In this article we will have a look at what affects the most our profits from scalping.
This lesson will be more about practice and I’ll show you what to look after when developing scalping strategies.
We have to do it in a different way
I am very strict in my strategy development and I want my strategies to manage very specific market conditions such as slippage, spread widening, etc. Therefore scalping strategies are not passing through the tests and they need to be adjusted. Particularly with its sensitivity to market conditions such as spreads. Only few traders realize that the backtest is made in ideal conditions – without delay in trading execution, without slippage, etc. In reality most of the time we do not getting the ideal performance and this makes our results worse.
How do the strategies react on slippage?
Let’s take a look at the simple strategy example:
Market and timeframe: AUD/CAD M5
Average trade: 10 candles
Average profit: 6 pips
Average SL: 6 pips
This strategy has a return/DD ratio 23 within last 3 years, which is very good, and if we would risk 20% of the capital, we would earn 460% without increasing position sizes.
Equity looks like this:
Spread was 2 pips and slippage zero.
What will happen when we will have an average slippage of 1.5 pips?
Return/DD ratio drops to 9, so the gain would be 180% without raising positions. Which is still not bad, but it has to be seen as significant drop down.
Equity after slippage looks like this:
It is visible that the results are worse. However, they still look promising; the return/DD ratio of 9 in 3 years is very good on a single strategy.
The following figure shows the equity curves of this strategy when slippage is from 0-5 pips.
Single color lines are equity curves with a certain slippage size.
If we build a strategy for scalping, we should not forget slippage. The results are slightly worse after calculating slippage, even though they are still very good and the portfolio is as I believe, still improving :). And keep in mind that slippage is not just a matter of automatic trading, but also matter of discretionary (manual) trading, just with our machines we can see them more because we can simulate them :).