Insights to Discretionary Scalping Part #2

Graybox Trading

Mar 10

In a previous post, I shared that a primary key to discretionary scalping was to keep your size down. Many traders make the mistake of thinking that you have to trade multiple contracts. But, for scalping, consistency must be the first goal and it is more important then sizing. Until you have consistency, you don’t size up on your trades, you don’t vary size, and you don’t trade more size then you have too. The other most important characteristic is discipline.

Regarding sizing, I am contradicting myself again because in the past I stressed how it was important to size up ones best trades. That still makes sense to me but for that method, you have to be able to trade very small. Let us imagine you have a risk unit and you divided it into 5 parts then you can play that game. I trained that method and the problem is that eventually your brain gets conditioned to believe that you win when you put on larger size. This can have very unfortunate consequences with futures. Sizing up makes sense when you are consistent but should not be used to try to recover a loss. Sizing up must be from a position of strength: never weakness.

Digressing, you may have noticed that I have not wrote anything about how to use order flow to trade, the best type of charts to use, or what type of risk/reward to use. As for why, first discretionary scalping requires the development of an elite ability to read markets. Those who have developed that kind of ability could trade off minute charts or range charts or volume charts. Of course, developing programmed setups and using BeyondBot could be a huge help– as it is a way to develop progressively. In any regards, out of that group who can read markets well, it is still going to be a much smaller group of traders who can develop consistency. The real differences come down to those who have the best execution, discipline, technology, and plan.

Regarding execution, in a previous post I shared a key insight was learning how to use limit orders in volatile markets. But, last night I was finding success with market orders even in the current volatile markets in a particular market. So, more generally speaking– the scalper needs to develop superior methods of executing trades and know when it is appropriate to use the various types, how, and when to use them.

You see trading profitable methodologies can be seen as a gestalt. Certain conditions must exist for a method to work well. Scalping requires help from the market in the form of volatility. It requires the trader to be able to read markets well. It requires the trader to have discipline. Importantly, markets are very efficient at the microscopic levels. Most scalping methods do best with a low R where the target is less then the stop: on the other hand, it is difficult to build gains without very high consistency when a single loss gives back multiple trades. So, the ability to catch directional runs can can be an important consideration.

Referring to discipline, discipline is the ability to adhere to loss limits but also to stop trading when one is up. As I shared before, part of the skill of elite trading is being able not to trade. And, that’s why I shared that “performance mindset” can be a trap if not carefully directed to the simulator. Some may argue that it does not make sense to quit if one has an edge– and there are some rare traders who have the ability to dig deep holes and work their way out. But, the reality is that most people cannot trade as well once they start to lose. One way to build a core for discretionary scalping is flexible thinking and the ability to develop a real-time understanding of markets or what I refer to as market cognition. The skill is finding the trades and markets that can work best. Another way is developing programmed setups that work. In any regards, one has to either be able to dynamically discover edge or find setups with statistical edge.

A trading plan is important because it can help guide the trader and can be formulated with mathematical insight toward meeting profit objectives. The math is paramount Let us be honest, most traders have not made 15k per year trading futures, and yet that would only require averaging $75 per day over 80% of trading days. Of course, everyone wants to make $500 a day but seeing how $75 per day could equate to 15k is illustrative of the power of consistency. Yet, even $75 may be too much to start with. Start with most something more basic like $50 per day because with futures (or other liquid markets) any consistent method that has a low risk per trade can be scaled up. It may even be better to think about capturing ticks: can you capture 12 ticks in the ES per day? If you trade 1 micro then that’s a $15 objective per day. Another way to think about the problem is a little differently but one might consider that one wants to trade a maximum of 5 lots and wants to hit $500 per day. In that case, your final tick value will be $62.5 and you need only average 8 ticks per day to hit your $500. It means you can start with the objective to just make $10 per day trading 1 e-micro like MES or MNQ.

A solid trading plan can help guide the trader and should define:

  1. Markets traded? How will you find opportunity? The benefit to trading multiple markets is that it may be easier to find an easy market to trade: downside is you risk getting into more trouble in unfamiliar products. Single market traders can usually develop a higher fidelity in reading markets but suffer when volatility is low.
  2. Profit objective. You will need to think about your average profit and your shut down profit. Your shut down profit will need to be higher then average profit. A reasonable shut down profit would be 3x to 4x your average profit objective, i.e. 3 or 4 winning scalps.
  3. Daily loss limit in dollars. A good rule-of-thumb is you should be able to lose up to 12x your loss limit.
  4. Maximum number of trades per day. This will change based on conditions. A reasonable starting point is likely between 4 and 30 trades per day. The key consideration is that you only took a single scalp per day then you would have to concentrate your risk in a single trade. While that might make more sense for a very selective systematic strategy, discretionary scalpers are likely to do better with more “looks”. But, generally speaking– the more looks you give yourself then the higher probability you can be profitable if you have an edge. However, it increases your risk– so it has to be constrained. One way to think about this let’s assume any trade worth taking should be able to average at least 1 tick– so that means over 30 trades you should be able to pull out 30 ticks.
  5. Max contracts. This should ALWAYS be one contract until you can demonstrate consistency. And, one should always start with the micros if your market offers it.
  6. Rules for when you can add contracts.
  7. Max number of losers before one calls it quits on the day.
  8. What sessions will be traded.
  9. How risk will be divided up over the day.
  10. Principles over rules: principles to guide your trading.
  11. Both flexibility to change your rules and a sound-process for changing the rules. Too many traders get hamstrung with rigid rules. On the other hand, changing your risk is best a conscious decision. A rule about how you will change your rules thus makes the most sense: never change your risk controls in the heat of battle and always write it down.
  12. External risk controls. Frequent scalping tends to more easily lead to disciplinary lapses then any other form of trading. I highly advise scalpers not to keep too much money in their account. Some brokers allow setting a daily loss limit: if offered, that would be advised. Alternatively or in addition, I recommend creating a sub account which can act as an additional risk control.
  13. Adaptability. The greatest difficulty is being able to adapt to changing markets. When the VIX drops to below around 16, discretionary scalping becomes more difficult. Developing programmed setups, discovering more markets to trade, and developing ability to trade longer time frames should be part of the plan.

Quick tip: I suggest recording every revision to your rules and the reason why. Your rules should be guided by your insight.

Let’s be honest, scalping is one of the most difficult styles of trading to master. Sometimes markets give fast scalps and sometimes markets give trend trades. One has to be aware of the kind of opportunity in the market. That’s why I suggest approaching scalping or any method systematically and, yet, keeping a wider view of possible trading opportunity.

Trading from a position of strength is always better then weakness. The trader who has systems to fall back on when they aren’t able to trade well is more likely to find long term success then a one-trick pony. A trading plan, as such, may be viewed as a project. A trader working to build a solid base may do better with multiple projects/plans in the works at the same time. Because every trading method has its own unique psychological difficulties. Scalping requires discipline to shut down when winning and not over-trade but selling options requires the discipline to wade through molasses as markets can make large moves before the options pay out– and that’s why I encourage every trader to explore different approaches to have a better probability of finding success in current markets.

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