StockFetcher Forums · General Discussion · Need Help with Scalping System<< 1 2 >>Post Follow-up
12 posts
msg #100421
Ignore kindtrader56
4/25/2011 9:12:49 PM

Hello Everyone

I have been working on a scalping system for the last 6 months or so and have had very mediocre success. I have built a screen that finds stocks and ETF's which have had a high for the day, above the open, of at least .25%( a quarter of a percent). I have also screened for a half of a percent profit. I'm finding setups that have met this criteria up to 24 of the last 25 days. Also, these stocks frequently have this same performance over 80% of days in a 50 or 100 day timeframe.

It seems like buying the open and selling with a limit order for a quarter or half percent profit would be a no brainer. Unfortunately, the one or two loses usually wipe out the 23 or 24 gains. If I set a tight stop the win rate drops drastically and the system fails.

Maybe I'm kidding myself but it seems like there is a solid premise here. I can't seem to balance the buy on open strategy with a sell on either a limit order or the close without having one or two losses overcoming all the wins. I know that the standard advice is to let winners run and cut loses short so maybe I'm on the wrong track going for the small, consistent gains.

Any advice would be very much appreciated.

Thank you.

671 posts
msg #100423
Ignore miketranz
4/25/2011 10:27:43 PM

Good post.When you say a couple of losses wipe out 23-24 gains,it sounds to me like you're taking too much downside risk on the losing positions,as opposed to your winning positions.Do the math,even at 50%,which basically means half of what you trade will wind up a loser,if the winners exceed the dollar amount of the losers,you will come out a net winner.If I understand what you're saying correctly,your percentages of winners to losers in basic numbers 23-24 gains vs 2 losses sounds almost impossible to me.The best traders on the planet couldn't come up with those numbers.Please get back to me on that one.Also,when you say you trade the open,how exactly are you entering a trade,market order pre open,on open,or a few minutes after open?Are you using a limit order? What's your RR (risk vs reward) ratio? In other words if you're risking .10 on the downside,what are you looking to make on the upside .20 .30 .40? Take me through an actual,entry to exit in detail so I get a clearer picture of what you're doing & I'll try to help you out.Again,good post,more people should come on here with real time,actual trading questions aimed at improving their results.Mike....

12 posts
msg #100424
Ignore kindtrader56
4/25/2011 10:56:37 PM

Thanks Mike. What I did is design a filter for ETF's and Stocks that measures how often a stock gains at least a quarter of a percent from the opening price. I buy the Open with a market order OTO ( On the Open) order that gets filled with the official opening price. Using my filter tonight (4/25) I can tell you that symbol EXG has shown at least a quarter of a percent gain from the open on 24 of the last 25 trading days. This would seem to provide a strong edge.

If you were trading say $25,000 per trade you could buy the open set a limit order for a quarter of a percent and make $50 after commissions. A small profit but if it is done with say 4 positions a day you could clear $200 a day.

Mike, I understand your comment about a risk/reward ratio. When I swing trade I will only take trades that can return 3 times the profit compared to my risk. If I am trying to gain $1 a share I'll only take the trade if a 33 cent stop is reasonable. Unfortunately, that wont work on a scalping system like this. If I set a tight stop I get stopped out constantly and my edge is negated. I am not saying that I have traded 24 out of 25 winners, I'm only saying that if I would of bought a certain ETF ( EXG tonight) each of the last 25 trading days at the open and sold with a limit order for a quarter of a percent profit it would have returned a quater of a percent gain each day. Now I realize that the past 25 days is no guarantee of the future but that is why my filter also measures 50 and 100 days back. I look for consistent stocks.

But bottom line I'm still not making consistent money because the one or two losers wipe out the 23 or 24 small gains. If I set stops I frequently get stopped out before the stock reverses and posts the quarter of a percent gain for the day.

Hope this made sense to you and any one else who might have a solution.

Thank you,


10,177 posts
msg #100426
Ignore johnpaulca
4/25/2011 11:42:11 PM

John was a little shell shocked about what happened to him over the last three days of volatile market activity—he had lost 70% of his trading equity! He was quite shaken, but he remained convinced that he could make the money back. After all, he had been up almost 200% before the market withered him down to the $4,500 he had left in his account.

What would you tell John at this point if he came to you for advice? Your advice should be, “Stop trading. Get out of the market immediately. You don’t have enough money to trade speculatively, and you don’t understand risk.”

John is very much an average market participant who calls himself a trader. He and people like him try to make a killing in the market, thinking they can turn a $5,000 or $10,000 account into a million dollars in less than a year. This sort of feat is possible, yet making those kinds of returns is highly unlikely while the chance of ruin is almost certain—even if the trader is very smart. Natural intelligence does not seem to help traders with position sizing strategies, which are critical for trading success.

Book Smarts vs. Smart Position Sizing Strategies

Most people would agree that PhDs are smart people. High intelligence, however, seems to be of little or no help in trading successfully. To test this idea, Ralph Vince conducted an experiment using 40 PhDs. (He ruled out doctors with a background in statistics or trading.) They were given a computer game with $10,000 and 100 trials in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial (1R). When they lost, they lost the amount of money they risked for that trial (−1R).

Think about that: you win what you risked 60% of the time and you lose what you risked 40% of the time. That's a positive expectancy system and those odds are fantastic compared with any table you might find in a Las Vegas casino.

Guess how many of the PhDs had made money at the end of 100 trials. When the results were tabulated, only two of the PhDs made money. The other 38 lost money. Imagine that! 95% of the PhDs lost money playing a game engineered to let players win. Why?

Position Sizing Strategies and the Gambler’s Fallacy

Let’s say someone started the game risking $1,000 on each trade and the first three trades all lost. Losing three in a row in a 60% winning game is a distinct probability. Now this participant is down to $7,000. He thinks, “I’ve had three losses in a row, so I’m really due to win now.” This is the gambler’s fallacy at work. He thinks that there’s a high probability of a winner after several losses. (Your chances of winning on any given trade in this game though are always 60%, regardless of the past results.) He decides to risk $3,000 on the fourth trade because he is so sure he will win. Although the probability of four consecutive losses are slim (i.e., 0.0256), it is still likely to occur once in a 100 trial game. The fourth trade results in another loss. Now he only has $4,000 left in his account and he must make 150% just ot reach break even. Beyond that, his chances of making money in the game have grown very slim. If he kept playing this way, he easily could be broke in a few more turns.

Here’s another way he could have gone broke. If he started out risking $2,500 on each turn, three losses in a row would take his account down to only one more trade of $2,500. There’s a 40% chance the next trade will lose and wipe him out. Additionally, he now must make 300% just to get back to even. At this point, do you think he is more likely to experience a profitable end to the game or bankruptcy?

Nearly all of the PhDs risked too much of their equity in the game. The excessive risk occurred for psychological reasons: greed, the failure to understand the odds, and, in some cases, even the desire to fail. From a purely mathematical perspective, however, their losses occurred because they risked too much money. Had they understood the concept of position sizing strategies, they would have done much better in the game—even if they had some psychological issues affecting their decisions.

Position Sizing Concepts

In a lecture to his students at a 1991 retreat in Hawaii, Ed Seykota said that once you know the expectancy of your system, the most important question a trader could ever ask is “How much should I invest?” Your trading system’s expectancy tells you the probabilities of winning versus losing for each trade and a bit more. Given that information, you can consider your objectives and come up with a position sizing strategy that will help you reach your objectives and answers the question “How much?”

In my opinion, position sizing strategies are the most significant, and yet least understood, part of any trading system. Most individual traders and I would say even many professionals do not understand the importance of this concept. For example, I once attended a seminar for stockbrokers that explained a particular investing method that the brokers could use to help their clients. While the seminar as a whole was terrific, the topic of a position sizing strategy for this method was never covered. In the past, people sometimes referred to position sizing strategies generally as “money management” and one speaker did mention money management briefly. I could not really tell what he meant though, so at the end of his talk, I asked, “What do you mean by money management?” His response was, “That’s a very good question. I think it is how one makes trading decisions.” Well, that’s fine but those brokers walked away from that seminar unable to help their clients with the most important part of a good investing method—knowing how much to risk on each position.

Your position sizing strategy is the part of your trading system that tells you “how much” or “how many” for each trade. How many units of your investment should you put on at a given time? How much risk should you be willing to take? You can’t answer these questions until you understand both your trading system and your objectives. You need to understand what kind of results you can expect from your trading system. Knowing the expectancy and SQN® score of your system can help in this area. You also need clear objectives for your trading and an understanding of what you are trying to achieve—especially in the areas of return and drawdowns. With these two inputs, you can start thinking about your position sizing strategy.

As there are millions of traders with unique objectives, there are millions of variations of position sizing strategies. Aside from your personal psychological issues, position sizing strategies are the most critical conceptual area you need to master as a trader.

Too Much Risk?

Remember our friend John from the beginning of the article? He was up 200% and then down 70% a few days later. We can probably infer that he was risking far too much on each trade. Would you guess he knew anything about appropriate position sizing strategies?

Source: by Van K. Tharp, Ph.D

12 posts
msg #100427
Ignore kindtrader56
4/25/2011 11:53:57 PM

Thank you JohnPaul. I have read most of Dr. Tharp's work also and feel I have a firm grasp on position sizing and risk/reward. This is not really the issue with my overall trading. As I mentioned, I use solid risk/reward ratios and position sizing techniques on my normal swing trading. But that will not work on this scalping system. I'm looking for any thoughts on how to avoid large losses while avoiding getting whipsawed to death.

It is entirely possible that there is no solid solution to this problem and that my filter, while interesting , is not really viable. I'm interested if anyone has tried this type of trading (filter) and has been able to devise a stop which doesn't ruin results. It sure is enticing though to have a filter that would have returned 23 or 24 small winners out of 25 trading days and still not be very profitable.


86 posts
msg #100428
Ignore jimvin
4/26/2011 12:25:36 AM

Disclaimer: I don't scalp-trade; my style is buy at open Monday and sell Thursday or Friday 1/2 an hour before close depending on how well the Market performed that week, with a 5% stop-loss and an open profit-take.

That being said, here are some key technical indicators I use in making a selection (filtering the filters I use) which may be of some use in scalping:

1. Stocks which are OTC or are Pink Sheets are much more likely to show a decrease in price in the short-term. (PINKs can make you a fortune overnight or a pauper in the same time-frame; same for penny and sub-penny stocks which I will not trade).

2. Stocks which show a negative MACD are roughly 85% more likely to show a decrease in price in the short-term.

3. Stocks which show a very negative MACD are roughly 70% more likely to show a decrease in price in the short-term, however that negative is much greater (doubling to 100% in the sample) than those stocks with only a negative MACD.

4. Stocks which have a very steep MACD cross-over slope are 50% more likely to show an increase in price in the short-term than those with a less dramatic slope. (Very steep is, of course, subjective, but I would place it at 33 to 45 segrees).

Note that every Market has its own personality and these rules will not always apply; they are based on an average of 10 trades a week for the last 6 months.

671 posts
msg #100430
Ignore miketranz
4/26/2011 12:31:26 PM

Mark,first off,I would never under any circumstance buy on open.I do however use the open as a pivot point to either go long or go short.I let the market show it's hand,then I enter a trade "in the direction of order flow or price".It could be anywhere from 1-3 minutes for the market to move off the open print before I enter a position.Also,if the general market is moving in your direction,you increase the odds that your trade will be profitable,just by going with the flow.I like Johns analogy pertaining to position size.It is probably one of the most misunderstood terms in trading.The reason is that most of the material that is written on trading,is from people who never traded,or failed traders trying to sell you a bag of goods.You stated that you're trying to scalp $50 3-4 times a day to add up to $200.Why don't you try scalping $200 with a $50 stop.Remember,one of the hardest things in trading is taking a loss.The quicker you learn to scratch a trade that's running against you,the closer you will become to trading profitably.It's part of the game.That's the way I trade.It works for me,it should work for you also.You are on the right path as far as trading a stock that moves in a consistent pattern.What you need to do is fine tune your entry and exit techniques,through trial and error using small position size at first until you become more profitable.Any more questions fire away.Hope that helps.Mike....

12 posts
msg #100433
Ignore kindtrader56
4/26/2011 4:20:39 PM

Thanks again Mike !

I believe that your advice is the right path for me. I'm risking way too much for very little gain. I need to lengthen my timeframe a little and trade for more profit. The reason I tried to develop my scalping method is because my personality leads to cutting short my winners and leaving money on the table. I know that this is a losing habit but I am overly risk adverse. Some of the problem lies in the fact that I lost my job 2 years ago, after a 25 year career, and at my age (55 years old) have been unable to find comprable employment. Trading is something I really enjoy and an opportunity to build a second career. That being said, the market doesn't give a crap about my situation and if I don't improve I'll never prosper. I have been breaking even for the last two years and while I'm certainly not going broke you can't be viable breaking even. With 10-12 hour days trading and studying for the last couple years, it sure is frustrating at times. But I will not give up and I am determined to succeed so I will keep working.

Thank you to everyone who answered and offered advice. I hope to be able to repay the favor some time.


671 posts
msg #100435
Ignore miketranz
4/26/2011 6:31:01 PM

Mark,I checked out EXG.The average "day range" the last 30 days is only .10 which makes it a very difficult vehicle to scalp.There is just not enough movement.Pull up a 30 day chart of AAPL.This stocks average "day range" is $5 which makes it a good stock to set up a scalp trade.RIMM a lower priced stock,also has good day range capabilities.I've also been searching for a good scalp system based on the open.One idea I had was to locate stocks that have a high percentage of opening and not trading below the open for the entire day.Couple that with stocks that have a decent "day range" and you can make money.That way,you won't get whipsawed to death.You can place a tight stop right under the open,so the worst that would happen is you scratch the trade with a minimum loss,come back tomorrow to trade another day with your head still attached to your shoulders.Mark,if you or anyone on here has any ideas on this method,I would be very interested in getting it into real time.My filter building skills are very limited.Thanks,Mike....

12 posts
msg #100437
Ignore kindtrader56
4/26/2011 7:55:03 PM


I adjusted my filter to measure how often a stock loses less than .01 percent a day from the opening price. I also broke it down to 5, 25,50 and 100 day history. I also measured RSI(2), Stochastic and Average Day Range for each stock. I only listed stocks trading above the 200 day MA, priced over $10 and Avg. Vol. of 500,000 a day.

I don't know if this is what you are looking for but it might help you get closer. I'm copying and pasting the filter. Not sure how to send a link on SF.



add column days(low more than .01 percent below open, 100) {xConsec}
add column count(low less than .01 percent below open, 100) { 100 days x Occur}
add column count(low less than .01 percent below open, 50) { 50 days x Occur}
add column count(low less than .01 percent below open, 25) { 25 days x Occur}
add column count(low less than .01 percent below open, 5) { 5 days x Occur}
average volume(90) more than 500000
Close above MA(200)
close above 10

StockFetcher Forums · General Discussion · Need Help with Scalping System<< 1 2 >>Post Follow-up

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