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Scalping - an issue with definition


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Scalping - an issue with definition

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 syswizard 
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A trading associate of mine is creating a system that uses indicators and more importantly price levels which he identifies. The system cannot be backtested due to the subjectivity in assigning the levels. His initial testing has shown many trades that last less than 5 minutes. I told him these must be classified as "scalping trades" and should be discarded from formal performance reports. I said that target price and stop price trump any price levels or indicators that may be used in the trade decision. Am I right ? I guess part of this issue comes down to the definition of scalping.

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syswizard View Post
A trading associate of mine is creating a system that uses indicators and more importantly price levels which he identifies. The system cannot be backtested due to the subjectivity in assigning the levels. His initial testing has shown many trades that last less than 5 minutes. I told him these must be classified as "scalping trades" and should be discarded from formal performance reports. I said that target price and stop price trump any price levels or indicators that may be used in the trade decision. Am I right ? I guess part of this issue comes down to the definition of scalping.

Why must these less than 5 minute trades be discarded from performance report? I don't see what a definition has to do with excluding trades, unless you are saying his tests are somehow invalid.

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 syswizard 
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Yes, I am trying to find a reason to invalidate his forward test results unless he filters trades that are affected more by noise than by any signal, indicator, price level, etc. IMHO a "noisy trade" in ES is one that lasts less than 5 minutes. In other words random price movement is a major factor in the eventual outcome of the trade. To me those trades are not unlike trades entered without any signal or price level with a profit target and stop loss of a few ticks.
Note: I would not discard any trades if his system was programmed and backtestable. However, use of discretion changes the rules for performance evaluation.

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 matthew28 
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If I was your associate and his system looks like it will be profitable from test results then he should forward test it by running it on sim for long enough to get a representative sample of results (as you say it can't be adequately backtested due to elements of subjectivity), ensuring any positive expectancy isn't based on optimistic limit order fills that wouldn't happen live). Then try it live.

Trading is about making money. I don't see how it is really relevant whether you decide to call the trades "scalp trades" or not and whether you think they shouldn't be counted because you personally don't consider that they are being held for enough time.

If he builds a system that has scalp trades he can run that system with other longer term systems as part of a diversified strategy portfolio and ideally smooth, or reduce volatility, in his overall equity growth.

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 syswizard 
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matthew28 View Post
...ensuring any positive expectancy isn't based on optimistic limit order fills that wouldn't happen live. Then try it live.

Yes, that is one fear I have. Since the system will be doing about 20-30 trades per day, the period of forward testing on sim will be about 2 months or 40 days....thus permitting about 800-1200 trades total. That should be enough, right ?

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 josh 
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syswizard View Post
A trading associate of mine is creating a system that uses indicators and more importantly price levels which he identifies. The system cannot be backtested due to the subjectivity in assigning the levels. His initial testing has shown many trades that last less than 5 minutes. I told him these must be classified as "scalping trades" and should be discarded from formal performance reports. I said that target price and stop price trump any price levels or indicators that may be used in the trade decision. Am I right ? I guess part of this issue comes down to the definition of scalping.

Who defined the "5 minute" threshold? Based on what?

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 matthew28 
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syswizard View Post
Yes, that is one fear I have. Since the system will be doing about 20-30 trades per day, the period of forward testing on sim will be about 2 months or 40 days....thus permitting about 800-1200 trades total. That should be enough, right ?

So from your initial post as you say the system can't be back tested, but refer to his "initial testing", I presume he is trading live data on a simulated account. In that case I would use screen recording software such as https://www.flashbackrecorder.com/express/ (the FlashBack Express version is free and works well), have a Depth of Market and a time and sales on screen and record the trading session.

If he has a recording with 20+ of his trades he will easily be able to see whether:

a. The trading simulator is filling the orders instantaneously as if they were first in the queue, or whether it is only filling them more realistically based on how many orders are in the book at that level and how much trades?

b. If he got stopped out was it actually a price sweep where in reality he would have got some slippage but was actually filled immediately in sim?

Ideally he would trade a session on sim, print a copy of all the executed trades for that session then skim through the video and check each fill and tick off all the ones the DOM and T&S show would have worked and remove any trades that look like they wouldn't actually have been filled in real life and see how the two P&L figures compare. Then repeat as necessary. One day's results would be enough to tell him whether it appears to be realistic/on the right track or not.

Obviously I have no idea what markets they are trading, whether using limit orders, market orders, stop market orders but if what I suggested sounds practical I would give it a go and see what the video shows.
Good luck.

edit: Regarding 800-1200 trades or 2 months. As he can't back test it I guess he just forward tests it until he feels he is being consistent and has a clear set of rules about when to enter and exit, and the results are positive. After that I don't see that you gain much for sim trading for a really long time repeating the same thing because the markets change over time anyway so I would then if possible trade a one lot and see how it goes live. Tricky of course if their trading method involves scaling in and out multiple contracts. (and starting with micro contracts if available would fill differently to the more liquid larger contracts, so wouldn't provide transferable knowledge).

Hopefully some of this might be a little relevant or provide some thoughts to consider.

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 syswizard 
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josh View Post
Who defined the "5 minute" threshold? Based on what?

I did. Totally from experience in the ES and NQ markets. I feel that 5 minutes is the minimum time under normal market conditions to get a change of 5 - 10 ticks which is the target range for expected profit or loss of this strategy. Anything less and one is trading noise.

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 syswizard 
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matthew28 View Post
So from your initial post as you say the system can't be back tested, but refer to his "initial testing", I presume he is trading live data on a simulated account.

I can confirm that his set-up with Ninja Trader 8 has been tested with both live trades and sim trades with no difference in the execution of limit or stop orders between live and sim accounts. My set-up is DTN IQFeed with Interactive Brokers accounts and I also see no difference with order execution between live and sim accounts.


matthew28 View Post
Tricky of course if their trading method involves scaling in and out multiple contracts. (and starting with micro contracts if available would fill differently to the more liquid larger contracts, so wouldn't provide transferable knowledge).

Multiple contracts are of course honored, but forward testing will be only with 1 contract. No scaling in or out will be permitted.

matthew28 View Post
Hopefully some of this might be a little relevant or provide some thoughts to consider.

Thanks for the feedback, but the real relevant issue is the time-in-trade issue. I am concerned that the strategy's validity will be compromised if there are too many test trades with very short time-frames. The rationale is that trading results for those trades will be based mainly on chance (i.e. noise) rather than any indicator or price level or signal used in the strategy. I call these very short term trades "noisy trades".....the results come from trading the random movements in the market.

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syswizard View Post
I can confirm that his set-up with Ninja Trader 8 has been tested with both live trades and sim trades with no difference in the execution of limit or stop orders between live and sim accounts. My set-up is DTN IQFeed with Interactive Brokers accounts and I also see no difference with order execution between live and sim accounts.


Multiple contracts are of course honored, but forward testing will be only with 1 contract. No scaling in or out will be permitted.

Thanks for the feedback, but the real relevant issue is the time-in-trade issue. I am concerned that the strategy's validity will be compromised if there are too many test trades with very short time-frames. The rationale is that trading results for those trades will be based mainly on chance (i.e. noise) rather than any indicator or price level or signal used in the strategy. I call these very short term trades "noisy trades".....the results come from trading the random movements in the market.

FWIW, I have some strategies that I designed specifically to take advantage of noisy markets. Some are only in for 1 minute or 2.

Not saying your friend's system is good or bad, but noisy trades are not necessarily bad IMO.

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 josh 
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syswizard View Post
I did. Totally from experience in the ES and NQ markets. I feel that 5 minutes is the minimum time under normal market conditions to get a change of 5 - 10 ticks which is the target range for expected profit or loss of this strategy. Anything less and one is trading noise.

So, you're funding this system, or have some other reason to even care about the label placed on a trade which is less than 5 minutes in duration? Your criteria appears to be purely subjective, which seems to be a problem you have with the system in question.

For some traders, a trade which is closed the same day it's opened qualifies as "trading noise" -- so, call it whatever you like, the question is: why does it matter?

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 syswizard 
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josh View Post
So, you're funding this system, or have some other reason to even care about the label placed on a trade which is less than 5 minutes in duration? Your criteria appears to be purely subjective, which seems to be a problem you have with the system in question.

For some traders, a trade which is closed the same day it's opened qualifies as "trading noise" -- so, call it whatever you like, the question is: why does it matter?

No question I did not do my due diligence to statistically determine that "5" minute time period....which could easily be 3 or 4 minutes.....and of course that period changes with the trading time of day. Morning openings will certainly have a smaller period than the afternoon. Same for the closing 15 minutes.


josh View Post
"trading noise" -- so, call it whatever you like, the question is: why does it matter?

The simple reason it matters is I don't want the trading results to be similar to a system that just trades noise.....i.e. a random buy/sell order is made with an attached bracket order of 4 ticks. I want the strategy's performance to reflect the implementation of the indicators, price levels, and other signals that comprise it. BTW: I agree that an entire day's price action could be classified as noise to a hedge fund manager whose average time-in-trade is measured in months or years.
In this case, for this strategy, the average time-in-trade is likely to be 5 minutes or more. Thus, noise in that context is something less than 5 minutes of price movement.

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 syswizard 
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FWIW, I have some strategies that I designed specifically to take advantage of noisy markets. Some are only in for 1 minute or 2.
Not saying your friend's system is good or bad, but noisy trades are not necessarily bad IMO.

Agreed....If you are trading for noise. However, if you have a strategy that is not trading for noise yet has test results that indicate the PnL is coming from noise, then I have a problem with that strategy. For me, trading noise is putting in a limit or market order with a tiny bracket for the target and stop (2-4 ticks). I am sure there are high frequency firms doing something similar to that.

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 JonnyBoy 
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syswizard View Post
Agreed....If you are trading for noise. However, if you have a strategy that is not trading for noise yet has test results that indicate the PnL is coming from noise, then I have a problem with that strategy. For me, trading noise is putting in a limit or market order with a tiny bracket for the target and stop (2-4 ticks). I am sure there are high frequency firms doing something similar to that.

I am failing to understand this thread at all. I have read it a couple of times and either I am failing to understand the point being made, or I am too dumb to realise what it is.

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 michaelleemoore 
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If trades less than 5 mins aren't really trades, I guess I better find another line of work . And NQ can certainly move a heckuva lot more than 5-10 ticks in 5 minutes. Just sayin'

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 syswizard 
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JonnyBoy View Post
I am failing to understand this thread at all. I have read it a couple of times and either I am failing to understand the point being made, or I am too dumb to realise what it is.

Sorry about that...the title is probably misleading. The jist of the thread is to point out a problem with short-term trading systems that have a profit target of more than 4 ticks. I contend that if the forward tested results are showing a lot of trades in the 1-4 tick range, that system is likely trading on noise and not on a signal. It is essentially scalping. One might infer that a system like this may not be stable over time.

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 syswizard 
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michaelleemoore View Post
If trades less than 5 mins aren't really trades, I guess I better find another line of work . And NQ can certainly move a heckuva lot more than 5-10 ticks in 5 minutes. Just sayin'

Welcome to the thread Montana...my daughters are from Livingston and Bozeman.
Yeah, the 5 minutes was arbitrary...I probably should have specified a tick range like 1 to 4 ticks. They are still trades but my contention is that they are scalping trades not trades based on slgnals...that's all. Thus a system designed to have a profit target of more that 4 ticks, yet has many trades < 4 ticks may not show stable results over time.

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 JonnyBoy 
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syswizard View Post
Sorry about that...the title is probably misleading. The jist of the thread is to point out a problem with short-term trading systems that have a profit target of more than 4 ticks. I contend that if the forward tested results are showing a lot of trades in the 1-4 tick range, that system is likely trading on noise and not on a signal. It is essentially scalping. One might infer that a system like this may not be stable over time.

It depends what the framework of the system was designed to do. Some systems are designed to trade noise and it doesn't mean they are not profitable, even if it is scalping. To put another way, a system that trades noise is still entering on signals that is was designed to do within that noise, even if its target is 1 to 4 ticks. So it doesn't make it any less of a system and it doesn't make its signals invalid.

If the system was designed as a swing trading system and it was generating a lots of trades in the 1-4 tick range, I would say that the system is flawed or not really a swing trading system because such a system should be designed such that the noise is irrelevant to it.

I short term day trade and I can be in a trade for seconds, on a micro spike for example or literally hours because the market isn't moving as quickly as I had hoped after I entered a position. My trade can be stuck in this so called noise and I can't do anything about it, but it doesn't mean my system is trading noise, it just happened to enter during that time.

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 syswizard 
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JonnyBoy View Post
If the system was designed as a swing trading system and it was generating a lots of trades in the 1-4 tick range, I would say that the system is flawed or not really a swing trading system because such a system should be designed such that the noise is irrelevant to it.

Thanks Jonny Boy....finally someone "gets it". To me, "a lot of trades" would be 50% or more of all trades.

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 LastDino 
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This might sound silly of me but this is the only thing popping in my mind atm

It "seems to me" that you either need to bump up timeframes of trading in that system or remove all the trade entries if trade target is withing so and so ticks from entry. In your case it seems to be less than 4-5 (?)

Nothing too complicated, its just that you seem to want to be trading on higher timeframe with higher tgts than what usually intraday traders do, so make the adjustments accordingly?

On flip side, if that system is popping up "lot of trades" in that above non wanted criteria, it seems to me that it is more of an intraday system than swing anyhow. Maybe time to get back to drawing board?

fyi, I trade 1 min TF and usually all my trades are in category that you define as noise, in fact I like it very much if I can pin down some sort of range and then possible breakout/down point, irrespective of the tgts.

Just my 2c, sorry if this is not helpful.

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 syswizard 
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LastDino View Post
It "seems to me" that you either need to bump up timeframes of trading in that system or remove all the trade entries if trade target is withing so and so ticks from entry. In your case it seems to be less than 4-5 (?)

Can't do that...the author has set the timeframe to 1000 ticks....with the intention of intraday swing trading.


LastDino View Post
On flip side, if that system is popping up "lot of trades" in that above non wanted criteria, it seems to me that it is more of an intraday system than swing anyhow. Maybe time to get back to drawing board?

It's is intraday...no overnight trades. One huge problem with his "system": too much discretion is allowed. He changes the targets and stops constantly. I have a problem with that.


LastDino View Post
fyi, I trade 1 min TF and usually all my trades are in category that you define as noise, in fact I like it very much if I can pin down some sort of range and then possible breakout/down point, irrespective of the tgts.

That's fine when you are trading the noise specifically. However, if you have a system that has intentions of longer term trades (5-60 minutes), yet half the trades are < 5 minutes with only a few ticks of profit or loss.....that's a problem IMHO.

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 omegaknight 
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syswizard View Post

That's fine when you are trading the noise specifically. However, if you have a system that has intentions of longer term trades (5-60 minutes), yet half the trades are < 5 minutes with only a few ticks of profit or loss.....that's a problem IMHO.

This point you made hit something in me that I have been trying to figure in my own trading for awhile. It seems to me, that if you are looking at Time in Trade, and noticing that a lot of the trades are fizzling out at loss, breakeven, or small profit within a very short time frame that the system can be fine tuned a bit more. Some things that come to mind: Look at it as you should be glad that the system figures out for itself that the signal was wrong very quickly and maybe you should reverse position. Maybe it need to have a pyramiding function added to it when say, the trade is open for longer than 10 minutes, to increase overall profitability, because if a trade is open for that long, it's going in the right direction.

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 syswizard 
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omegaknight View Post
Maybe it needs to have a pyramiding function added to it when say, the trade is open for longer than 10 minutes, to increase overall profitability, because if a trade is open for that long, it's going in the right direction.

I'm not a big fan of scaling in or out, but this sounds like a pretty good idea.
Thanks for that.

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