Whenever you read of a system that uses scalping..run away, to know why..keep reading:
Imagine a roulette wheel in a casino. You walk up to the table and place a bet on either red or black. What are your chances of success?
If you’ve never played roulette, you might think the odds are 50–50. After all, half of the numbered pockets are red, and the other half are black, right?
WRONG. In addition to the red and black pockets, there is at least one pocket that is neither red nor black. This “zero” pocket tilts the odds slightly against our player. In European roulette there is only one zero pocket, giving the house aslight advantage. On this table, the odds are about 53:47 against our player.
American roulette wheels have two 0s, zero and double zero, and this increases the house advantage to about 5.3 percent. This further stacks the odds against our player, reducing his chances for success.
In the world of forex trading, the zero pockets represent the spread. The odds are always going to be at least slightly in favor of the “house,” which in this case is the market maker. The wider the spread, the more “zero pockets” the trader must overcome. Just as each additional zero pocket lowers the roulette player’s chances of success, every additional pip in the spread lessens the trader’s chances of success.
Doing the Math:
Let’s assume that we are trading a currency pair that has a 3-pip spread, since a spread of that size is very common in the forex market.
Our trader just wants to gain 10 pips. That should be easy, right? It’s understood that the trader will lose the spread (3 pips) upon entering the trade. So, in order to turn a profit of 10 pips, the trader actually needs the exchange rate to move 13 pips in his or her favor: 10 + 3 = 13
Now that we know what is required to create a winning trade, let’s see what would have to happen to create an equivalent loss. This is how we will determine the odds of success or failure.
In order to generate a loss of 10 pips, the trader would only need an adverse move of 7 pips. This is because a loss of 3 pips is incurred immediately upon entering the trade, again due to the 3-pip spread: 10 - 3 = 7
We’ve determined that our trader needs a positive move of 13 pips to gain 10 pips, but an adverse move of just 7 pips will result in an equivalent loss of 10 pips. The “raw odds” of 10-pip win versus a 10-pip loss for this trade can be expressed as:
13/7 = 1.857 : 1
The odds of success in this case are 1.857:1, or nearly 2:1 against. That’s a real eye-opener, isn’t it?
Now you know why it’s so difficult to make money trading for small gains.
Do your best then blame luck.