The Secrets to Discretionary Scalping

Graybox Trading

Mar 03

Do you you want to know the secrets to scalping futures with discretion during these volatile markets? Read on to learn what I have learned scalping today’s market.

The biggest secret to scalping futures in the current volatile market is to size way down. If you are not seriously consistent then you are better off to trade 1 MES (micro es) lot and have a better chance of profitability. Yes, just 1 lot is enough to make tangible profits in the current market.

Why can sizing down work so well today? First, there is high risk in the markets but there is also exceptional opportunity. The implications for scalping are (1) you should risk less per trade and (2) you can place a lot more trades because of the abundant opportunities — but that is only if you do not max out your risk.

There is another point: many traders size up because they do not have confidence in their ability to make money consistently in all market conditions. Many trading psychology problems such as FOMO, over-sizing, and getting emotional are associated with some combination of (1) a lack of confidence in some aspect of one’s trading combined with (2) a recognition of exceptional opportunity which leads to not respecting the risk properly.

The reality is that frequent discretionary scalping is like flipping coins. Who wants to risk hundreds of dollars on a coin flip– where breaking news, the changing of the wind, or a change in order flow can lead to a losing trade? But if you really feel like you have a skill in reading markets and like to trade– the micros may be your answer. During volatile markets, by keeping your size down you stand a better chance to recover from losing periods– to go on too have a winning day. Recovery is more likely because the greater number of trade opportunities.

The key really is not to change your size and never size up when losing! Today, I was a good anti-example. I hit my profit target for the size I am trading with but kept trading. I was up and down. But then I started struggling and started sizing up and very quickly my loss was 3x what it would have been had I not traded more contracts. So, yes the other aspect is you need a plan and discipline to shut down when you’re up. Scalping is extremely intensive and most cannot do it that well for long periods.

The next secret is to master the use of limit orders. While market orders have their place, when markets get wild limit orders are generally safer. Automated systems can use market orders because of their speed but in today’s markets discretionary traders are generally at a disadvantage when using market orders.

So far, I have described how one might go about very active discretionary scalping. I have learned that successful trading methodologies tend to take advantage of clusters of properties that compliment one another. On the other hand, traders who struggle are more likely to have happened upon a wrong mix.

Below I outline some scalping methodologies/mixes that I think can work:

Active Discretionary Scalping

This is basically the style I outlined above. This style is defined by flexible real-time thinking, keeping size down, and more likely a higher frequency. This style of trading also requires or strongly benefits from volatile markets. Position sizing should allow taking 6 to 12 consecutive losses per day. This style values and harnesses the power of flexible thinking. The cost of flexible thinking is being wrong more often and not having as much statistical comfort. Likely to perform best in very volatile markets.

Semi-Active Hybrid/Semi-Automated Discretionary Scalping

This style is defined by identifying specific edge or setup in the market, a higher selectivity, stop and target are defined statistically based on the opportunity. Because selectivity is higher, frequency is likely to be lower. Position sizing should allow for taking 4 to 6 consecutive losers per day. This style values and harnesses the power of statistical edge and automation/semi-automation. The cost of statistical edge is that market dynamics may change such that the specific edge doesn’t work as well or that markets simply become abnormal at times. Likely to perform best in markets that are “similar” to recent past.

Selective Discretionary/Hybrid/Semi-Automated Scalping

This style is is defined by identifying a few higher probability trades per day. Trading can be manual/discretionary or semi-automated. Manual trading of these methods require more discipline and patience. Position sizing will generally need to be defined by the opportunity. Tactically, scalping options might be an alternative for managing risk instead of using stop losses. This style places emphasis on pricing over other methods. Position sizing should allow taking 3 to 6 consecutive losers per day. The cost of waiting for pricing power may include missing a big trade or an easy opportunity to catch a trend because typically operating at the edge of ranges– and the selectivity means that more risk will need to be taken on the opportunities that are taken.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at