Comments on: Is “Scalping” Irrational?

By: jcl

jcl — Fri, 07 Oct 2022 10:58:03 +0000

Thanks for the comment. Size is Length-PatternSize-1 because otherwise Data[i+j+1] in the loop would overrun the array size.

By: R Poster

R Poster — Thu, 06 Oct 2022 21:38:45 +0000

This is an excellent article. In thecalculation of the size:
int Size = min(Length-PatternSize-1,1024);
I think that it should be:
int Size = min(Length-PatternSize+1,1024)”;
This would give the number of complete patterns within the widow defined by the Length or maybe the definition of size is different?
Thanks for the very helpful article.

By: Kunal Parmar

Kunal Parmar — Tue, 27 Feb 2018 01:58:54 +0000

You are a genius! I’m a fan! This is the first article that I’ve read on your blog and I’ll be reading more now. Thank you for such great content.

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By: Teera Lucksanapiruk

Teera Lucksanapiruk — Sun, 04 Dec 2016 10:34:47 +0000

Interesting results. Does this mean that theoretically one minute bars are more predictable than else above it, not including 12 and 24 hrs bars?

By: Bala Umasankar

Bala Umasankar — Thu, 24 Nov 2016 08:59:41 +0000

I really enjoy your articles. And it’s very humbling (that you can write simple(!) code to demonstrate).

Some of the papers rank with peer reviewed papers.

Needless to say I have benefited a lot from your papers and thanks!

By: Scotpip

Scotpip — Sat, 12 Nov 2016 14:22:52 +0000

Your assumptions on the costs of active day trading seem too pessimistic. I feel you get a more realistic view if you calculate on the pip size of entry and exit stops.

Clearly, active traders have to seek out brokers offering good commissions and tight spreads. And they are restricted to trading the cheaper pairs – but because there are more signals per day this is not an onerous restriction.

At our broker, spread on the Euro is around 0.2 and round-turn commission after volume rebate is 30 units per mio.

Consider a momentum-entry Euro system where the TP is 5 pips and the SL is 2 pips. With such a tight stop, exits are handled client-side to prevent being spiked out by the spread and news trading is avoided.

For a $1 mio winning trade on the Euro:

– The gross pip win is 5 pips – 0.2 pips slippage = 4.8 pips.
– The gross dollar win is a pip value of $100 * 4.8 pips = $480.
– The net dollar win is $480 – $30 commission = $450.

Total costs are $50, a manageable 10% of the gross dollar win. In a winning system, these higher costs are compensated by a much higher capital turn compared to swing or position trading.

– The gross pip loss is 2 pips + 0.2 pips slippage = 2.2 pips.
– The gross dollar loss is $100 * 2.2 pips = $220.
– The net dollar loss is $220 + $30 commission = $250.

The risk/reward ratio after costs is 450/250 = 1.8.

So after costs the breakeven win percentage of this real-life active system is an achievable 36%.

A system that generated a few trades per day with a 50% win rate would be very profitable with reasonable variance. With a win rate over 55% it becomes pretty bombproof. With a good broker negative slippage on entry will reduce profits but still leave them healthy.

These are tough targets but not impossible – I’ve seen systems that achieve this. Active trading can be very rewarding.

By: Just Me

Just Me — Thu, 22 Sep 2016 10:56:12 +0000

Win rate alone is worthless and very missleading information until you view it together with other important metrics as average trade reward/risk ratio.

By: Lau Kel

Lau Kel — Thu, 15 Sep 2016 15:00:43 +0000

Hi jcl,

Interesting post. I would tackle the problem from another perspective. Since the drift of a stochastic process scales linearly with time while volatility scales with the square root, the higher the frequency the lower the signal/noise. At very high frequency < a few seconds, you can get good result from the order book/flow which is highly predictive. But that is beyond the scope of most trader because of level 2 quote access (altough some fx brokers propose access to it) and of the latency (you will be beaten by HFT traders and be relegated at end of the queue of the book causing at best small losses). Moreover, trading is costly. So, is it hopeless? No! but one has to focus on developping strategy on volatility at short time scale and on issuing limit orders strategically (except in some situations) in order to limit the cost of the spread (of course you have to make a model which is not too latency sensitive). To sum up, Scalping is a pure volatility game…
(I think J. Kinlay wrote a good article long time ago on the mathematics of scalping which explains something similar)

Best,

Lau K

By: jcl

jcl — Tue, 30 Aug 2016 06:21:14 +0000

The meaning of the 3 is 3 bits, which is simply the entropy value. You can normalize it when you want to compare entropies of different alphabets. Since this is not the case here, I don’t see much of a point in normalizing.