The "Scalp" Strategy

[jeremyjohnolson 19]

I am thinking of adding a new strategy to my play book.  I tried it in sim today and it worked very well.  I will continue testing it out in sim for several sample sets of 20 each before I actually try it live to be sure it is working (or prove it doesn't).  Please leave any and all comments, shoot holes in it, or let me know if you think it's a good idea, or could use some tweaking, etc...

I have noticed that nearly all trades I take from my play book will be in the green at least at some point, even if only for a small moment, even the ones that never fully hit even my first profit target and eventually end up stopping me out completely.  So the idea I have is to take the same trade I would normally take from my play book, like the 1 min ORB or 5 min ORB for example, but then to take a much larger position size then would otherwise be justified based on good risk management and a normal technical stop loss level and then only hold the trade for a very small movement in my favor instead of holding out for the full move.

The idea is that a normal trade setup from my play book which has at least a 2:1 risk to reward (RR) might only have a 50-60% likelihood of success, because I am waiting for a relatively larger move.  Whereas, if I take a quick scalp, in the same direction of the trade from my play book, but only for a very small initial part of the move instead of holding out for the full 2:1 RR move, then I can take a much large share size and be able to justify a much less favorable R:R because I will be able to get a much higher win rate, like around 85-90% or better.  For example, I can let the trade go against me by $100 before it turns back around, and I take a quick $80-$90 profit when it pops up (or drops down if short) even if only for just a short little moment.  Even though this R:R is terrible, the win rate should be high enough to still make it an overall winning strategy.  Potentially I can make the same amount, or better, in a shorter time frame on a relatively small move due to the larger position being taken coupled with the higher win rate.

So to sum it up, I am calling this strategy the “Scalp” (I know, not very original) and these are the basics of it:

Take a big position for a small (but highly probable, 85-90% win rate) move.  Be less concerned about risk to reward (RR) and more with probability of success (win rate).

Must have reason for believing stock will move in a certain direction.  Examples of reasons can be:
- Based on a set up in my trade book
- Stock called out in the trading room
- Stock is ranging (buy long at bottom of range or short at top of range)
- Stock is trending (buy long at bottom of trending range or sell short at top of trending range)
- There is a large bid or ask (if large bid, sell short above the large bid.  If large ask, buy long below the large ask)

Edited December 28, 2020 by jeremyjohnolson

[Angela Kuzeva 23]

Hi Jeremy, in my opinion your entry should be very precise and I found if you enter on the wicks this strategy is lucrative but also this style is dangerous. Perfecting price action, local structure and L2 are the most important for the success of this strategy.  I mean the better the entry the better the outcome. You must be able to stomach the stock to go against you for a short time and a larger drown-down as you are entering with bigger position size. Basically you are looking for a quick move with conviction, if not happening you bail. Also look for stocks with bigger ATR and they have to be in play and move quickly. Position sizing is something I found super critical and have to be carefully considered based on your account size and buying power. If you are adding on these plays, your risk increases and you can easily blow your account if you don't calculate in advance the maximum shares you can take.  Certainly there are money in these scalps but I am still digging to find out what works for me.

The range plays work and I play them on SPY as SPY is ranging often. 

Edited December 29, 2020 by Angela Kuzeva

[JS 10]

Hi Jeremy

I think certain risk reward ratio for a strategy only makes sense when taking win rate into consideration. I think your strategy works at a higher win rate. 

The video below explains it well I think.

however the difference between a higher R/R strategy and a lower one would be how capital is utilized. You might need a much bigger BP when playing lower R/R strategy to get the same profit. Commission percentage would be higher as well. So I think as long as that capital is not an issue, the strategy should work out well. 

Edited January 1, 2021 by Jiheng Sang

[Adam Lewis 64]

A key to this will also be keeping stops really tight. You need almost instant resolution to remain in the trade, as is the case with scalps. Once a trade starts tickling around break even it becomes a coin flip and it's really not worth waiting around to see what happens. Holding a large size, the second you see your p/l dip into the red you'll need to cut the trade to protect against a sudden flush.

However, I do agree with you on the principle of banking profits! I'm just starting out still, trading small size (so like 50 share positions, aiming at $15 profit per trade). I've started to bank profits earlier, having seen so many trades push into the green only to fall back.

[JS 10]

5 hours ago, peterB said:

this is, i believe wrong thinking as you are trying to play the 50/50 chance of the price action oscillation of movement either up or down. that is not how you shall trade and i believe you cannot do profit on that too, otherwise all the computers would trade this way. You need to look for a real pattern with real probability of win.

Hi Peter,

I would agree on this point if the selection of his setups is random. However one key difference for Jeremy is that the setup has to be in his playbook. For instance, instead of waiting for 2R before taking pa partial, he takes early partials to lock in profit. Probably not the best trade management but entry and stop loss qualification should remain the same. 

For my self, my performance has been consistent for the last 2 months but I always feel that I am scalping. That is why I want to work on my trade management. I am not good at statistics and have no reputable sources to back up my claim. However below is my cumulated R for the last 2 months. Average winning trade R is only 0.55 but my win rate is over 70% so I am ahead overall. These are around 240 trades for November and December. Would this work in the long run? I am not sure and that is why I want to keep working on all aspects of my trading. In addition, after reviewing my trades, there around 30% of all them are considered bad decisions ( positive results or not). 
 

I probably need to do some probability analysis such as regression analysis to see if anything is random but I am not there yet. 

Edited January 2, 2021 by Jiheng Sang

[JS 10]

21 minutes ago, peterB said:

your stats say it all. your strategy is not able to generate a 1R profit per trade. that means that you risk 1R and in average get 0.55R which is wrong.there will be market conditions when it will slope down. If you do not understand it here is an example/analogy.

you go to a bar to buy a beer. you pay for 1 beer and always get only 0.55 of beer instead and you walk away from the bar every day happy that you are not thirsty 70% of the time.

Your statistical success is only a deviation you can scratch as to generate 20R with 240 attempts is just peanuts- 0.08R per trade making your broker richer but not you.

glad to hear your opinion. So what is the an acceptable overall R/ trade to make it statistical significant? is gain to pain ratio something we can use to measure?

It would also be great for consistent traders to share their average R and standard deviation of it.

Edited January 2, 2021 by Jiheng Sang

[JS 10]

I was not trying to brag about my stats as I said that I am a new trader and have a lot to learn in all aspects of trading. 

However, I am not quite certain if it is irrational to risk $1 to get less than $1, providing probability of winning is in my favour. For instance, casino only needs a 1-2 % edge to be overall profitable. I could be wrong so please keep the discussion going. 

[JS 10]

2 minutes ago, peterB said:

whatever works for you. you are on the way of defining yourself as a trader so if that will prove to work for you and satisfy you, there is nothing wrong.

i am presenting only my opinions and doing 240 trades for 20R profits does not seem to me right and i think you should have some realistic expectations of having a 2R daily profits which normally you need only a 1 good trade so the same 20R you get in 2 weeks with 10 trades and save a lot on commissions and emotions

Thanks.

I am in no way satisfy with what I got now. Like I said, I consider more than 30% of the trades in "bad" category, regardless the results.

my current daily goal is 1-1.5 R and I am not even there yet. The last 2 months has been more stable after I made some adjusts on my trading. However, is the improvement due to my adjustments or market condition? I do not know. Guess I will just need to keep plowing through and time will tell. 

[JS 10]

8 minutes ago, peterB said:

yes that is the part of the problem. your strategy works for bad trades same as good trades just from its nature - the price action always moves up and down and eventually and also inevitably you will end up looking for the trades that just do more profits so you can spare a lot of time and money by tossing this strategy and use something that really works. honestly being a begginer i was also thinking that i will develop something new and great but the probability of that is just very near 0. the market is here for ages and everything is already invented. You cannot buy a scalpel and start doing new methods in brain surgery. You need to do what everybody (successful) does then build your personality around it. Not to try to find the golden holy grail. It just does not exist.

I did not invent anything. All my trades are based on existing strategies from BBT. As a beginner I do not believe you can create your own strategy. But because of the bad trade management, I feel that I am scalping all the time. Not saying that I am scalping on purpose. 

What I do want to know is that does Scalping really work? I hear and read that people do it and it is a specific type of trading style. 

 

Edited January 2, 2021 by Jiheng Sang

[JS 10]

honestly, I am new and I am open to anything but I need to know that I know what I am doing. I still want to keep working on existing BBT strategies. 

If my stats say I can scalp with profit and my BP is not an issue, I am willing to try it. However, it does have a lot of inefficiency by its own. 

 

Edited January 2, 2021 by Jiheng Sang

[jeremyjohnolson 19]

Thank you everyone for your input, it’s been very helpful. I just want to make a couple comments for now.  First, this idea I had of scalping is not my only strategy that I have been working on, it’s just one new one I am trying out but it is in conjunction with my other strategies in my play book.  In other words, I would not randomly or arbitrarily just jump into any old stock that is ranging or trending, but I would do it based on other indicators which make me believe it will go one direction or another. I guess the big difference is instead of taking a smaller position and waiting for a big move, I take a big position and wait for a small move to increase win rate.  My plan is to nest this scalp strategy with my other more conventional strategies so that I take a big position for a short pop in my direction then leave a more normal sized position for the larger move. I have only tried it a couple days so far and it has worked out quite nicely (in sim).  I took about 30 trades and had an 82% win rate, but only over two days time, so definitely need more time to see if it’s really working. Also, I got a bit confused on the whole bar example because I do think that overall you come out ahead if you risk say $1 to make $0.80 if your win rate is 80% (just using random numbers to illustrate a point) because you will win more than you lose. So at the end of the day when you add up 80 winners of $0.80 each you get $64.00 less 20 losers of $1.00 each, or $20 in total, you net $44 profit.  So yes, mathematically you can win by having a RR less than 1 as long as the win rate is high enough to make up the difference.  Is it the way I want to trade all the time, probably not.  Of course I would rather get large moves and make bank with fewer trades. That’s why this scalp strategy would just be one more arrow in my quiver and not my only one. Anyway, just wanted to chime in with those couple thoughts for now.

[jeremyjohnolson 19]

3 hours ago, peterB said:

if you have a strategy which gives you 2R on average, is that strategy better o worse than the strategy you described?

It could be better or it could be worse, you did not give enough information for me to answer your question because it also depends on what the win rate is.  The “R” is only one variable in the equation. I mean if you take it to the extreme and say for arguments sake that the win rate is only 10% for the 2R trade, then that would be an overall losing strategy regardless of the fact that you have 2R on winning to losing trades because you only win on average 10 out of 100 trades.  Maybe you win $2 and lose $1, but if you only win 10 times and lose 90 out of 100 trades you have a net loss of $70 on average over time (scale up and add a few zeros onto the end of those numbers if you wish but the math is still the same).  So win rate and risk to reward rate both must be taken into account when trying to determine if a strategy is a winning or losing strategy.   Also, I was just putting numbers to my example to illustrate a point, I am not saying you would have to take 80 trades before it becomes profitable.  It’s already profitable, on average, after your first trade (on average).  Lastly, I hear what you are saying about that there might be better set ups, better strategies, but if the quick scalp works 80% of the time, why not do it?  What is stopping me from doing both the “superior” 2R (or better) trade strategies and the quick scalp at the same time by taking a large position at first then taking it off to recognize quick profits and holding a relatively smaller position for the bigger move, sizing my position based on good risk management based on where a good technical stop loss level should be placed? 

[Martin D 27]

Scalping exists as a type of trading rather than a strategy i.e. Andrew and therefore scalping in itself is viable.

I would be defined as more of a scalper and while I don't focus on R per se, by nature it is good trade management to focus on a good entry so that risk is low and reward is high. I didn't see an R figure in your original post but if you're talking about 0.5 R you're talking about 66.6% success before commissions and you then add in the increased commissions for the increased size you'll probably be talking upwards of 70% success rate in order to break even (I assume you've calculated what this would be based on your own circumstances),  if you ask me that's asking for trouble and if you nail your strategies then it shouldn't be needed as good traders are generally in the 70-80% accuracy mark anyway so a risky 80-90% doesn't make sense. 

However, if you run a significant enough sample and it's clear cut then it doesn't really matter what anyone else thinks if it works for you. If I looked at how I would do that, I would be looking for upwards of 1000 trades with a noticeable margin of error before I would take notice of it being anything other than a lucky streak and go live. While I do see what you're talking about in my own trading sometimes I'm not sure I see it 90% of the time that I would want to make those kind of trades viable. I would rather work on my trading than testing that kind of volume unless you have the skill set to program a bot.

Just to run an example through of my thinking behind the above, what kind of R would you be looking at? If you were looking for 0.5R, what if it goes 0.3R and then starts to pull back, do you take the 0.3R and run due to your increased size/risk or hold out like a normal trade? Once you get this close then it becomes really tight in the R/success % and each 0.1 drop in R has a larger % impact to required success. In a 0.3R example you'd be somewhere around or even above the 80% mark to break even with commissions. If we work that through on a $0.2 risk because you've got a good entry, your 0.5R is $0.1 and your 0.3R is $0.06, that kind of difference is very difficult to control in my view. Therefore with a high dependency on a very high success rate and a high impact of R on the required success % then I would want a very high sample size to test that.

If you increase that to say 1R then there are successful traders out there who don't mind taking a trade like that if they have a high degree of confidence, that's normally recommended for experienced traders though.

[JS 10]

10 hours ago, jeremyjohnolson said:

It could be better or it could be worse, you did not give enough information for me to answer your question because it also depends on what the win rate is.  The “R” is only one variable in the equation. I mean if you take it to the extreme and say for arguments sake that the win rate is only 10% for the 2R trade, then that would be an overall losing strategy regardless of the fact that you have 2R on winning to losing trades because you only win on average 10 out of 100 trades.  Maybe you win $2 and lose $1, but if you only win 10 times and lose 90 out of 100 trades you have a net loss of $70 on average over time (scale up and add a few zeros onto the end of those numbers if you wish but the math is still the same).  So win rate and risk to reward rate both must be taken into account when trying to determine if a strategy is a winning or losing strategy.   Also, I was just putting numbers to my example to illustrate a point, I am not saying you would have to take 80 trades before it becomes profitable.  It’s already profitable, on average, after your first trade (on average).  Lastly, I hear what you are saying about that there might be better set ups, better strategies, but if the quick scalp works 80% of the time, why not do it?  What is stopping me from doing both the “superior” 2R (or better) trade strategies and the quick scalp at the same time by taking a large position at first then taking it off to recognize quick profits and holding a relatively smaller position for the bigger move, sizing my position based on good risk management based on where a good technical stop loss level should be placed? 

I think a perfect example would be one of our moderator John's HOD strategy. Below is a screen shot from his 2nd presentation. His is averaging 0.29R/trader at 89% of win rate. he can still accumulate more than 20R/ month. I would be more than happy to consistently get 20R per month even I pay more commission. The key is here is consistency. I would say if more green trades helps you psychology, it is then the right strategy for you.

edit: I am not trying to say that John is scalping, just to show that it might be okay to have less than 1:1 R/R trades.

Edited January 4, 2021 by Jiheng Sang

[jeremyjohnolson 19]

1 hour ago, Martin D said:

Scalping exists as a type of trading rather than a strategy i.e. Andrew and therefore scalping in itself is viable.

I agree with your statement.  However, the reason I am including it as a strategy is because there is more to it than just simply a scalp.  Maybe I should call it something else to be more descriptive, like "scalp in direction of established strategy" or maybe to be shorter just "strategy scalp".  I don't know.  Maybe it's a crazy idea lol.  I could be going down a wrong road.  That's why I posted here, so honestly, I welcome criticism of my idea.  I want to know if it's a bad idea or not.

I will take all constructive criticism seriously and keep an open mind, but I will also try it out for myself (in sim to begin with).  I believe my best shot of succeeding is to listen to others, but also to test and prove things out for myself at the same time.  What works for one person will not necessarily work for another since we each think and act differently.  So we have to listen to others with experience, but I believe we also have to take what they say with a little bit of a grain of salt because they are not you, they do not know you personally and how you think and how you trade.

Also, I read in a few posts back something to the effect that everything that could be thought of regarding trading has already been thought of and not to try to come up with anything new because it won't work.  While on one hand I get what I think he is trying to say and I do think there is an element of truth to it, on the other hand I also see this as very "in the box" type thinking.  So the element of truth to that sentiment, in my opinion, is that most "out of the box" thinking types of ideas, probably 99% of them, do in deed fail because there is a reason that "in the box" types of ideas are in the box to begin with, because they are tried and true and proven to work.  However, that is no reason to simply as a rule discard all outside the box ideas since to do so would be an end to all new innovation.  There is no possible way I would ever believe that ALL possible trading ideas have already been thought of and we might as well stop trying to explore new ideas.  So yes, I will continue to explore new ideas, and yes, 99% of them will probably fail and prove to be bad ideas, but that is the only way to find that 1% of new ideas that nobody ever thought of before.  Or just a new way of looking at an old idea and a new way of implementing it in a way nobody ever thought of before (or at least that I know of).

Edited January 4, 2021 by jeremyjohnolson