I’d never tolerated intraday scalping. Even back in 2007-2008, when it could have been a good idea because the market was more volatile, I generally avoided it. I thought it was a waste of mental energy. I’m not saying you can’t make money; I’m just saying there are easier ways.
Over the years, most markets have become less volatile, so it’s even harder to the scalp. The less volatile the market, the less profitable scalping will be.
In the early days of online trading, currencies, indices, and equities moved much more wildly. Today, we can find volatility in the cryptocurrency market or small caps. The EurUsd doesn’t move much, and even the US stock indices have very little volatility on most stock trading days.
Taking leverage out of the equation, scalping only makes sense in a few markets: cryptocurrency, US small caps, and some commodities. Even though it makes sense, I still think it’s a waste of energy.
It’s hard to make money from small movements. By entering and exiting the market, we generate many commissions, which translates into high costs; it’s clear that making a profit is almost impossible.
A few traders may still make money from this strategy, but the majority will fail in the long run. Most people who try to invest in stocks usually go for short-term trading. This is why so many new trading accounts die out.
Let’s look at some reasons why I think intraday scalping is a bad idea.
Commissions killing you while scalping
Trading generates commissions for brokers, banks, and other intermediaries. It is the commission on executions that makes these individuals so much money. Brokers make more money as more trades are opened during the day.
If I were a broker and decided how to spend my advertising budget, I’d definitely advertise intraday scalping. I’d recommend that my clients trade on a 5-minute timeframe, not a monthly one.
Go to any CFD broker’s website and see if they offer a strategy on weekly or monthly charts. You’ll find mostly intraday strategies.
Brokers claim intraday scalping is safer because it avoids you going overnight, but in reality, it’s safer not to use leverage and send you overnight. Brokers use the wrong mental biases that hide behind the use of stoploss.
The tight stoploss advertised as a safe approach to trading is just one way the broker makes more money. As we’ll see later, most movements are random, and a stoploss doesn’t make sense. Use less leverage.
Have you ever wondered why CFD brokers give you so much leverage? Because their ROI is infinite if you open and close orders and generate commissions.
The fact that your broker is making money should make you realize that you’re losing. Most scalpers don’t seem to understand this concept.
Any business has costs and revenues. Earnings are what you make after you subtract costs from revenues. Everyone knows that as costs increase, earnings decrease, but it seems like that rule doesn’t exist in trading.
Your mind sucks when you scalp
Intraday scalping activates specific mechanisms in the human brain that have to do with compulsions, such as sugary drinks or gambling. Brokers want you to make many trades, and the more you play this game, the more you become addicted, like gambling.
These activities stimulate the production of dopamine and serotonin. Not everyone who trades becomes a pathological gambler. It’s like alcoholism; only some people get it.
But even when it’s not pathological, scalping is a pretty exciting activity and has little to do with investing.
The problem with compulsive trading is that the trader believes he’s just investing when in reality, he’s gambling. If a trader played slot machines or roulette and lost money, he’d feel guilty; while scalping believes he’s investing, he doesn’t think he’s doing a wrong thing.
If your wife saw you playing slots all day, she would beat you up, but you’re investing, so you’re a responsible person.
The colors, the charts, the sounds, what do they remind you of? It’s a giant online casino where people predisposed to gambling add their money to the broker and the market.
The candlestick chart makes it really easy to see patterns that aren’t really there. Most price action strategies, once tested with automated systems, prove to be ineffective.
On top of that, we have to add other feelings, like impatience and frustration. Spending too much time in front of a computer screen will lead to opening more trades than necessary. A couple of bad trades will lead you to open others attempting to recover losses. The broker is rubbing his hands, but you’re losing money.
A short history of scalping
The game is started by launching MetaTrader and the various indicators, but the MT4 platform is now outdated.
At first, many scalpers came from the world of online poker, and the transition to forex trading was pretty easy. Online poker on many tables is similar to extreme scalping; he easily supported scalping because the poker grinder was trained. But they’re very different. In the end, the two businesses had a very similar story, although online poker didn’t last nearly as long.
In the beginning, people mainly did scalping with MetaTrader in the forex market. When the market was volatile and easy to trade, it was profitable for a short time. The volatility subsided quickly. As you might know, volatility is influenced by many factors.
Stocks are now traded through CFDs, so they move a lot more than the currency market. Even today, you can find stocks with a lot of volatility where you can scalp.
Commodities like oil and gold have also attracted interest because they’re so volatile. Commissions on commodities are usually high, and scalping is even more difficult. I won’t go into the contango problem, but the commodity swap with CFDs is something crazy.
Now lots of people are starting to scalp even cryptocurrencies. I don’t think there’s anything more wrong than trading cryptocurrencies short because the movements are even more unpredictable.
On top of that, cryptocurrencies are a few ways to make money through long-term trend following strategies, so it doesn’t make sense to trade them in the short term. You need to have the right mindset to invest in cryptocurrencies, or you could throw money away by investing at the wrong time.
Price movements are random in the short term
The price moves for supply and demand reasons. You can’t predict what price will do in the short term. Huge amounts of money can be invested in a stock for various reasons, and it can move the price in the short term quite randomly.
Do you think you can predict price movements by analyzing a 5-minute chart? Maybe you can get an advantage by using volume analysis. But if you’re just a private trader, the only thing that’ll keep you out of trouble is increasing the time frame and lowering the leverage.
Learning to program is pretty important for backtesting a strategy. Accurate statistics show that many theories don’t work; it saves you time and money. If a system doesn’t work backtesting, it probably won’t work in real-time.
The price usually moves sideways during the day. At that moment, a scalper might consider taking advantage of this pattern by trading the bounces inside the channel. There were robot night scalpers who automated this strategy back in the day, but it didn’t last.
I think time spent scalping in front of the screen is wasted time. Investing means studying long-term trends, predicting market cycles, following central banks.
If you’re scalping, you’re probably struggling with algorithms
The candlestick chart might seem to be right about some famous patterns, but it’s not. The price movements are pretty random. Can you find the pattern before the algorithm?
Hedge funds pay good salaries to analysts and engineers and use powerful computers with lightning-fast processing speed. Do you think you can make a living with your laptop against these monsters?
The institutions can scalp because they have artificial intelligence algorithms, and above all, they don’t have high commissions to pay. High-frequency trading makes hundreds of trades in seconds and certainly makes a profit. HFT has a big impact on short-term price movements.
I can skip the conclusions because I’ve repeated the same thing from the beginning.
Intraday scalping is a total waste of time and only enriches the broker. If you’re a novice trader and just bought a scalping course, this article will piss you off.
I’m sorry to be blunt; nobody will teach you how to scalp. If someone succeeds and makes money, they still can’t help you out.
Using automatic systems might give you a few more advantages, but as I told you, there are many bullies in the neighborhood, and you’re going to get beat up.