risk management when scalping

H

hft_boy

Hi all,
I've been scalping lately, with good results. As far as I can tell, scalping is basically picking up pennies up in front of a bulldozer. You can pick up lots of pennies, and it's fine as long as whatever you're trading is trading in a range, but a big movement will wipe you out. Obviously I don't really want that to happen with me, which brings me to my question: how do you manage risk when scalping?
 
Quote from hft_boy:

Hi all,
I've been scalping lately, with good results. As far as I can tell, scalping is basically picking up pennies up in front of a bulldozer. You can pick up lots of pennies, and it's fine as long as whatever you're trading is trading in a range, but a big movement will wipe you out. Obviously I don't really want that to happen with me, which brings me to my question: how do you manage risk when scalping?
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The 42 million dollar question. I guess a very high R:R hoping that in the long term you maintain a high win rate, possible close to 95%.
 
reduce size, increase frequency. penny here penny there, quickly will create piles of money.

stop loss is not a good choice.

I do not know what stuff you trade. I buy OTM options either call/put. in that way, if the market runs huge wave against me,I am not hurt at all, just my premium lost. I do not use stop loss.

for example, qqq at 66, my call may be at 0.3, then qqq dropped to 63.5, my call just go to almost zero, if qqq dropped more to 62, even 60, even to ground zero. I just lost 0.3. so I am not afraid at all.

but if NQ at 2700, I bought it there, it dropped to 2680, I may think cut loss "I may think, oh my god, if it drops another 100points", that will force me to cut loss. after I cut the loss, NQ goes to 2750. I get to kick my ass why I not hold. to tell the truth, I can not hold because of risk control. if I buy call, there is no problem for me to hold toward 2750.

if above qqq scinerio happens, NQ needs a stop loss. stop you out, then you are not in the wagon. lots of time, it is like that. first thing , you must cut loss to avoid large loss, so the "make you whole or make you be fooled" chances are killed by stop loss. the chances for you to win are greatly reduced.
 
trading naked is the best way to scalp.

trading naked means when in a position, the capital the position occupied is the risk.

the risk must be pre-determined and not dynamic.

future risk is dynamic, i.e., it will create risks dynamically, may far beyond margin requirements. so you can not trade future naked.

individual stocks/etfs risks are dynamic too, may far beyond your predetermined risk level. so you can not trade them naked.

the only instruments you can trade naked is buy options.
you can not sell options naked, so you can not scalp it by selling options withoout any protaection.

if you buy options,you do not need stop loss at all, you do not need worry about unexpected. since the risk is not dynamic, it is static. the worst is premimum lost.
 
Quote from trader198:

reduce size, increase frequency. penny here penny there, quickly will create piles of money.

stop loss is not a good choice.

I do not know what stuff you trade. I buy OTM options either call/put. in that way, if the market runs huge wave against me,I am not hurt at all, just my premium lost. I do not use stop loss.

for example, qqq at 66, my call may be at 0.3, then qqq dropped to 63.5, my call just go to almost zero, if qqq dropped more to 62, even 60, even to ground zero. I just lost 0.3. so I am not afraid at all.

but if NQ at 2700, I bought it there, it dropped to 2680, I may think cut loss "I may think, oh my god, if it drops another 100points", that will force me to cut loss. after I cut the loss, NQ goes to 2750. I get to kick my ass why I not hold. to tell the truth, I can not hold because of risk control. if I buy call, there is no problem for me to hold toward 2750.

if above qqq scinerio happens, NQ needs a stop loss. stop you out, then you are not in the wagon. lots of time, it is like that. first thing , you must cut loss to avoid large loss, so the "make you whole or make you be fooled" chances are killed by stop loss. the chances for you to win are greatly reduced.
More...

Makes sense. I've been doing this in forex, and the thing which seems to make the risk manageable is trading small (i.e. 3-10:1 leverage), and picking up lots of pennies. In the meantime, if Ia really bad move my way, say, 20 pips, I'm only facing a loss of 2% account value (assuming I use max leverage of 10). If that happens rarely then on average I should profit. Plus, moves against me just aren't that scary. But what happens if like a bomb is dropped on Germany or something? How can you prepare for a worst case scenario?
 
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