ForexSpirit

Since I have been investigating forex scalping for the past few weeks one thought that has entered my mind more than once is: what sort of trading method would you end up with if you tried to combine aspects of scalping with the 4×1 trading methodology that I had used for so long?

In many ways the two methods are completely at odds. Scalping is generally seen as the epitome of the trading adages such as ‘cut your losses’. When you scalp you go for small gains on each trade but you want your loses to be even smaller. The opposite is recommended for the 4×1 approach: you often look for small profitable gains and give your losses plenty of room to breath.

A key factor of traditional scalping is identifying a tradeable pattern and basing your entry on that pattern. The 4×1 method allows for far more arbitrary entry decision making. Since no indicators are generally used, an entry is often made based on intuition (which is in turn based off of plenty of screentime and experience).

It was thus very interesting to read a thread on Forex Factory called Scalpers Paradise where a trader seems to have devised a method that looks awfully close to an amalgamation of scalping and the 4×1 methodology.

The trader, Dionisios Miliaresis, mostly seems to apply a counter-trend scalping approach. He looks to scalp on retraces at round number, pivot and support/resistance lines. In contrast to traditional scalping where high leverage is employed and few trades are entered the complete opposite is the case here. Low leverage is paramount, which seems to mean no more than 3:1 gearing. Trades are entered more frequently, around six times a day with a profit target of between 5 and 10 pips.

Trades are only taken in a single direction for each currency pair traded. The decision as to which direction to trade is made at the beginning of the trading session.

A disaster stop of 250 pips is entered when the trade is first put on. A trade is given room to breath and is not cut off the second it looks like it is going the wrong way. If a trade is still in the red at the end of the current trading session then a decision is made to hold or take the loss. An individual loss should result in no more than a 5% reduction of account equity.

Multiple entries can be made in the same currency pair. For example, if an entry is made and immediately goes into the red, another entry can be made at a ‘better’ level. Since the new entry is just as much of a scalp trade as the first one it will not be around for very long if its profit target is hit, so having multiple entries in this way can not be considered to be cost averaging (in the classic sense).

If a 7% reduction in equity is reached due to having multiple losing trades open then they are all closed out and the 7% loss is booked.

This method boils down to having lots of small profitable trades and the occasional big loss.

Taking big losses can be hard for many people. For a traditional scalper if you have to take a big loss then you’ve made a big mistake. As point #17 in The 25 Point Mantra states:

Big losses prevent you from having a winning day. They wipe out too many small winners that you have worked so hard to achieve. Big losses also “kill you” from a psychological and emotional standpoint. It takes a long time to get your confidence back after taking a big loss on a trade.

If your trading plan only has you taking small losses then if you ever do have to close out a big losing trade it is sure to have a very detrimental psychological impact. But what if big losses are part and parcel of your trading plan? If they are to be expected then they are not such a shock when they do occur.

I think it ultimately comes down to the psychological makeup of the individual trader. For some people the negative impact of a loss far outweighs the positives of a win. Others are more even keeled and are able to accept both in equal measure.

I do not see myself as having a problem taking an individual loss. If a losing trade needs to dealt with I can cut it without qualms. On the other hand I do see that I gain something from having my wins far outnumber my losses. There is definite positive reinforcement in having multiple wins in a row.

In many ways I find this style of scalping, which I have rarely seen used before, to be a more natural fit for me. As a result I have switched my scalping efforts to focus more on developing a trading method around these principles than the Cyrox Simple Scalping approach.