In today’s episode, you’ll discover why you lose money scalping the markets.
So tune in now…
Hey, hey, what’s up my friend? In today’s episode, I want to talk about scalping and the reason why most traders lose money scalping the markets.
1. You got caught by news
As a scalper, you’re entering the markets in and out relatively quickly, capturing five ticks or five pips and that’s it.
You could do it consistently for a few days, capturing five pips to seven pips every day, until you’re finally caught off guard like a news release that you’re unaware of and then you’re pretty much down by 40 or 50 pips, wiping out all the gains that you’ve accumulated.
As a scalper, it’s very important to know when news releases are coming, especially in the markets you’re trading. If you trade forex, you better be sure of the major news that could affect your currency pairs like, NFP, FOMC, etc.
News is important for a scalper because it can go two ways.
Number one is that, if there’s a major news release coming out, and you don’t want to take a gamble, then you’ll want to exit your positions before the news is out. This way, you’re kind of protected and will not get stopped out by the volatility during news release.
Number two, the proficient scalper can take advantage of the news release, and profit from it. (I’m not going into further details on what that entails.)
But as a scalper, you have to be aware of the news release that could affect your markets.
2. You simply don’t have what it takes to be a scalper
Scalping is not for everybody. And this is especially so if you’re the type of person who is wishy-washy, and you can’t make up your mind.
If your wife asks you about your plans for both of your dinner and you can’t make a decision, then scalping is not for you. Because scalping requires you to be decisive.
You’re trading on a really low timeframe. Sometimes scalpers don’t even look at charts, they simply look at the order flow and make decisions out of it. They are making split-second decisions.
If you are always on the side-lines, afraid to be wrong, not sure what to do, then clearly scalping is not for you.
3. You can’t read the price action of the market
As a scalper, it’s very important to read the price action of the market, be it via order flow, or by looking at the charts. As a scalper, you have to understand the intricacies of your market inside out.
Different markets have different behaviours, and their behaviours change over time. And as a scalper, you have to be able to read the behaviours of the markets you’re trading.
Maybe today is a trending day in the markets, where they’re consistently making higher highs and higher lows. Then as a scalper, you have to see that uptrend and be able to exploit that trading opportunity.
Maybe when the next day the market goes into a range, you have to anticipate that and then trade the range for that next day. You can see it’s about not being a one-trick-pony because the market condition could change the next day.
So as a scalper, you have to be able to read the price action of the markets. That’s because you’re pretty much trading only two or three markets, so you don’t have the liberty to watch 50 markets and cherry-pick your setups across the 50 markets.
Trust me, you won’t have the mental capability to be scalping 50 markets at once. At least I don’t see or I don’t know any trader or scalper who does that.
If you’re trading on the daily timeframe, you can trade 50 markets. But as a scalper, you have to master the art of reading the price action of the few markets that you’re trading because things change very quickly.
4. You have the wrong expectations about scalping
Many people want to be a scalper because they think they can make a certain number of pips or a certain amount of profits every day.
Here’s the thing, as a scalper, you also have losing periods. Think of scalping as a trading strategy to trade the markets, where no trading strategy will work all the time.
There’s because the market changes all the time. The only way for trading strategy to work all the time is if market conditions never change.
For example, if the market is forever in an uptrend, so you can always buy the dips or buy the breakouts, then yes you can make money every single day, every week, every month.
But let’s be honest, if you’ve been trading for like three months or six months or a year, then you would know that no market remains the same forever, regardless of the timeframe that you’re looking at.
This means that as a scalper you shouldn’t expect to be making profits every single day because markets change over time. How good you are depends on how quickly you can adapt to the new market conditions.
And that’s why we talked about reading the price action of the markets earlier. At the same time, you want to go in with the expectations that you will have losing periods, especially when market conditions change.
Your strategy could stop working and you would need time to adapt, and you will encounter drawdowns and losing period. So be prepared for that.
5. You don’t pay attention to transaction costs and the spread
Let’s say there are no transaction costs, and you’re trading the EUR/USD with 5 pips stop loss and 5 pips target profit.
But here’s the thing, if you have a spread of let’s say 1 pip, then that’s about 20% of your potential profit. Can you see where I’m coming from? This will cost you a lot in the long run.
Let’s say your spread is 20% of your returns, and let’s say hypothetically every month as a scalper you make 20% a month. But if you’re paying 1 pip spread out of that 5 pip profit target and stop loss, then you’re pretty much flat for the months.
That 20% will go towards paying off that spread. Can you see where I’m coming from? And that gets worse if your spread is even wider. This is like the Nemesis of a scalper.
So you have to monitor your transaction costs and your spreads very closely because if a market has very wide spreads or large transaction costs, the odds are just simply against you.
So look into your transaction costs, if you are someone with a high trading volume you can negotiate with your broker to see how you can reduce your transaction costs.
If you trade forex then maybe you want to look at a spread of 0.2 or 0.3 if you have certain tie-ups with your broker. If you trade stocks, then discuss that with your broker because this is something that is not to be taken lightly.
This is the reason HFT firms bring down their transaction costs to almost zero and could even get rebates back from the exchange. This is important.
Here’s a quick recap…
The reason why you lose money scalping is because:
- You get caught off guard by news
- You don’t have what it takes – if you’re someone who is wishy-washy, or can’t make up your mind, then scalping is not for you
- You can’t read the price action of the markets
- You don’t have the right expectations about trading
- You get killed by commissions and spreads
With that said, I’ve come to the end of today’s episode. I will talk to you soon.