Scalping Or Trend Trading?


#1

By Darrell Martin

Aside from the sound of the terms of “Scalping” and “Trend Trading,” one of which sounds painful and the other one sounds almost pleasant, do they have any other psychological connotations?

Is it better for you as a trader to scalp or trend trade? Are there inherent advantages or disadvantages to both methods of trading?

Scalping: Feels Good

As painful as scalping sounds, this type of trade can make you feel really good because it wins so often. The flip side of this is that when it loses, it stings something awful! This sting makes you stop trading, and you don’t make back the money you lost. It becomes a vicious cycle where it feels good to win when you do, but the damage done when you lose actually hurts not only your account size but your trading psychology as well.

Did you Win or Lose?

If you continuously think of it as winning or losing, that can also play with your psychological mindset. The goal is to make money and not be concerned about whether or not you won or lost. It is not that scalping does not work as a method of trading, but the insult of losing four or five times as much on a loss is much more shocking to your trading psychology than the benefit of winning often.

Trend Trading: Profitability in your favor

Trend Trading involves putting profitability in your favor. You are following the trend and allowing that to work for your benefit. It’s about having a better reward risk ratio. Trend trading is where one win can wipe out a multitude of losses making it much easier to handle the losses when they come.

Look at the following images:

These images show statistics for both types of trading styles. The first image shows Trend Trading. It has a higher Expectancy. To find that number, you take the total Ticks Profit and divide that number by the Number of Trades. In this case: 17574/4718=3.72.

Expectancy

Expectancy means on average, every time you push the button to execute a trade, that is the amount of ticks you can expect to make.

The second image shows Scalping. You will notice that both images have the same Number of Trades: 4718. Expectancy on Scalping comes in at 3.12.

Max Drawdown

The next thing to look at is the Max Drawdown, which is defined as the greatest number of ticks you would be down at the worst time in the time period covered by these statistics. These examples cover a four-month period, so the trending drawdown is a bit more.

Each of these stats images shows the same number of trades; however, when you compare the Ticks Profit on Trend Trading, 17574, to Scalping, 14739, you can see a difference of nearly 3000 ticks on the same number of trades.

Winning/Losing Trades

Which style had the most winning trades? Look at the numbers under “Num Trades”. At first glance, you may think that Scalping would be the best style to incorporate with 3359 winning trades and only 1359 losing trades over four months time. But remember, that less was made overall. The stats for Trend trading show 2076 winning trades and 2642 losing trades. So, more losses, but you would still be more profitable.

Some traders like to do a bit of both types of trading. However, they are usually very experienced traders with larger accounts. Their accounts can afford to be wrong once in a while. They know what to do to recover. Their trend trading will make up for any losses sustained from scalping.

Summary

In the examples shown above, the total Ticks Profit for Trend Trading made over the four month period was much higher giving you a higher reward/risk ratio and a lower win/loss ratio over Scalping. Overall, it is probably better for your account and for you psychologically to have a higher reward/risk ratio and a low win/loss ratio.

To learn more about these aspects of trading, go to apexinvesting.com, a service of Darrell Martin.