Scalping by Malcolm Morley

Following below is something I wrote in a previous post about the extreme adverse risk/reward scenario you get when you scalp with a market maker like OANDA, as opposed to dealing with a broker, and attempt to earn the spread yourself. Believe me, I wish the following wasn’t true, but I don’t see how it can be. Of course, nothing I’ve said below will stop you giving it a serious go, but you should be aware of the math’s! Following below is something I wrote in a previous post about the extreme adverse risk/reward scenario you get when you scalp with a market maker like OANDA, as opposed to dealing with a broker, and attempt to earn the spread yourself. Believe me, I wish the following wasn’t true, but I don’t see how it can be. Of course, nothing I’ve said below will stop you giving it a serious go, but you should be aware of the math’s!

Anyway repeating myself….

‘…..it seems to me that scalping for pips when dealing with a market maker is doomed to failure. Let me try to explain why.

Say we are trading a 2 pip market like Euros, and let’s just say we want to make 5 pips, and are willing to risk 5 pips.

Ok. We buy at 60, t/p 65, s/l 55

Now here’s the problem: To buy at 60 the market must be 58-60. To reach our profit target it must move to 65-67 (a 7 pip move). To reach our s/l the market must move to 55-57 (a 3 pip move).

Just look at that 7:3 risk/reward ratio. The market has to move over twice the distance for us to profit the same amount as we have risked! Those are terrible odds – we would stand more chance at roulette!

By comparison, if we are looking for 100 pip moves, say Buy at .9860, t/p .9960, s/l .9760, the market has to move +102 for us to win, and -98 for us to loss. It’s still pretty horrible, but it’s a hell of a lot better.’

Good trading,

~chaffcombe

Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=000602

I have lived and breathed trading ever since trading fx professionally in London, Toronto and Philadelphia in the early 70's (yes I know that shows my age!). While my professional career subsequently took me from the trading desk to designing treasury systems for some of the world's leading financial institutions, my desire was to always trade for myself. As a consequence, following 5 years with a major international stock-broker (the last 3 as... More