Why Scalping Is A Waste Of Time (Do This Instead) | Profits of Scalping Trading Strategies
This article argues why scalping is a waste of time. Why? Because you highly likely end up losing money.
We don’t recommend scalping when trading. Scalping is hard and almost all scalpers end up losing. Scalping is a waste of time because it involves competing with better-equipped traders and institutions and you need to deal with lots of randomness and noise in the market. Most likely you end up losing money – scalping strategies are rarely profitable. There are better opportunities in longer time frames. Additionally, backtesting is more difficult the shorter the time frame. Scalping is difficult!
We believe you should do this instead: find edges and strategies on longer time frames.
What is scalping in trading?
Scalping is a trading style that profits from small price changes in any financial instrument, be it for example stocks, oil or FOREX. The time horizon is very short: from just a few seconds up to a maximum of some minutes (day trading). The main idea is that small profits per trade generate big profits done many times. As such, this is a trading strategy that could be labeled as high-frequency trading. Most scalpers use a 1-minute scalping strategy.
Obviously, scalping is day trading. However, a trading day is at least 6.5 hours, so even for day traders scalping involves a very short time frame.
Is scalping in for example forex, stocks, and oil profitable?
Very few traders make good money by scalping – almost no one is profitable. Most likely this is the most difficult way to make money as you are competing against better-equipped traders, as you will find out after reading this article. Short-term trading is mainly a zero-sum game (and definitely in FOREX and derivatives and to a certain extent crypto).
What is your edge when scalping?
As always, when you want to start trading you need to ask yourself these very important questions:
- How and why should you make money scalping?
- What is your edge compared to the other players?
- What is your prey, and where are you in the food chain? You need to understand the ecology of the markets.
- Do you have the mental skill set to perform scalping?
In a previous article, we both defined a trading edge and how you can go about to find them. In the long run, it pays off to do due diligence on the questions listed above.
Who are your competitors when you do scalping?
As a scalper, you compete with many sophisticated players like banks, hedge funds, and traders sitting much closer to the market than you do. Are you going to outcompete these on their home turf? That is pretty unlikely and very naive. Better charting or indicators are not going to help at all. In order to make a profit, you need prey. Who is that going to be?
High-frequency traders (HFT) are much better equipped than you are. They have better software, better brainpower (most likely) and are better capitalized.
Last but not least, they are much closer to the relevant exchange and have shorter latency. Speed is of the essence when scalping, and sitting in some remote apartment on the other side of the world is not exactly an advantage.
Scalping strategies rarely work
Scalping strategies are in practice no different than any other strategy. The only difference is the time frame. You can scalp based on support and resistance, Bollinger bands, volume breakout, news, and for example indicators. It’s like any other algorithmic trading strategy.
The main problem is that the opportunities for profitable scalping are a lot fewer than most traders imagine. The sad truth is that there are very few scalping strategies that work.
If you still want to scalp for small profits, make sure you have scalping strategies that are backtested or quantified. Most, if not all, articles based on scalping strategies are just anecdotal evidence. Anyone can put up a chart and show some successful trades. But you need to define your scalping strategy very accurately so you are able to test it on historical data. But that is easier said than done because backtested scalping strategies are not likely to reflect reality:
Backtests unlikely to reflect scalping profitability
The first drawback of scalping is that any backtest or quantified edge is unlikely to give any realistic probabilities of success. Our experience indicates there is a correlation between quantitative testing and later trading success, but this is unlikely when employing very short-term time frames.
Any backtests relying on short-term data are unlikely to reflect the realities when you start scalping real money. There is too much noise and randomness.
Furthermore, transaction costs most likely eat up most of the theoretical profits.
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