There is one change that has helped me a lot to build better scalping strategies.
It won’t come as a surprise to some here, but I think it’s worth mentioning anyway.
Focusing on Risk Management Instead of Entry/Exit
The change: start building a strategy with:
- a minimal, basic entry and exit conditions
- a strong focus on risk management
By emphasizing a strong focus on risk management, I mean everything related to it, including testing and making decisions on:
- what position size to use – fixed or adjusted according to the stop loss placement (the closer the stop loss, the smaller the position)
- whether to set a stop loss or possibly hedge
- where to place stop loss
- whether to move the stop loss to break-even or not
- whether to use a trailing stop
- and more
Testing
The next step is to test different variants on the instrument and time frame that interests you.
You cannot rely on a single universal set of rules for risk management.
Example: You decide to set the stop loss below the low of the previous candle. But there are candles of 3 pips in size and there are candles of 10-15 pips, even on minute charts.
Take a look at the minute charts of USDCHF, GBPUSD, or GBPJPY. These exhibit completely different price behaviors.
This was also my mistake. I worked hard on improving entry/exit, so if I changed the currency pair, instrument, or time frame, I tried to optimize the entry/exit parameters to achieve the best results.
The risk management rules stayed the same, which is why I created over-optimized strategies that did not perform well in the long term.
Regarding Entry/Exit Conditions
Still, you need to have some entry/exit rules.
The point is to start with a very basic ones.
For example, you have an idea for a strategy based on Stochastic, combined with three moving averages and the opening price.
Reduce it to just Stochastic and a simple take profit condition. The goal here is to minimize noise in this part.
Advantages of Focusing Primarily on Risk Management
You will quickly find out if the strategy has any potential.
I mentioned earlier the idea of building with Stochastic.
Then you limit yourself to one-two entry parameters and test it with various risk management variants.
If you manage to achieve a profit factor around 1, it means you have a potentially interesting strategy to further develop.
But at this point, you’ve already built a foundation in the form of good risk management.
In Summary
As a scalper, I open large positions and try to realize profits quickly.
I am not interested in swing movements.
I look for such entries that will give me the highest probability of success.
But since I work on large positions there is a big risk that with bad risk management the position will quickly bring a big loss.
Since I began focusing on risk management when building systems, and only then on entry/exit, my results have significantly improved.
