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