Art & Math of Scalping

Graybox Trading

Mar 19

The basic variables that are important to understand for scalping are the R or return/risk, your win ratio or consistency, and the number of trades or opportunities you get per day.

Let us start with some hypothetical, imagine you have a low R scalping method but can find many trades per day. The benefit is that you can divide up your risk capital so that you do not risk much per trade. For example, let’s imagine you risk $100 per trade and you can find 10 or 12 trades per day and you on average make about 50% more then you risk or $150 per trade. In that case your expectancy is $37.50 and you would be stand to make $375 to $450 per day only risking $100 on any given trade. So what’s relevant is that this can be scaled up to $900 per day while your risk only increases to $200 per trade. On the other hand, it is true your total risk would be $2400 (200*12) over the day.

Next, let us compare this to a higher R scalping. In that case, you will take fewer scalps and make more per unit risked. However, you will need to risk more per individual trade. In that case, let us imagine you make 3R per trade, your win ratio is 45%, and you are able to find 3 trades per day. Assuming $100 risked, your expectancy will be $80 and you will make on average $240. If you wanted to scale up to $900 per day you will need to risk $300 per trade but your total risk per day would only be $900 vs $2400. But you will have a higher probability of losing the full $900 at 17% per day.

It is clear that both high R and low R trades can be scaled. There seem to be some important considerations for low R trades, though. First, you need to be able to divide your risk into enough units to be able to recover from expected losing trades on the day. A division that allows for 6 to 12 consecutive losers seems about right. Assuming a $500 risk per day, this would equate to a risk per trade of $42. Now, you can see why it is so difficult to near impossible to scalp the e-mini futures on a tiny account placing many trades because your risk only allows for 3 ticks and very few traders can trade that precisely! If you move down to the e-micros, it becomes more possible, of course.

The other critical consideration for making low R scalping work is that you have to minimize taking several losers in a row. Once you get the unit sizing down, avoiding taking several losses in a row seems to be the biggest challenge to making it work in practice.

High R scalping is likely more forgiving because they can be structured more statistically. The difficulty is that it is more challenging to find as many high R scalps day trading because R is likely to increase with holding time. Likewise, the standard deviation of return also will likely increase which means more lumpy returns.

It is my suspicion that multi-market traders that is equity traders, crude oil, etc. likely do better because they are able to find better high R opportunities which are more difficult to find day trading the equity futures. Lower frequency systematic strategies, also, tend to have a much higher expectancy compared to discretionary traders– and that’s their primary advantage, as well.

Another critical feature for scalping futures is that futures are highly algorithmic traded or manipulated markets. Whether or not they are truly manipulated or whether it is due the leveraged nature and trader behavior does not really matter, what matters is that scalping futures is a very specialized skill set that few traders will be able to learn because it requires knowing how to execute. It requires very specialized skills. The specific execution skills are not generally known nor taught.

And, that combination of lacking the specialized skills required to micro-scalp combined with the greater development of more generalized skills is likely a common cause of frustration among futures traders.

One pathway to success then would be developing those specialized skills by trading a single e-micro unit while allowing for greater flexibility of opportunity by day trading equities, as well. And, in a nutshell, that is how I am structuring my trading at the moment. I am structuring at least part of my trading toward learning equities day trading and scalping now while continuing to practice with the e-micros. As well, I continue to work on quantitative and systematic strategies.

The ability to find both high R trades and scale them to my risk preference with equities and the ability to scalp with commission free trading should give me the greatest flexibility to discover opportunity niches where I can excel at.

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