Time after time I get into conversations with people who are absolutely new to forex trading. I do this in order to profile them, follow their progress and learn more about their needs, deficiencies and therefore develop ways in which I can help them become better traders, lose less money, etc. One of the things that I have always found a little bit curious is that as soon as these people get to know the world of automated trading systems they dive into a search for scalping trading strategies. For some reason, scalping seems to be excessively appealing to new traders. After a lot of analysis I think I have found out the reasons why.
First of all, you should all know that I consider that it is impossible or at least terribly more difficult and less profitable to trade with an automated trading system that scalps than with one that follows trends. The reasons for me to believe this are very well founded and concise.
To start, scalping strategies work on lower time frames and are therefore subject to drastic changes between different market conditions. For example, a given scalping strategy that was profitable in 2007 may not be now and vice versa. Also, scalping profitability is determined by the spreads in a very significant manner such that spread widening can completely wipe out the profits of a scalping system. You also cannot forget that the small nature of the price movements makes scalpers vulnerable to broker feeds, stop hunting, etc. Long story short, making an automated long term profitable strategy that uses scalping is very hard, if not impossible. In fact, I do not know a single scalping automated trading system that has shown at least 2 years of profitable trading, let alone, anyone who lives from trading automated trading scalping systems.
So why do new traders focus on this obviously more difficult and risky trading approach ? After doing an in depth analysis and asking several new traders, it seems pretty obvious, the answer is mainly psychological. People prefer to trade losing strategies with ridiculous risk to reward ratios because the more people take profits the more they feel like "winners" while really profitable systems that take many loses and then big profits make people feel like "losers" just because it is difficult to deal with extended periods of loses.
There is also the fact that scalping strategies take people out of the market fast and trade often. Most new traders do not like the feeling of being in the market because it triggers their greed/fear buttons pretty fast. While a trend following strategy usually has opened positions from hours to months, scalping systems usually close positions within minute, sometimes seconds, of the trades being opened. Trading often is also something new traders like because trading often and making a lot of small profits makes them feel like "winners". Again, the psychological factors kick in, even though it is pretty obvious that trading more often makes traders spend a huge amount of money in spreads , something which is absolutely avoided with trend following systems (like I have written in other posts).
The truth, as I have found it to be, is that automated scalping strategies can give that short term "winning shot" that makes new traders enjoy them so much but they are never (in my experience) long term profitable. New traders stick to them like flies to honey but in the end, those big losing trades will come and the monster will show its face. A paramount part of making novice traders profitable is to make them face their emotions, the results at the beginning will be disastrous but with adequate guidance they will become profitable in either manual or automated trading.
If you would like to learn more about which systems I call "long term profitable" and why I call them like this please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !
First of all, you should all know that I consider that it is impossible or at least terribly more difficult and less profitable to trade with an automated trading system that scalps than with one that follows trends. The reasons for me to believe this are very well founded and concise.
To start, scalping strategies work on lower time frames and are therefore subject to drastic changes between different market conditions. For example, a given scalping strategy that was profitable in 2007 may not be now and vice versa. Also, scalping profitability is determined by the spreads in a very significant manner such that spread widening can completely wipe out the profits of a scalping system. You also cannot forget that the small nature of the price movements makes scalpers vulnerable to broker feeds, stop hunting, etc. Long story short, making an automated long term profitable strategy that uses scalping is very hard, if not impossible. In fact, I do not know a single scalping automated trading system that has shown at least 2 years of profitable trading, let alone, anyone who lives from trading automated trading scalping systems.
So why do new traders focus on this obviously more difficult and risky trading approach ? After doing an in depth analysis and asking several new traders, it seems pretty obvious, the answer is mainly psychological. People prefer to trade losing strategies with ridiculous risk to reward ratios because the more people take profits the more they feel like "winners" while really profitable systems that take many loses and then big profits make people feel like "losers" just because it is difficult to deal with extended periods of loses.
There is also the fact that scalping strategies take people out of the market fast and trade often. Most new traders do not like the feeling of being in the market because it triggers their greed/fear buttons pretty fast. While a trend following strategy usually has opened positions from hours to months, scalping systems usually close positions within minute, sometimes seconds, of the trades being opened. Trading often is also something new traders like because trading often and making a lot of small profits makes them feel like "winners". Again, the psychological factors kick in, even though it is pretty obvious that trading more often makes traders spend a huge amount of money in spreads , something which is absolutely avoided with trend following systems (like I have written in other posts).
The truth, as I have found it to be, is that automated scalping strategies can give that short term "winning shot" that makes new traders enjoy them so much but they are never (in my experience) long term profitable. New traders stick to them like flies to honey but in the end, those big losing trades will come and the monster will show its face. A paramount part of making novice traders profitable is to make them face their emotions, the results at the beginning will be disastrous but with adequate guidance they will become profitable in either manual or automated trading.
If you would like to learn more about which systems I call "long term profitable" and why I call them like this please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !
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