Scalping v Swinging

I’ve been getting more emails than usual recently about how to trade on the horses so I reckon it’s about time I wrote a serious article about trading instead of writing about babies backsides and kabbadi world championships! So here goes.

Swing trading seems to be the flavour of the month these days, where the trader works out where the price is going and tries to get on board for most of the price movement. For instance, the price is steadily moving up and he lays at 3.45 and rides it all the way up and backs it at 4.2. Well bollocks to that.

As tempting as these big profits can sound it can get incredibly frustrating trying to get on these moves unless you’re willing to have wide stops in place. Wide stops are great when you get the price direction right because you don’t get stopped out before it goes your way, but when you have a few losing trades on a run then you need to get on a big movement just to get your money back.

Bear in mind that a roulette wheel can regularly dish out 10 or more reds on the trot and that’s on a 50% chance of red or black turning up. By going for these large profits you might be on a 20-30% chance of a winning trade, in which case a losing run of 15 or more is well within the bounds of normal probability, even if you’re doing nothing wrong.

And if you’re losing 5 ticks or more on every losing trade it’s not long before you’re spending all your free time in steam rooms with a bunch of naked blokes you don’t even know just to get over it. And those places have really slippery floors, anything could happen.

But fear not, there is an alternative to being a swinger. Accurately predicting the direction of the price isn’t as important as most people think it is, and the shorter your timeframe is for each trade then the less important accurate price prediction becomes. By scalping the market for quick, single tick profits your chances of a winning trade will always be greater than when going for the big profit, so your losing runs will be shorter and more manageable.

Also, there are infinitely more 1 and 2 tick movements than there are 10 and 20 tick movements so it no longer matters if you miss them because another will be along right after it. This means you can afford to try for nice prices and try to get good position in queues and when you don’t get matched most of the time it doesn’t matter.

People also get hung up on the fact that when scalping you only make 1 tick profit and that’s not enough to cover the losses. But how many times could you have got out of a trade with a single tick profit and you didn’t, only for the price to instantly turn on you and you end up with a 3 tick loss instead? In that situation, by taking that 1 tick profit you would actually have been 4 ticks better off. If the same thing happens on your next trade then in the space of a few minutes you’re 8 ticks behind where you would have been if you just took a single tick, so now you have to lay at 4.2 and back at 5.0 just to catch up.

The biggest problem people seem to have with scalping is that they can take a few single tick profits no problem and then they get on the wrong side of a fast, straight line price movement that costs them 10 ticks. Then they get a couple of ticks back and then whack, it happens again, and that’s pretty much the end of their scalping career. They believe that these large losses are inevitable and that single tick profits aren’t big enough to cover them but that’s not the case.

I hardly see any price movements on the favourite in a liquid UK horserace before the off where it isn’t possible to get out with less than 5 ticks loss, so if you do have a 10 tick loss it's because you're trying for the best price all the way down instead of just hitting what you could get straight away. And you should only have a 5 tick loss if the price gets smashed by a very large bet at the exact same time you get matched. As long as that doesn’t happen you can get out with a 1 or 2 tick loss by hitting the price that’s available immediately instead of waiting for the best price.

It’s only the unwillingness to take an instant loss that causes the large losses, because most people understandably feel quite resistant to laying at 3.45 and then a second later hitting the 3.40 bid for an instant 1 tick loss. But that’s what you have to do if your lay bet gets matched at 3.45 and straight away there is more money trying to back at 3.45 and you can’t get on the front of the queue to back at 3.45 to scratch the trade. You can’t wait for prices because it’s during that wait that you are vulnerable to the price suddenly tumbling.

Even if the price holds at 3.45 when your lay bet gets matched, if you can’t get close to the front of the queue to back at 3.50 you should consider scratching by just hitting the 3.45 to get out instantly. Every extra second you spend waiting to get your back bet matched at 3.50 is extra time for things to go pear shaped. And even if you scratch the trade by backing at 3.45 and then a few seconds later the 3.50 trades out and you could have got it then it doesn’t matter anyway, you missed out on a tick profit, big deal.

For scalping to work you have to truly understand the meaning of instant and be willing to take instant 1 and 2 tick losses before they get any bigger than that. You can get 1 or 2 ticks back easily in the next few trades but if you always try for the best price to scratch or to take your losses then you will get repeatedly stung by large losses when the price moves against you in a straight line. Learn to be wrong instantly without needing to give it time to come right.

I’ve read books and articles that talk about having confidence in your trades but personally I think the opposite is better, I think the less confidence you have in your trades then the easier it is to accept you’re wrong and get out quickly. Why should you be right? You don’t know what everyone else is thinking or whether a big back bet is suddenly going to hit the market and smash the price down 5 ticks. It’s best to assume that the trade you just got into is a ticking timebomb, get rid of it as fast as you can and pass it onto some swing trader. The less time you have a position then the less can go wrong.

Of course, if you happen to be very good at reading the market and predicting which way the price will go then swing trading is the way forward, but if I was one of them then I’d have to call this The Swinger instead of The Scalper and then I reckon we’d get all kinds of unwanted attention!

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