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Testing A Euro Currency Futures Scalping Strategy

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  • Testing A Euro Currency Futures Scalping Strategy

    Scalping is something that intrigues many system traders. The challenge at taking small, consistent trades from the market daily while risking very little is appealing. With scalping, it’s generally accepted you are trading from a small timeframe, probably 5-minutes or less. The idea is to open a position and capture only a few ticks of profit. The appeal is since we are trading from such a small timeframe, your risk is small thus, you can trade with a small account. Often you will have setups that produce high win rates and occur more frequently than setups on a higher timeframe such as hourly or daily. There tends to be a higher frequency of trading opportunities with scalping which can potentially lead to large accumulated profits vs. your starting equity.

    In my opinion, scalping for the retail trader is very difficult to do. One of the biggest barriers is the transaction cost in both commissions and slippages. Scalping means smaller profit per trade yet, as you drill down to smaller and smaller timeframes your costs remain fixed. Thus, the negative impact of commissions and slippages grows taking a bigger percentage of your profits. A single tick of slippage is hardly noticed when you are holding a trade for several days with an average profit of $600 per trade. However, on a scalping system that single tick is the difference between life and death. Then throw in latency, computer issues, internet issues and your margin for error is small. Again, on larger timeframes you can exit a trade now or in a few seconds and it won’t matter that much. Not so in the scalping world where everything is hyper-sensitive and your margin for error is tiny.
    With all this in mind, I thought it would be interesting to look at a scalping trading model for the Euro currency futures. I ran across a very simple scalping strategy at the website One Step Removed. The author is Shaun and he stumbled upon a scalping strategy when conducting research on another trading model. Shaun’s concept and testing was performed on the EURUSD Forex pair. Shaun also points out in his article that his strategy will not be profitable if you have execution slippage of more than 2 pips.
    I found the strategy simple in nature and thought we would have a look at it. I will be coding this strategy in EasyLanguage and will test it on the Euro currency futures. The strategy code is available at the very bottom of this article. Extreme Price Moves

    Shaun noticed that extreme price moves as defined by 1% distance from a 200-period simple moving average (SMA) occurred very rarely. Going with the premise that price will soon retreat from such an extreme, this might be a potential location to open a trade. In short, Shaun’s Simple Scalping System (SSS) is a mean reverting strategy that utilizes a SMA envelope. When price closes beyond the envelope a trade is opened. The trade is closed when price returns to the envelope.
    Below is an image of the system with a trade example. Notice there are times when price touches the lower bands and no trade is entered. Price must close below the band to trigger a trade.

    Chart Setup and Trading Rules
    • Chart: EURUSD 5 minute
    • SMA Period: 200
    • Moving Average Envelope: 1.0% of the SMA
    Entry rules
    • If the price crosses and closes below the lower envelope, then buy at market.
    • If the price crosses and closes above the upper envelope, then sell short at market.
    Exit rules
    • If the price crosses and closes above the lower envelope, then exit long at market.
    • If the price crosses and closes below the upper envelope, then exit short at market.

    For the following backtests in this article I will be starting with a $10,000 trading account and testing over the dates May 2001 – December 31, 2011. The Effect of Slippage and Commissions

    To demonstrate the insidious effect that commissions and slippage have on a scalping trading model, for my first backtest I deducted nothing for slippage and commissions. I then added commissions and slippage and ran the backtest again so you can see how it impacts the equity cuve. You just might be surprised at how damaging commissions and slippage can be. The first equity graph below does not take into account slippage and commissions.
    No Commissions or Slippage

    The next two charts below do take into account both slippage and commissions. The first chart uses 1 tick of slippage while the second chart uses 2 ticks of slippage.
    $5 Commissions and 1 Tick Slippage Per Round Trip

    $5 Commissions and 2 Ticks Slippage Per Round Trip
    Attached Files
    Last edited by MT-MC; 06-26-2017, 09:24 AM.

  • #2
    I got curious, how do guys trade 50-100 or even more RT's a day?

    I mean their setups should be really simple and not require much analysis and at the same time have an edge (or they wouldn't trade like that, right?).

    So my question is to people who are aware or maybe use such techniques: what's it like? Is such high frequency scalping mostly charts based, DOM based, T&S based or what?

    I've read several threads about index future scalping using DOM, but didn't see examples of real setups that appear every couple of minutes.

    Of course I don't ask anyone to disclose their edge, but maybe someone can show examples of setups (maybe older ones, which don't have much of an edge anymore) which are used for such heavy scalping just to know what this kind of trading is like?

    Also The thing I have noticed is though, that whenever it is right to try and get 1 or 2, it is often wrong to just take the 1 or 2 because it is worth double that. In other words, even though 1 or 2 handle swings occur four times as many times as 4 handle swings, the expectations are such that 96% of the 1-2 handle swings are noise and "impossible" to trade unless you are a MM (imo), and maybe 75% of the 4 handle swings are possible to trade, 50% of which turn out to be noise-2-handle-moves (and have to be recognized as such,) leaving 25% of which turn into real-4-handle-moves.

    Comment

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