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In this article I am going to share with you four reasons why scalpers could be dangerous and everyone who would commit money to trade with such short-term strategies should be extremely cautious and mindful. Although potentially the shorter-term a strategy is, the more profits can be earned, and there are reasons why the real time results could differ a lot from those obtained in backtesting mode regardless of the trading platform that was used. Let's begin with the first reason:
Most Forex scalpers rely on tick occurrence in order for the signals to be generated. Their logic is based upon every market movement known (tick). The problem here is that Metatrader 4, for example, which is the most popular trading platform generates ticks in the backtester using its own algorithm based on OHLC data from lowest timeframe data available – usually M1. So, the ticks used to backtest your scalper are not “real”, they are made from MT4. This fact makes the obtained backtest results susceptible for errors and discrepancy. Personally, I have made tests running a scalper on live chart for a few days and then backtested the same system in tester on the same time span. Surprisingly the trades themselves were a lot different which led me to ponder on how real my backtested calculations are and just confirmed my knowledge that ‘ticks’ on MT4 are not real.
Since scalpers are frequent traders it is reasonable to expect that the average trade measured in pips would be very low in most cases – like 0.5-1 pips at most. Therefore any additional trading cost should be subtracted from the already low average trade. A slippage of 0.4 pip would possibly wipe out almost 80% of potential profits.
In order to be sure about the profitability, one should run the scalper on a small live account and then monitors the slippage and if there is enough profit left, then the Forex strategy could be forwarded to well-funded real account.
An increased spread during important Forex news or a spread just bigger than the one used in the backtest could be another cause of eaten profits. Expecting a lot of trades to be executed during a day makes a small change in spreading a potentially big determinant of the final net result of the trading system.
Since during the backtest we could only apply fixed spread, we should be very careful in choosing a broker which have low real time spreads which in turn will allow the scalper to be profitable. Another viable option here is run the backtest with wider than normal spread in order to get conservative results.
The final reason why I am staying away from trading with scalpers is the fact that some brokers do not allow trading with systems which are very frequent traders. Here we are talking mostly about real extreme cases where the average length of the trade is few seconds. If a trader begins to trade with such a strategy, his account could be suspended from trading so it is imperative that if you are planning to trade a scalper you contact first the broker and explain your intent and then if everything is OK, proceed trading.
I have shared with you my four reasons why trading with scalping strategies could be dangerous, and the traders who want to try them should be extremely cautious. The difficulties regarding the backtest accuracy, slippage, and spread costs during the real trading and broker's unwillingness are more than enough reasons for me to stay out. I hope that I have contributed to your knowledge regarding the matter. I wish you profitable trading.
Contributing authors are active participants in the financial markets and fully engrossed in technical or quantitative analysis. They desire to share their stories, insights and discovers on System Trader Success and hope to make you a better system trader. Contact us if you would like to be a contributing author and share your message with the world.
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