This post covers the reasons why I scalp the FOREX currency market.

I am NOT advocating that you try scalping.

Only consider scalping if you understand and feel comfortable with each of the topics I discuss — and even then I don't suggest you attempt scalping without specific training as the risk of losing a lot of money attempting scalping without proper education is almost guaranteed.

The reasons I scalp the FOREX currency market is covered in the following topics, which I'll discuss in detail in this post.

I Scalp The FOREX Market Because I Feel:

• Scalping Is Safer With Less Risk
• I Have Total Control
• Simpler Set of Trading Rules
• Small Gains Can Add Up Quickly
• Better Personality Fit

Scalping is a trading style where the trader makes many, many trades a day, taking many small gains rather than an investor who may place and hold positions for weeks, months, or longer.

Scalping differs slightly from the better known practice of 'day trading'. A day trader isn't necessarily a scalper in that a day trader's only distinction is that they are position flat at the end of the day.

That might indicate the day trader only makes a few trades during the day, whereas the scalper makes literally dozens of trades during the day before going position flat.

Of note is that to this post, I have a companion video of the same title Why I'm a Short Term FOREX Scalper that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

And this is absolutely true — if you don't manage your risk properly.

Not having absolute control over your risk management is like driving your car down a city street 70 mph without a seat belt.

Scalping is a skill that a trader must develop rules to manage that risk. Both long term traders and scalpers must manage risk, it's just that the scalper must build those rules for the shorter time frame they hold a position.

It's, I suppose, inconceivable to a long term trader that the risk a scalper manages is parallel to what they manage. But it is. A long term trader with a 55% win rate may mitigate their risk by having a reward to risk ratio of, say, 1.50 to 1.00 (150 pip win vs 100 pip loss) whereas a scalper might have a 70% win rate with an inverted reward to risk ratio of 0.625 to 1.00 (5 pip win vs 8 pip risk) thus appearing to be 'riskier'.

Let's look at that more closely and compare the 2 scenarios. I threw the following up on my white board after coming in from running water through the system after having a new well pump and expansion tank installed. I was far from being in any state of mind to slant this stuff in favor of the scalper....

Hypothetical Results of Analysis of Scalper vs Long Term Trader

Most scalpers (including myself), and long term traders that I am aware of, have mentioned their win to loss ratios match up pretty well with my example numbers.

Yes, I know... a 70% win rate seems 'unreasonable' to most. However, by rigorous attention to the price action environment, and finger on the trigger with no fear to take that immediate loss, 70% is not unreasonable. There are specific reasons why this is the case, but those discussions are beyond the scope of the intent of this post.

The simulation assumes each trader makes 10 trades within their trading time frame. 10 trades a day for a scalper is nothing, and 1 good trade a month is reasonable for the longer term trader.

So, the long term trader gets to complete 1 full series of 10 trades a year for a net gain of $3,750, whereas if we throttle the scalper back to making just 10 trades a week as opposed to a day for a yearly gain of $4,400, both traders come out about the same in net return from a dollar as well as a percentage basis.

Obviously, theoretical calculation analysis like this is done pretty much on looking at what is glibly referred to in project planning as "The Happy Path", and more formally from a Pert Diagram perspective as the "Optimistic Path". It's just the simplest solution without a lot of gory details to clutter things up.

For example, the long term trader could argue that they could run two complete series of trades in 8 months, and the scalper could equally propose that their results could be duplicated 3 times a week as opposed to just once. Even a slight change in any parameter could thus radically change the outcome.

Having said that, from my standpoint as a scalper who has experience over long periods of time — several months is a very long time for a scalper — a 70% win rate, 10 trade series a day, 3 days a week, for 40 weeks is my theoretical model that I compare actual results to.

What this implies is that with those metrics, the theoretical return per year changes from 44% per year to an astounding 132%.

Bear in mind that this is my "The Happy Path", which does not take into consideration 2, and perhaps 3, 6 losing trade sets, being sick and missing 6 to 9 trading days, extending the 2 week vacation to Bryce Canyon to 4 weeks, etc.

So what does all that have to do with proposing that scalping is as 'safe' as long term trading? Well, the issue all hinges on that 70% win to loss ratio I think. I believe that the reason the scalper has a better win to loss ratio is because we're not trying to get 150 pips out of the position, or even 30, or 20.

The long term trader must be more like a sniper, carefully choosing a trade entry because they know they'll have to be in that for quite awhile.

On the other hand, although I'm a scalper, I do have profit targets that are more than a few pips. Trading for a few pips is silly. I identify upfront that price action could move price 20, perhaps even 30 pips.

However, I know that statistically it's very likely that somewhere 10 to 15 pips out, price may — as in may — experience a slight retraction. Thus, though I am happy to grab a quick 3 or 5 pips out of the trade if it does turn against me, I will hold if price moves in my direction toward that 20 or 30 pip target.

Thus, in the long run over many trades, I will be successful 70% of the time getting some profit with the potential of 1 in 20 or 30 such trades running out for a profit of 20 or 30 pips.

So, even in the example calculation where I only get 5 pips each win, I still end up pretty close to the long term trader's results. And that's particularly the case if either of us hits one of those massive 6 losing trades in a row series.

To me: that's a much safer methodology than running trades overnight, or — gad... — for weeks....

Having gone through all of that, I feel the real key to the 'safety' in scalping the currency market is contained in the next section.

If I am in a position, and it starts to chatter — indicating that movement in the anticipated direction may not be as strong as I had calculated — then I can just exit the trade, wait until things change, and re-enter a new trade.

I look at the potential downside risk a long term trader assumes with a stop of 50, 100, or more pips as fraught with potential disaster.

I always think in terms of the statistical probability that I'll hit 6 losses in a row fairly regularly in my trading. This is true for the longer term trader as well, though obviously they won't hit that as often as I will.

Regardless, let's say we're both trading 1 full lot positions on a $10,000 bank. As a scalper, I'm out with an 8 pip loss with a 15 pip profit target, whereas the longer term trader sets their stops at, say, 100 pips with a 150 pip profit target as shown in the previous section's trade analysis diagram.

Thus, as a scalper, those 6 losses in a row equal 6 x $80 = $480. Because I'll hit say as many as 3 of those bad runs in a year, my max downside is $1,440. With a $10,000 bank requiring 5% margin of say $5,000, even hitting those 3 sets of 6 losses up front would still leave me with $3,560 of trading power.

The long term trader is not quite so fortunate. If they took those 6 losses at the start of the year, it would result in 6 x $1,000, or $6,000 pushing their account balance down to $4,000 — not even enough to place the next trade!

Though we both have 'total control', I think that as a scalper — from a theoretical standpoint, anyway — I have a far stronger edge of staying power than the longer term trader.

In addition to the upfront catastrophic 6 losses in a row, as a scalper I am not encumbered with constantly calculating and reevaluating my position as price moves against me: I just exit at 8 pips, wait until things change, and re-enter a new trade.

The longer term trader, however, has to constantly be making decisions as to if they want to take an immediate loss, or wait it out to see if price rebounds before reaching that 100 pip stop.

In this example scenario, the scalper's per trade expectation value is $11 ($110 / 10 trades = $11), whereas the longer term trader's is $375 ($3,750 / 10 = $375).

It would thus appear that under "The Happy Path" conditions that the longer term trader has the best of it because they have a per trade expectation value 37 times that of the scalper.

And yet, because the scalper has the built in mechanics with such a short stop level that it's a simple decision for them to close the trade with perhaps only a 3 pip loss rather than waiting for the 8 pip level to be reached.

This is far more difficult for the longer term trader to do. Long term trading plans rely on just that small 55/45 win/loss edge to win out in the long run. And this is true, however: this is only true over the long run.

Sorry, but 10 trades in a year is not a 'long run' in comparison to the scalper that makes 10 trades a day, potentially 1,200 trades a year (10 trades a day, 3 sets a week, 40 weeks).

For example, if you were going to drive from Chicago, IL to San Francisco, CA, your travel plans would be far more complicated than mine if I lived 9500 South in Chicago and only wanted to drive up to North Shore Beach off of Lake Shore Drive (selected as I believe my dad was a life guard there for a few summers growing up).

It's the exact same thing with trading: the longer time frame your trading plan calls for, the more detailed it must be — and the more rules it must have — to account for all of the known and unknown issues that may come up over that period.

As a scalper with only a 5 pip target horizon to consider, I have very little planning to do. And thus, far fewer rules to cover those plans. My rules are quite simple:

• Consider taking a position when price structure indicates a possible profit target at least 20, better 25, pips out.
• Enter the trade when price momentum indicates strength to drive price to that structural target.
• If the position goes against me 8 pips, exit immediately, no tears.
• If the position goes in my favor, exit when price begins to slow and chatter.

That's it. Those are my rules.

When I follow those rules implicitly, I can get that 70% win rate with daily gains averaging 0.5% on risk.

When I don't follow those rules, and things start to go badly, my focus changes from trading for pips to that of trading for dollars, and everything goes totally to shit. And it's those times that reduce that potential theoretical "Happy Path" 132% profit return on risk substantially.

But let me specifically zero in on the details of this. I'll use the assumptions from the prior examples where I calculate my current trading efficiency against my "Happy Path" an average 0.5% gain on risk.

So, my target, on average, is to make $5 per thousand risked, in this case $5 per $1,000 bank.

That just translates upward: $50/$10,000, $500/$100,000, $5,000/$1,000,000, to all you can kill and eat. For discussion purposes, I'll use $5 per $1,000 bank risk.

Right away, there's a problem to discuss: What if I had a $100,000 bank but only traded 1 mini lot with $1,000 of that bank? What's my return calculation then? Would it be $5 / $1,000 = 0.5% return, or should it be $5 / $100,000 = .005%?

A hedge fund must calculate gains based on the entire portfolio: They start the year with (simplified) $100,000, make 1 trade for a $1,000 gain, and thus must report a miserable 1% yearly return on assets — even though they might have made that $1,000 by 'risking' only $1,000 of the total $100,000.

If that was the only trade the fund did for the year, then a $1,000 gain on the $1,000 investment it took to make that gain is a 100% return!

Yeah, see the problem here??

And just to give you something else to consider: to make that $5 per $1,000 bank doesn't really require you to even have $1,000! For example, U.S. Securities and Exchange law requires 5% margin to trade FOREX.

If the price pair that I am trading is at 1.2530, for example, then I would need $6,265 ($125,300 x .05) for a full lot, or $627 to trade 1 mini lot, and not $10,000 for a full lot, or $1,000 for the mini.

If you're new to all this, let me rephrase to what I want the discussion to focus on. To translate from full lot to mini lot, you divide by 100. That's the differential. It's like buying 1 bottle of beer out of a 10 pack that sells for $10: 1 bottle will cost you $1.

So, if all you have to trade with is $1,000, you will need $627 dollars for margin plus $1 above margin, or $628, to place the trade. If you only had $600, you wouldn't be able to place the trade because you wouldn't have the full required $628; you'd be $28 short.

Now back to the second problem I raised: why do I need $1,000 to trade 1 mini lot with a margin requirement of $628?

The answer is: I don't. All I need to trade 1 mini lot at a price of 1.2530 is $628, not $1,000.

Now, ignoring the 0.5% return on risk of $1,000 for a $5 gain, let's just say that I make a trade and gain $5.

Is that then a 0.5% return on a risk of $1,000 (because I chose to have some buffer money in the account to keep trading if I made a few losses), or is it rather almost a 0.8% return on the 'real' risk of $628?

Or even worse: Since I could not place the trade without at least $1 more than the $627 margin then my risk is really only $1 because if the account falls below $627 I couldn't even make the trade. Now, my gain becomes 500% ($5/$1 = 5)!

Yikes!

I wrote a software application that not only calculates a tax return compatible trade reporting form, but also compiles my trading metrics. Those trading metrics provide me with my return on risk based not on the entire account size, but rather on a transaction by transaction basis against the actual dollar value of currency lots that I actually traded.

For example, if the lot size that I traded 1 position with was $100,000, then that was a full lot trade, and my return would be the gain (or loss) divided by $10,000. If the transaction was for $10,000 of currency, then that would have been a mini lot, and my gain (or loss) would be divided by $1,000.

So, my returns are based on the value of the currency traded, not the size bank I have, or what the particular margin requirement is for the currency pair I traded.

What does that mean? It means that my gain on any trade will be divided by the lot size of the transaction divided by 10: $100,000 full lot currency value would be $10,000, and a mini of $10,000 currency value would be $1,000.

That seems far more reasonable — and simple — than any other means.

In the case of the mini lot calculation with $1,000 as my risk that I'll be using in this discussion, the excess above the 'real' risk of $628 is proper because it enables me to continue to trade even if the first few trades are losses.

So, that additional $372 is my 'dry powder'. You should always have dry powder, and not trade short stacked.

Now, I can continue with my discussion of small gains adding up because we now have a firm and valid definition of what the risk basis is: If I'm trading a full lot, then my risk is $10,000; for a mini it would be $1,000. This discussion is based on trading 1 mini lot with a $1,000 bank.

I have mentioned numerous times a figure of $5 per thousand risked as my average target gain per trade. Why?

Because that $5 gain on 1 mini lot is just 5 pips. Because it's so easy to grab 5 pips, I feel — and experience in my own trading — that is a more than viable daily scalping value.

Daily? $5 daily gain, not $5 per trade?

Yup. My daily trading profit is a tiny 5 pips — regardless of trading account size or lots traded.

Why just 5 pips?

Because it's so easy to average 5 pips a day that it's stupid easy.

But, really.... 5 pips???

Let's look at this in detail.

Regardless of whether I make 1 pip on 5 trades, or make 20 pips on 1 trade and lose 15 pips on the next trade: over the long run 5 pips a day is more than reasonable to make.

Well, unless, of course, you start thinking of it in dollar terms of $5 per thousand traded, then you start trading with your emotions, the 70% win rate goes to shit, and you wonder why you have a headache....

So, I've got a $1,000 bank, and over the long haul average $5 per day trading only $1,000 risked per trade.

If I trade 3 days a week for 40 weeks my gain is $600. Hello... that's a 60% return on that $1,000 risk — repeating or end of year balance.

$600 a year income not quite good enough for you? Great. Sell all your stupid shit, raise a $100,000 bank and make $60,000 a year.

On just 5 pips a day, 3 days a week, 40 weeks.

$60,000 a year is job replacing income. $60,000 a year is F-you money.

Do small gains add up?

You tell me....

But don't tell me anything if you don't follow the rules. It's like Michael Douglas as Gordon Gekko in the 2010 movie Wall Street 2: Money Never Sleeps says:

"Hey, stay positive pal. Most people, they lose, they whine, and quit. But you got to be there for the turns. Everybody's got good luck, everybody's got bad luck. Don't run when you lose. Don't whine when it hurts. It's like the first grade, Jerry. Nobody likes a cry‐baby."

Some like to sail a small boat on a lake while others may rather race their Audi around a private track.

Some folks have no problem sitting down at the poker table, while others would cringe at the thought.

And some traders are more suited for long term trading, while others prefer scalping.

What you enjoy doing, or are suited for is up to your own individual personality.

I enjoy sailing that small boat. I'll sit down and play Texas Hold 'em at the drop of a hat. And I prefer scalping.

After beginning my training in the martial arts in 1968, I learned all about risk, and risk management. I successfully applied those skills obtaining a B.S. in Physics in 1972, to opening what became a successful karate school in a conservative New England town, to start investing in real estate which 40 years later allowed me to retire a millionaire, and to having a successful 33 year career as a senior software engineer.

I'm not afraid of shit — other than spiders and dying too young.

I'm risk averse.

Even now — just about to turn 71 — I'm preparing to push it all to the center of the table in the FOREX currency market again, even after taking my account to the wood a couple of years ago losing $50,000.

I embrace risk, but differently than most would define that.

I embrace the assumption of risk. However, I absolutely will not take a risk.

Taking a risk is like jumping out between 2 parked cars into the street without first looking to get to the other side.

Assuming the risk of getting to the other side of that street for me is to wait patiently at at the intersection for the light to change, looking in both directions before I step off the curb, as well as continuing to look both ways as I cross.

I don't take risks, but I will assume one if I feel the conditions are such that I have more than a high probability of success. That's my personality.

And when I lose, I don't "...whine when it hurts," because it really is like the first grade: Nobody likes a cry‐baby. And, that's my personality as well.

Scalping in the FOREX currency market is suited to my personality, and that's why I'm a scalper.

Video: Why I'm a Short Term FOREX Scalper

You might also be interested in the following video I did which analyzes a quote from Jesse Livermore: "To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate."

I find it interesting that Livermore combines a process of: "To be patient and react only when the market gives the signal," with that of his use of "is to speculate" to define that process.

It would seem that "To be patient" and "speculate" are at opposite ends of the trading spectrum. That's what I discuss in this video because I think without understanding these concepts is dangerous. I know it was for me when I first started trading a live account. I learned it the hard way.

Video: Trading As A Speculator Defined By Jesse Livermore