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Easy Losses, Hard Profits


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Easy Losses, Hard Profits

  #11 (permalink)
 artemiso 
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Big Mike View Post
Market may seem like 50/50, up or down, but in reality:

- Most traders end up "scalping", primarily due to a fear of loss
- Scalping has enormous expenses associated with it
- If you "scalp" for 8 ticks and your stop is also 8 ticks, you pay a 1 tick bid/ask spread to enter the position, and you pay roughly 1/2 a tick in commissions
- This means on trades where you hit your target, you are keeping only 80% (expenses are 20%)
- This means on a trade where you take a stop, you are losing 100% plus expenses of 20% or 120% total

Winners = +80%
Losers = -120%

I realize scalpers will disagree with me and they have their reasons. To each his own.

There is a good discussion here:



I am not a scalper. By increasing your risk and reward size, you are increasing your efficiency in the market (each trade is less expensive). Scalpers will argue that you are also giving up more trade opportunities, which have a cost associated with them (missed opportunity cost).

Mike

I disagree. Your reasoning assumes that the only difference between the two trader profiles is the magnitude of the profit target and stop loss. As a 'scalper' myself, I consider a huge difference is that I pay a lot less in commissions. To put the numbers in perspective: Ignoring exchange and regulatory fees, I get to trade 41100 more round trips per year than a 'swing trader' who only trades 3000 round trips per year, for free. (See the crossover in the diagram below.)

If you compare two traders, one who is allowed to trade 41100 contracts for free, and one who only trades 3000 contracts, it's clear that the former has a huge advantage.



What I'm trying to get at is that:

1. The correct conclusion to draw from any argument pertaining to commissions in a 'swing vs scalp' argument should be that traders should demand lower fees from their brokers.

2. Scalping is superior to 'swing trading'.

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  #12 (permalink)
 
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 Big Mike 
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@artemiso, you are not an average example representative of the thread starter.

No need to go around on this again, I think it has been discussed enough in the thread I linked to.

Mike

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  #13 (permalink)
 
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 Big Mike 
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artemiso View Post
I disagree. Your reasoning assumes that the only difference between the two trader profiles is the magnitude of the profit target and stop loss. As a 'scalper' myself, I consider a huge difference is that I pay a lot less in commissions. To put the numbers in perspective: Ignoring exchange and regulatory fees, I get to trade 41100 more round trips per year than a 'swing trader' who only trades 3000 round trips per year, for free. (See the crossover in the diagram below.)

If you compare two traders, one who is allowed to trade 41100 contracts for free, and one who only trades 3000 contracts, it's clear that the former has a huge advantage.



What I'm trying to get at is that:

1. The correct conclusion to draw from any argument pertaining to commissions in a 'swing vs scalp' argument should be that traders should demand lower fees from their brokers.

2. Scalping is superior to 'swing trading'.

A more reasonable example might be:

Scenario 1:
Scalper that trades 5 times a day for 8 ticks, 1 contract per

Scenario 2:
Day trader that trades 1 time a day for 40 ticks, 5 contracts per

It is a matter of efficiency vs opportunity, but naturally also a matter of noise.

Mike

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  #14 (permalink)
 artemiso 
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Big Mike View Post
@artemiso, you are not an average example representative of the thread starter.

No need to go around on this again, I think it has been discussed enough in the thread I linked to.

Mike

Well, I didn't mention the point above in the thread that you linked.

[Edit: I overstepped a line by talking about strategy development here.]

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  #15 (permalink)
 
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 mokodo 
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TraderTed View Post
If we turn this concept around, we should be totally rational and analytic in placing stops and keeping them, but we should be much more irrational in not taking profits too early. This should result quite some time in letting winners turn into loosers, but accompanied with huge winners from time to time. Winners that big, that there are significant profits over time.

I read about this sort of approach referred to as a barbell strategy (Taleb). Allocate the majority of your resources to safe strategies and a minority to more risky ones. You can repeat the the 80:20 rule within each subsequent '20' part, always finding an increasingly riskier way to use the capital. The key is the '20' parts need to have (potentially) increasingly asymmetrical returns. I had this in my trading plan once, designed to kick in once I had reached a certain profit per week/month, but never reached that level to try it out!

I get the idea that you would have a chance of the very rare but huge winner. An opportunity that you would not otherwise be exposed to. The sort of trade where you get a week long swing trade with an initial risk of just a few ticks. But who on earth would ever have the discipline not to cash it in early! Just going for way OTM options is the same way to get that kind of exposure.

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  #16 (permalink)
 
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 Massive l 
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The problem with your 3 point target and your 2 point stop is you are minimizing losses but you are also minimizing winners.
You want to minimize losers and maximize winners. In order to maximize winners, you'll need to implement different trade/risk management strategies.

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