Traders like to automate their trading. A rugged trading system is the minimum, as it serves for uniform behavior and mitigates caprices of the own psychology. For traders with psychological execution problems complete automation pays off even more.
Automation is not a new phenomenon in trading. Programs that try to detect the right entry and exit are as old as computers. Mostly the old school systems are aligned to trend trading or at least swing trading. Newer software for small traders that is available for Forex does often scalping. Interestingly scalping is the opposite of trend trading. Scalpers hope that the price comes back, while trend traders want it to go ahead.
One reason why scalping system software is only available since some years is surely the advanced technology of today. Realtime trading or even online trading wasn’t simply there for the small guy. The early beginnings were companies like Etrade and the like, but the spread that had to be paid back then for stock trading was enormous compared to today. You could trade online, but not very often, provided you didn’t want to go broke. Online trading was more online investing.
Still, that is not the full explanation. Scalping software is in vogue for Forex but not for stocks. Trend trading dominates automated stock trading systems. Scalping robots for the stock market are rare.
The deeper reason is probably the Forex brokerage industry. Generally their model of compensation is via the spread and not by a fixed fee. A Forex broker makes money with highly leveraged but short lasting trades. Do the math and you will find that only a few trades can convert your trading capital into your broker’s earnings. Spreads look so marginal, but with the virtual spread that is hidden in the custom quotes for you and the leverage they become huge.
May it be that Forex brokers supported the scalping robot rush, and that they all the time only have pretended not to like scalping traders?
Scalping needs a market that trades calmly in a range, so that prices more often than in a pure random situation come back. Trend trading needs the opposite, a market that doesn’t come back. Markets change their price behavior. It is their very nature to be unpredictable. If it were different, we all could become millionaires. There have to be losers in the game and the markets “achieve” that only by their unpredictability.
We are now zeroing in on the big advantage of trend trading compared to scalping. If there is a trend, chances are that there is a reason for it and the trend goes ahead after the trader put on a position.
In a scalping environment it is much less likely that there is a reason. One could be a market player who forces the price into a range. Another one could be anticyclically operating participants who have thresholds for selling at a higher price and buying at a lower one. That also could form a range. But mostly ranges are formed by random.
In other words, if the price came back for some period and fluctuated basically sideways, there is generally no reason to think that it will go ahead doing so.
If prices are driven completely by random, neither trend trading nor scalping works. To succeed with scalping you need active anticyclical forces in the market. There are such forces, but it is unpredictable when they become primary, and that is the big difference to cyclical forces that form a trend. Take growth stocks for a convincing example.
So, it is your turn now to decide whether you want the next scalping Forex robot or better try a trend trading neural automaton for the stock market.
