First of all, what is scalper ? A scalping strategy is defined by most brokers as a strategy that either takes a profit of less than 5 times the spread of a given currency or a strategy that closes positions in less than 5 minutes. This definition is quiet wide and in general includes trading strategies that try to catch very small profits in the market (hence the word scalping). Most traders think that it is easier to catch a very small profit in the market than a large one because the market tends to move in random directions on small time frames.
So what are the problems of scalping strategies ? Well, I´ll write a small list and discuss each point so that you can see why any scalping ea or strategy is finally doomed to fail.
- In order to get that small profit, you usually need to risk much more. This of course is a consequence of the movement being random. You want to take a profit but if you place your stoploss at the same distance then the same randomness might as well take you out with a losing trade. The solution is simply to make the stoploss higher than the randomness, that usually means risk to reward ratios high, usually from4:1 to 400:1.
- There is no way to predict that randomness consistently. This is because the things that rule that randomness are not predictable, they are of course, random factors which cannot be accounted for. This translates in indicator signals becoming completely useless form one time period to another. So for example, a scalper may be profitable from 2000 to 2001, then it is not anymore. It is impossible to make sense of the randomness (do it and you’ll get a Nobel price in economy) and it is even more difficult to write a set of rules for it that work long time. Hence, your scalper will fail and you can take that to the bank.
- Spreads affect scalpers a lot. Because the take profit is so low, changes in the spread have a drammatic effect on the system’s profitability. So the system maybe working and then the broker widens the spreads a little and you are absolutely doomed to fail.
- Your very high risk to reward ratio makes the system very vulnerable to losing trades. In fact a few consecutive loses are enough to wipe out an entire account in some cases and in other cases the loses take months to recover because of this same factor.
- Your trading cost is too high ! You trade for 100 times a day or for 10 times a day, you are working for your broker. This is because you are just paying at least 200 pips a day in spreads to be on the market. This is extremely high !
- Finally (this is not a valid reason for unprofitability but it is something I want you to take into account) none of the people I know who have made significant amounts of money in the forex or futures market has ever done it by using a scalper strategy. Scalping is a fool’s strategy (for all the above reasons).
If you would like to learn more about this type of strategies as well as other commercial and free expert advisors I have reviewed please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !