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Yes, Give it to me

The Truth About Scalping Nobody Tells You 

 February 25, 2020

By  Rayner

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In this episode, you’ll discover the truth about scalping that no one tells you (and it’s not what you think).

So tune in now…

Resources

Trading Terms Every Trader Must Know

Intraday Trading Techniques That Work

The Essential Guide to Chart Patterns

The 4 Stages of the Market Every Serious Trader Must Know

Transcripts

Hey, hey, what’s up my friend? 

In today’s episode, I want to talk to you about the truth about scalping that nobody tells you. You’ll often see videos saying:

“Master this simple chart pattern to be a profitable scalper.” 

“Simple scalping strategy anyone can adopt.” 

And here’s the truth – scalping is not what you think. 

What is scalping

Scalping is one of the fastest frequency of trading that a discretionary trader can adopt. You’re operating usually on the 1-Minute timeframe, the 3-Minutes timeframe.

And some scalpers I know trading the futures market don’t even look at the charts. They simply look at the order flow of the market. They look at how the bids and offers move up and down and then place trades based on that information.

Scalping is one of the fastest forms of trading for discretionary traders. 

Truth #1: You can’t scalp the market using only one pattern

Let’s talk about scalping the market using one chart pattern or that one strategy. It is difficult. If you want to be a professional scalper, you can’t just rely on one pattern or one strategy. And the reason for this is because market conditions are always changing. 

The market goes through uptrend, downtrend, range, low volatility environment, high volatility environment, etc. And if you only know one pattern to scalp the markets, then what if market conditions change? Which it does once every few days. 

If you observe a lower timeframe chart pattern and its market condition, the market structure changes once every few days or sometimes even faster. If you only know one pattern, one strategy, it’s pretty darn difficult to be a profitable scalper.

You can’t just rely on one pattern or one strategy to trade the markets. You’ve got to adapt as market conditions change. For example: 

  • If the market is in an uptrend where you look to buy the dips or to buy breakouts
  • If the market goes into a high volatility environment, you can look to fade the highs or fade the lows
  • If the market is in a downtrend, you can look to sell the rallies and stuff like that

You have to adapt accordingly to market conditions. As market conditions change, you can’t just force that one pattern to scalp the market. It doesn’t work that way. 

Truth #2: You’ll specialize only in a few markets

It’s because you don’t have the bandwidth to trade 40, 50 markets. I would say at best you can just trade 1 to 5 markets. That’s the max you can go because you’ll really watch the price action, understand the intricacies of each individual markets that you’re trading.

And trust me, for different markets, they have different behaviours. For example, do you know that the GBP/USD is a trending market? This means that whenever price breaks above the previous day high, it tends to continue in the direction.

Whereas markets like AUD/CAD is a mean-reverting market. Whenever price breaks above the day high, it tends to reverse lower from there. This is statistically proven. You can do a backtest and you’ll see what I mean. 

It’s important to understand the behaviour of the markets that you are trading. 

Truth #3: You’ll have to pay attention to transaction costs

Transaction cost is something you have to pay close attention to for scalping. I know some of you who trade Forex you’d think:

“Rayner, there’s no transaction cost in the Forex market.”

Yes, there is and it’s in the form of a spread. Let me give you an example. Let’s say you trade EUR/USD, you have a 5 pips stop loss, a 5 pip target profit and a 1 pip spread for your trade. In the long run, let’s say your win rate is 55%. 

Let me ask you, will you make money in the long run given the numbers I just shared with you? The answer is no, you won’t make money.

Because if you take into account the spread of 1 pip and do the math, it’s actually a losing strategy because of the spread. You must take into account the spread. 

If you think about this, a 1 pip spread on a 5 pip target profit, that’s about 20% of your profit potential that’s being paid to the spread. Be aware of this as the spread will quickly eat up into your returns. 

And for scalpers, the transaction cost is something that you must pay attention to. And for stocks, there are even more to consider because now you have the spread, you might also have your transaction costs and commissions to pay on each trade. 

Moving on…

Truth #4: You have to be aware of news release

It’s not uncommon in the Forex market for the spread to widen to 20, 30 pips during non-farm payrolls. And if you’re a scalper, you have 5 pips stop loss or 10 pips stop loss, guess what? When the news comes up, you’re stopped out of your trade instantly. Just like that. 

So you have to be aware of a major news release that’s coming up. And whenever there’s news release coming up, my advice is to stay out of the trade and close all positions. 

Don’t go into news release with existing positions because that’s like a huge gamble that could stop you out instantly or even stop you out more than what your stop loss has predetermined. 

Truth #5: Scalping is stressful

If you can’t make money on the higher timeframe there, it’s unlikely you’ll be able to make money scalping the markets. Think about this, scalping is so fast-paced, you have to make decisions on the fly. 

Usually, within seconds, you have to know whether you want to buy, you want to sell, or you want to stay out. It’s not like trading off the Daily timeframe where you have 24 hours a day to if you should buy or sell or should you scale up your trades. Stuff like that. 

As a scalper, if you’re trading off the 1-Minute timeframe, guess what? After one minute, let’s say that the candle has closed. Are you going to enter now? Every second that you hesitate could mean that you’re going to miss the trade.

You have to be quick on your feet, you have to think on the fly on where you should be entering, selling, should you be staying out, should you scale out of your trades, should you add into your trades and stuff like that. 

This is why scalping is a highly stressful endeavour to undertake. 

Hopefully, these 5 points will highlight to you the truth about scalping. It’s probably not what you are expecting, but rather, for you to understand where I’m coming from and to help you better decide if scalping is for you. 

With that said, I’ve come towards the end of this episode and I’ll talk to you soon.

 

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