfxbook.com, even after so many trades, it is hard to define my “edge”. There are so many undisciplined trades or “disaster” days. I’ve completed about 1700 Forex trades to date. I have still yet to answer the question of whether short term scalping can be profitable. Most say no, the spread alone will destroy accounts.
　
　　
Scalping… can it be profitable for the retail trader?

There are some on our forum who claim profitability, but their trading records are not available for inspection. There are others who have phenomenal short term gains, followed with large losses over time.
I have great respect for all of these traders. They have no obligation to prove anything. Honestly, I believe the best traders, as they achieve excellent results, post on the forums less over time. When I was day trading stocks for a living at a proprietary firm, I spent no time posting on forums.

Can the “spread” be beat on short time frames? To strengthen my discipline and to try to answer this question, I will start another account to scalp short time frames. Five hundred trades with discipline is my goal, with simple rules for stop-loss, and daily equity stop-loss.

1. On the 1 minute time frame, price is NOT trending most of the time.

2. If a trade moves in favor of your initial position, keep entire position, profitable trades are NOT scaled out. Exit profitable trade at your discretion in one complete unit.

3. If a trade moves against your initial position, 1/3 of position stopped at -2.5 pips, 1/3 stopped at -4.5 pips, last 1/3 stopped at -6.5 pips (spread included). Obviously, these stops are activated manually, so your prices may not be exact. I have accounted for slippage with the position sizing (allowing for 5 pip average loss).

This is a varied stop-loss, opposite of “What to Avoid”, pg 265, Trade Your Way to Financial Freedom, by Van K. Tharp. Basically, as a position moves against you, you are reducing it. If the position moves in your favor initially, you have the full position.

(edited Sept. 27, 2010)
Though I still use a scaled stop-loss on some trades, 2.5 pips for the first “stop” is very tight in many situations. I use much discretion when deciding to scale-out and often give an initial trade room of 5 pips on average. Time of day, volatility, and quality of signal play an important factor.
Please read my Addendum post following for more insight.

4. In this study example, super-tight stop-loss, less than 1% of account per trade, initially set for an average of 4.5 pips (spread included on EUR/USD with Oanda). I may adjust position sizing or actual pips but less than 1% of account risk per trade will be constant.

(edited Sept. 27, 2010)
I have been averaging in with an additional lot (initially 7500) on some trades. When dealers “stop-run” or move price during low liquidity (pre/post-news, market open/close, etc.), it is hard to pinpoint the best entry. If I enter a second lot, I’m looking for almost immediate confirmation on that lot (within 2-3 minutes). If not, then both trades need to be exited quickly. The goal is still to risk less than 1% of account per trade. Sometimes, I scale-out the first loss around 5 pips, and re-enter at a better price if I am convinced of the support / resistance area and momentum. Never more than 2 lots, about 2% account risk total.

5. 4.5% account equity Daily stop-loss.

6. Account Value / Initial position / Stop-loss position sizes

$400 7500 2500/2500/2500
$480 9000 3000/3000/3000
$480 actual 8000 (Oct. 11, 2010)
$530 proposed 9000
$540 actual 9000 (Oct. 22, 2010)


(edited Oct. 8, 2010)
I had planned to be aggressive and increase my position size by 20% at a 20% gain in the account. Over the last month, EUR/USD has risen over 1100 pips increasing the margin requirements. As such, I have profits of +20% but cannot change to 9000 units because of margin constraints when using two lots. 8500 units might be too tight as well, if I face a 2-3% drawdown, I would have to lower my position size again. My next tier will be 8000 units. If we see a substantial decrease in EUR/USD soon (lowering margin), I will consider more.
……
I have an account stop-loss of $320. If the value falls below $320 (-20%), I will stop trading this style. With the position sizing above, and slippage to an average of 5 pip losses on initial positions, I will be below 1% account risk per trade.
　
Simple rules, stay disciplined, and examine the results.
I’m very curious to find out if the trend, momentum, and a little bit of support and resistance discretion, can over come the “spread”.

I’ve always sought extraordinary returns in Forex. I have no interest in 30-40% per year. I want +20% per month. You need an “edge” and you need many opportunities to exercise that “edge”.

Proper risk management and a couple of trades per day from long time frames won’t cut it. Scalping could give those returns, if I could prove to myself it was possible, and exercise DISCIPLINE.

　

These are examples of trades I have entered, all with less than 1% total stop-loss.

1. Scalping against support/resistance on the 1 hour, 15 minute, 5 minute, and 1 minute timeframe. These entries may be from candle bodies or wicks.

2. Playing with support/resistance or volatility near “round” numbers. (1.2800, 1.2850, 1.2900...)

3. Playing with support/resistance or volatility near daily Pivot Points (S3, S2, S1, PP, R1, R2, R3).

4. I may enter off the 30 SMA on any time frame (using the moving average as support or resistance) with the trend.

5. Pure “momentum” trades, strong moves with price action.
　
Eighty percent (80%) of my scalps are usually some sort of support/resistance trade, lasting less than 4 minutes.
　
Twenty percent (20%) of my scalps are momentum type entries with strong trend.

I have the 30 SMA on my charts, as a trend “reminder”. I will trade with and against the “trend”. Generally, if I am trading against the short-term trend, I take profits faster than when I am with the trend. With the trend, having a full position on, you should be trying to capture as much as volatility and momentum will allow. I do glance at the 15 min TF chart, and consider daily pivot points. Every 10 to 15 minutes, I revise where I’m willing to buy or sell, based on current price action and trend.
　
　
(edited October 23, 2010)
One of Capitalist88’s research articles on scalping made the statement:
Identifying overbought / oversold conditions rather than trends are the key to profitability in shorter time frames.

Now, imagine an overbought situation with an obvious resistance level right above it. That is where I want to be short.

Let’s say you are watching EUR/USD on the 1 minute time frame. It is a “down” day, the EUR/USD is negative and below the central pivot point. For the next few minutes, price slowly goes lower, and breaks the local low of a recent candle. All of this is happening around 1.3740, after a break of 1.3750. Now, 1.3739...then 1.3738... It looks like a breakdown is happening and you want to be short. Do not short here!

What follows is… price suddenly stops going down… and you get a quick move upward. Perhaps it takes less than a minute, perhaps it takes 4 minutes. Price reverses and climbs to about 1.3746. It’s crazy, it was so weak, and you are in a downtrend… how could it go up?! If you had a small stop of 8 pips you are most likely stopped out.
　
At 1.3746 price can’t seem to move higher, it “flutters” for a moment, then reverses and goes back down. Within minutes, it is lower than where you initially shorted it.

This is the type of price action I look for. Let’s say eight pips upward in a normal market when price should be breaking down is overbought to me.

Combine that with resistance at 1.3750 (actually seen on a chart, on different time frames) and the fact that 1.3750 is a round number or “psychological level”, then this can be a very low risk short opportunity.
People who do not watch the lower timeframes dismiss this kind of price action as “noise.”

I don’t use indicators for the OB/OS situations, I use recent candles and a “feel” of current volatility, it is discretionary. You do not want to short an up market, in a strong upward trend just because it is so high. You need a major resistance level on the charts, and since you are REALLY fighting a strong trend, you’ll want to see immediate confirmation. I generally scalp these trades quickly.

If you are lucky enough to get a quick retracement near major resistance in a downtrend, you should hold a short longer.
Find the resistance levels, find a great price (the retracements) and use them together. This is how I trade.

Keep in mind, all of these trades were completed on an Oanda account, 95% of the time with a 0.9 spread trading only EUR/USD. I have never used MetaTrader. Some have argued that MetaTrader is “slow” or “clunky” for scalping, I do not know.



Here is a portion of my actual spreadsheet I keep on all my accounts.
I include notes if relevant to the trading day (news, volatility, etc.) You can see the distribution of winning days versus losing days. Obviously, if conditions were favorable I traded more often on some days or for longer hours. This was discretion on my part.

In general, I am very wary of highly volatile times (market openings, closings, news…), and/or times when Oanda widens the spread to greater than 0.9 pips.

My hours of being available to trade are generally between 9:00am and 2:00pm EST, Monday through Thursday. On Friday, I will try to trade between 9:00am and 12:30pm EST.

In an active trading month, my average screen time has been about 40 hours, or about 2 hours per trading day. From October 2009 through August 2009, I have 360+ hours logged with the Oanda trading platform, actively watching price. Consistent with the above, the first month with this account, I used approximately 37 hours.

For this account, I was greatly influenced by Capitalist88’s research articles, specifically his “EUR/USD Scalping Study”, and the article by
Boris Schlossberg, “Know Yourself, Know Your Setup”, specifically the 10% solution. Read my Influential Ideas post, Part 5.

There was a poll posted at FxPath.com in August 2010, “What is the single most effective tool for trading forex?” With over 540 people voting, support and resistance had more than 3 times the votes of any other item (trend, candlestick patterns, trendlines/channels, oscillators, Fibonacci, etc.). This also convinced me to come back to the 1 minute time frame with a simplified perspective.

Keep in mind, trades that initially went in my favor and were exited with no partial stop-loss, are counted as one, single trade. Trades that moved 6.5 pips or more against me, were stopped out, sometimes in three positions, yielding 3 separate trades. So when examining my trades, there will be less unique entries, but every partial position has the potential to turn into profit even if another part has been stopped out…hence they have individual value.

My trade entries were simple decisions. If I thought I saw some support/resistance, I would try a long/short scalp. Basically, I avoided many of the mistakes I had made in the past.

Money management, trade risk, and account daily stop-loss pitfalls had caused disproportionate losses compared to my average gains in the past. My own quote from a post in February 2010-

“Likewise, about weaknesses... get a handle on them. If you don't know what you do wrong and can't admit it, figure it out. Yeah, it seems much more fun to scour Forex Factory for systems, indicators, or the latest Heiken-Ashi charts on the 15 min TF with Slow Stochastics and 6 Moving Averages... but I guarantee you will save or make more money just by fixing your mistakes in relation to basic trading principles.”
　
　
　
　
A final note:
All price moves are not equal. As a scalper, you have to realize that during times of low liquidity (pre-news, pre-stock market open, etc.) price will do some wild, incomprehensible things. A 15 pip move right before the London stock market close is not the same as a 15 pip move in the middle of the
London session.

You have to be nimble and make some educated guesses, put the price action in context with a slightly higher timeframe. Ask yourself the questions, “Are stops being run?” or “Is this a real breakout?” and consider the time of day. I believe this is why so many EAs and indicators fail.

You have a better chance shorting a move upward when it nears major resistance rather than shorting a move upward just because your RSI(8) is greater than 80. Put the price moves in context.

I don’t know many candlestick patterns, nor do I even know how to apply a Fibonacci tool correctly to a chart. My confirmation for my trade entries are generally the speed at which they move into profit while also considering how much adverse price movement I had to endure. I have no problem taking a 2 pip winner very quickly. There will always be more trades.
　
　
My main goal with this account was to improve my own discipline and provide real evidence to others that scalping on short time frames can be profitable with simple rules and experience. I hope it continues.
Good Luck!

Influential Ideas for Scalping

　
Take the time to mentally work on these two psychological edges: 1) Suspend what you believe, trade only what you observe, and 2) stay emotionally detached from the outcome of your trades. - Toni Turner

Individual trades are essentially meaningless. It is only a series of trades placed by consistently following the rules of your system that has any significant meaning. - Dialist

During the trading day, you should concentrate only on doing what is necessary for your strategy rather than thinking overly much about your goals or the consequences of trading. - Ari Kiev

Identifying overbought / oversold conditions rather than trends are the key to profitability in shorter time frames. - Capitalist88

Start buying when the price stops declining - start selling when the price stops rising. - daytrading

To make a long story short, I don't scale out of a winning position only a losing one now and it has helped my bottom line. - mbqb11

Ignore all that hype for various systems.
The exit is more important than the entry. - Ronald Raygun

“What to Avoid”, pg 265, Trade Your Way to Financial Freedom.
- Van K. Tharp

Know Yourself, Know Your Setup - Boris Schlossberg
http://www.forexfactory.com/showthread.php?t=5097

Sam Seiden’s articles on supply/demand and support/resistance are good. He has free content available on the internet.

(originally composed Friday, October 29th)

Losing Trade Management

As I finish my second month of discretionary scalping using support and resistance, I have some confessions to make.

Initially, I was using a scaled stop-loss. I did exactly as I stated in the My Rules post for the first three weeks of September 2010.

Averaging in an additional lot became a common practice in markets that were not strongly trending against my trade entry. It really does help boost the winning trade percentage, especially when identifying support/resistance on the longer time frames. Looking at a few 1 hour candles, can you determine the resistance level within three pips? Not exactly.

Nonetheless, the scaled-out stop loss faded away. I spent more time determining whether I thought individual trades had potential and did not scale out in small increments. I still think it is a great way to get traders to stick to their stops and exercise discipline.

I have an emergency stop set in Oanda for 9 pips. So far, I have removed that on more than a dozen occasions or so. I have had an individual trade go against me almost 4% on three occasions, before returning much nearer to the support or resistance area that I had chosen.

My in-trade drawdown is actually higher than my current 2.4% on Myfxbook.com, because they only recalculate drawdown on closed trades. I have no doubt as I increase my position size with the profits in the account, my largest drawdown is yet to come.

At current normal volatility, during the overlap of the European and US session, 8 to 12 pip 1 minute candles are not rare. Stop hunting on short time frames is frequent.

Considering my 30 SMA as a simple trend indicator, and some correlation between the US equity markets and the EUR/USD, I am going to list some examples to try to explain my losing trade management strategies.

I wish I could “wrap” it all up with a pretty little ribbon and say your stop-loss should be at 8 pips, but that just doesn’t work for all market conditions.

Examples:

1. EUR/USD below central pivot, US equities markets all negative,
Overall downtrend on 15 min and higher timeframes.

You found a resistance area and took a short on what you thought was a good retracement, but it has continued to move against you 5 more pips. Clearly, in this case, I would give the trade some room. I would feel very confident if you had a round number or pivot point near to potentially offer additional resistance. Don’t panic, within 2-3 minutes has it at least stopped moving against you?

2. EUR/USD below central pivot, US equities markets all negative,
Overall downtrend on 15 min and higher timeframes.

You found a support area and tried to go long (buy) the Euro. These are potentially the most disastrous trades. I give these very little room, keep a tight stop and scalp this quickly. You can make pips with these, but they should be quick trades ( < 4minutes). Most of my “blow up” days from my February - July 2010 account were trades like this, fighting a strong trend, without determining a good support or resistance area. Be right, be quick, or get out.

3. EUR/USD below central pivot, US equities markets all negative,
Overall downtrend on 15 min and higher timeframes.

You short some resistance at 1.3489... While the trade isn’t moving against you too much… it isn’t going down either. You are nearing 12 PM EST, the European market close. Expect a stop run, perhaps to 1.3500, it happens often especially around market closes and when dealers finish up orders. Yes, that is 11 pips, it’s going to “hurt”, but hopefully just for a short time. If you don’t see significant slow-down of the rising price as it nears or breaches 1.3500, you might have a problem. Otherwise… hang tight, you’ve got the trend on your side. As long as 1.3500 isn’t a session high (or morning high), you might be able to take a much smaller loss in a few minutes (or even a profit).
These are just a few examples.

As of my last trading day in October, I have completed 239 trades. Like I previously stated, I’ve had 3 potentially “big” (3-4%) losers, which were closed at smaller losses. To be fair, I have had many trades push 7 or 8 pips against me briefly, that I have closed in profit. When the trend is on your side, and the market turns, you have an obligation to not just breakeven, but to make profits when ordinarily a tight stop would’ve left you with a loss.

Looking at price action, and objectively examining whether you would take an entry at the current price regardless of your current position ( holding a losing trade), is a skill that develops over time. Just as I make trade entries on retracements at “good” prices, I often try to close losses on a pullback as well.

If you haven’t done many scalping trades ( +200), or have trouble taking losses, then stick to the scale-out strategy for awhile, try to bank some profits in your account for a month.

So far, not giving up on my trades, I close most losing trades at worst 5-6 pips from entry. This is very near what I had set out to do with my scaled stop-loss. My worst trade, as far as pips lost, was 11 pips. I had already scaled out the first 1/3 of the position.
It was a short with no obvious resistance after the level I determined. Once it broke my level, I knew it could potentially run for awhile and I cut it immediately.

These are the discretionary types of decisions that must be made.
In the afternoon US session, I could probably use a 5 pip stop most days. In the mornings, that is often too tight. I’ve tried using indicators to compute a volatility based stop-loss or position size, but on the 1 minute time frame I haven’t succeeded.

Read Tom Baldwin’s interview in the original Market Wizards.
He started as a pit scalper (and market maker).

“Never give up on a trade. Many traders who are in a losing trade will just get out because they were taught that you have to have discipline. Great. Those traders will always be around. But if they just had some patience and said, :Yes, it is going to be a losing trade, but instead of getting out here…maybe if I wait for a few more minutes I can sell a little better.”
　
After more than a thousand scalp trades in 2010, I am beginning to understand this mentality. There is no deception, you admit to yourself that you have a losing trade and need to exit. You start looking for the best spot to exit within reason. I often try to wait for the pullback or retracement to get a good exit price. Sometimes I spend as much effort at covering the loss at a good price as I do on finding an entry. I manage BOTH sides of the trade.

Let there be no doubt, if my losing trades are “breaking out”, making relative new highs/lows against me, or have no further support/resistance to contain them… I am out quickly.

These are very simple examples of areas of support and resistance from actual trading days in September 2010 and October 2010. Unfortunately, even 1 minutes candles shown "after the fact" don't always clearly show the counter-trend move I am waiting for.

The main message is that trade entry ideas do not have to be complex decisions.

This is my position sizing template for account growth in the near future.

Position Sizing
　
(EUR/USD 1.3950 as of Oct. 20, 2010)
　
(10,000 units = 1.00)
Position Size x 5 / Account Bal = .008375 (.8375%)
=>

Account Bal x 16.75 = No. of Units (Position Size)

$540 x 16.75 = 9045 => 9000 units
$600 x 16.75 = 10050 => 10000 units
$660 x 16.75 = 11055 => 11000 units
$720 x 16.75 = 12060 => 12000 units
$780 x 16.75 = 13065 => 13000 units
$840 x 16.75 = 14070 => 14000 units
$900 x 16.75 = 15075 => 15000 units
$960 x 16.75 = 16080 => 16000 units

…
This is my position sizing template based upon a 5 pip loss
being less than 1% of the account balance.

Feel free to post criticism, thoughts, or whatever.
I am not profitable for 2010, but I am experiencing some recent success.

This thread is a collection of the thoughts and ideas that have brought me to this point in my trading.

Hi there, I am impressed by your prefessional approach in this journal. Im sure if you commit to one style for as long as it takes you will find success.

As for your last 3 months on fx book that is an equity graph to be envious of thats for sure!

I might look into using myfxbook myself. I like the daily breakdown graph. Do you have any idea why youve made more trades on mondays than other days? I find mondays to be less liquid and less volatile

Honestly, I'm not sure. Lately, (the past 3 months) I've had more success and more confidence with the US morning session (9:45am-11:45am EST).

So, why do Mondays get more attention?
My first thought, and this may not be correct, is that there are generally less news releases on Monday mornings.

Things get "stupid" before news releases, maybe up to 15 minutes before.
If orders get "pulled" from dealer books and people are waiting for the news then price tends to ignore support and resistance levels for a short time. Unless I can predict those movements (not usually), I avoid trading at this time.

It might be that overall, there is less news on Monday, so I don't feel as if I have to tread so carefully?

Tomorrow, for example after 9:45am EST, there is only Business Inventories (medium impact). I usually wait until 9:45am EST to trade to let the NYSE, and Nasdaq open for some of the initial "volatility craziness" to calm down.

I'll try to keep an eye on my Daily stats and see if I can figure it out.
Thanks for your thoughts.

Great stuff Intu. For some reason I cant open the PDF.

google

Thanks for taking the time to check out the thread.
I created that .pdf to avoid posting a lot of charts, but I probably
created a corrupt file or something.

I'll post some here. These are what are in the .pdf
Keep in mind, there is nothing "magical" here, just simple stuff.

More chart examples...

More chart examples...

last 3...

I hope you dont mind me posting in your journal. Here is a scalp i took.