The ULTIMATE Beginner's Guide to SCALPING

welcome to the ultimate beginner's guide to scalping in this course you are going to learn the hidden dangers and pitfalls of retail scalping from a multidisciplinary perspective this is the minimum knowledge you should have before attempting any type of retail scalping by using important concepts found in finance mathematics statistics behavioral economics and neuroscience you'll be able to grasp the true reality of retail trading and its many unexpected consequences before we proceed you should understand that this video is made for educational purposes only before we start the course we should establish the context that motivates the

course in the first place what motivated me to create this course is what i call the trinomial problem of modern retail trading which is the combination of low entry barriers to the financial markets high leverage and poor financial education low injury barriers mean that nowadays any person can easily open a trading account with a various amount amount of money that was not the case a couple of decades ago retail trading used to be a privilege of people who were financially stable enough to dedicate thousands of dollars to start trading without affecting their personal finances the

suspension of the entry barriers flooded the financial markets with hundreds of thousands of new small retail traders by itself the low entry barrier paradigm is not necessarily a problem the problem begins when the next two elements of the trinomial enter the scene beyond the possibility of easily opening a trading account with a very small amount of money many advantages are now accessible to the retail trader the one that stands out the most is the obscene levels of leverage that are available high leverage creates many technical and behavioral problems in trading we'll examine these problems throughout

the course in great detail on top of that the level of financial education nowadays is a bit misleading there is a great deal of available information which represents an increase in quantity but there is a lot of incorrect information floating around which represents a decline in quality not having enough correct information about something is already bad but having incorrect information about something creates the illusion of knowledge which is arguably worse the combination of these three elements created a massive problem there are thousands of unadvised and badly educated retail traders with unrealistic expectations and access to

high leverage flooding the financial markets on a daily basis it's no wonder why most traders fail the financial market is counterintuitive in many ways and it requires serious education before we move on to the specific knowledge about scalping and its technical peculiarities we need to clarify some of the consequences of the trinomial problem of modern retail trading the fact that now retail traders can start trading with a very small amount of money and they can theoretically produce astronomical returns with high leverage created two situations the first situation is that some retail traders believe they can

transform scalping into a job the second is that some retail traders believe they can become rich quickly and systematically while starting with almost nothing by using a high leverage scalping strategy let's begin first by attacking the notion of whether or not it's possible to retail trade or scalp for a living first we must make a distinction retail trading is done by individuals trading their own money at home retail traders rely only on the return they generate over their own capital institutional trading is done by individuals hired by institutions like funds or banks institutional traders receive

a salary to trade for an institution this distinction will become important in a moment the idea that retail trading is work is incorrect and it comes from a misunderstanding about the concept of work and the different ways of making money traders who believe that retail trading is work believe that work is the effort you make in order to make money even though this definition seems to be valid it's incorrect or at least it's incomplete working and making money are two different things and the key to understand lies in the true concept of work and in

the knowledge about the different ways of making money there are basically two ways of making money you can make money through earned income and you can also make money through capital gain these are two vastly different things earned income comes from work here we need to clarify the concept of work work is not the effort you make in order to generate money work is the effort you make in order to create value to someone else in exchange for money notice that the income you earn from working is not just a function of how much effort

you make it's a function of how much value you are able to generate to someone else when we talk about earning an income you get rewarded proportionally to how much value you generate to someone else in other words earned income is a function of how much value you produce the higher the value the higher the income value is a function of effort which is how much you work and competence which is how well you work in other words value is generated on the quantitative aspect of effort is aligned with the qualitative aspect of competence another

way of looking at this is that competence maximizes the amount of value you generate per unit of effort you apply the bottom line here is that earning an income is about generating value it's not just about generating effort there are three ways to earn an income you can sell your labor power you can sell a product or you can sell a service the first one requires that you work for someone and the other two require that you open a business for example let's take a simple example of a business that sells a product if you

employ effort with competence you will create a product that adds value to consumers and therefore you will get rewarded proportionally i'm oversimplifying this of course but the key point is that if you want to earn an income you will need to create value and as we already saw value is a function of effort and competence not just a function of effort if you work hard without competence your product will not be competitive so despite working hard you will not get rewarded an institutional trader for example is an individual who sells his labor power to the

institution in exchange for a salary he or she receives a salary because he or she will generate value to the institution somehow if effort and competence are applied the main point i want to make here is that earning an income is a deterministic endeavor in other words if you employ enough effort with enough competence you will generate value and you will get rewarded proportionally there is little to no chance involved in the outcome keep this idea in mind because it's going to be important in a moment the other way of making money which is completely

different from earning an income is through capital gain capital gain happens when a profit is generated due to a change in the price of an asset for example if you own stocks and the price goes up you make a profit that's capital gain there are several ways of gaining capital like investing speculation and arbitrage for the purposes of this course we are interested in a form of capital gain called financial speculation financial speculation is when a person speculates about the future price of a financial asset based on the past information about this financial asset it

should be clear to you that retail trading is financial speculation when traders look at the price chart they are speculating about the future direction of price based on past information of price unlike earned income which is about value financial speculation is about information in other words successful financial speculation is a function of having good information about the marketing question has nothing to do with creating value for someone else in exchange for money the problem with that is that the future of price is uncertain and this uncertainty comes from the fact that we have limited information

about any given market when we look at a price chart we are looking at the final representation of the battle between buyers and sellers in its recent past however we cannot perfectly understand all the intentions of buyers and sellers in the market any financial market is composed by many different buyers and sellers with different buying or selling potential acting for different reasons at different times obviously we can infer what buyers and sellers are doing based on this limited information we have this is what price action analysis is all about after all but the point is

that these inferences are imperfect because the past information of price is limited meaning that predictions will work sometimes and failed in others even if you always analyze the market correctly that also means that retail trading is a game of skill and chance at the same time a good trading strategy allows the trader to rely more on his skill rather than chance but it's impossible to remove uncertainty from the equation due to this problem of limited information to understand what that really means you can think about what it would be like to speculate about the future

of price if you had complete information about the intentions of buyers and sellers of the market in real time if that was possible you would be able to perfectly predict the future of price in the short term in the history of science there is a concept that helps us understand this idea of limited information is the concept of laplace's demon proposed by the french scholar and polymath pierre simon laplace let's use laplace's own words to see what the laplace's demon is all about we may regard the present state of the universe as the effect of

its past and the cause of its future an intellect which at a certain moment would know all forces that set nature in motion and all positions of all items of which nature is composed if this intellect were also vast enough to submit this data to analysis it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom for such an intellect nothing would be uncertain in the future just like the past would be present before its eyes in other words laplace's demon is a hypothetical entity

that is able to know all the relations of cause and effect in the world in real time this entity would be able to predict the future of price because it would have complete information about all the forces acting on price in real time in fact you would be able to predict the future of anything needless to say the dream of every trader is to become laplace's demon but that's obviously not possible however since there is incomplete information about any financial market there is uncertainty about the future that doesn't mean that price is unpredictable sometimes we

can make good predictions and sometimes we cannot the financial market can be classified as a complex system which is a system that has both elements of order and chaos simultaneously order and chaos are not mutually exclusive they can coexist in a system uncertainty however is always part of the market due to this problem of incomplete information the point i'm trying to make here is that financial speculation or retail trading is a non-deterministic endeavor due to the uncertainty of the future that means that the trader's outcome doesn't depend only on his or her skill it also

depends on an inherent element of chance outside the trader's control the situation makes the trader vulnerable to two different types of error the trader can make a false positive or a false negative error in his judgments a false positive is when the trader analyzes the market incorrectly and gets a positive outcome that creates the illusion of skill a false negative is when the trader analyzes the market correctly and gets a bad outcome this creates lack of trust in good trading techniques this is when the uncertainty of the market makes the trader believe he doesn't know

what he is doing these two errors occur in financial speculation due to the inherent and unavoidable uncertainty of the future in summary earning an income is deterministic because acting correctly generates the desired outcome capital gain is non-deterministic because acting correctly is not a guarantee of having a good outcome due to the unavoidable uncertainty of the future which is created by the problem of limited information in the markets capital gain in the context of financial speculation is about having information in order to make educated predictions about the future of price of a financial asset it has

nothing to do with creating value it's one way of making money but it's not work the problem however lies more in the nature of financial speculation which is non-deterministic since there is uncertainty about the future of price due to the problem of incomplete information financial speculation is non-deterministic traders depend on skill and chance simultaneously let's now go back to the original question which is whether or not you can retail trade for a living when we talk about making a living we are talking about guaranteeing different types of needs and these needs have a hierarchy here

it's useful to know something called the maslow's hierarchy of needs at the base of the hierarchy we have this physiological needs things like food water and sleep which are critical to survival next we have the safety needs which are also crucial for survival these two levels can pose what is called basic needs basic needs are critical for survival so in order to take care of these types of needs you need to rely on something deterministic like earned income the reason for that is that you cannot attach basic needs to the unavoidable uncertainty of the future

this is why using forms of capital gain to make a living is a bad idea moving up the hierarchy we have the psychological needs which involve relationships and feeling of accomplishment psychological needs are very important for well-being but they are not critical for survival for example you're not going to die if you don't have a feeling of accomplishment in your life but having this feeling positively affects your well-being for obvious reasons the top of the hierarchy is composed of the self-fulfillment needs like achieving the full potential in life being the best at what you do

or being deeply involved in creative endeavors it's a hierarchy so it necessarily follows that you need to take care of basic needs before you worry about self-fulfillment the point i want to make here is that in order to guarantee matters of survival you need to rely on something deterministic meaning something where the outcome is now partly attached to the unavoidable element of chance in other words to make a living you need to rely on something under your control so you can either sell your labor force sell a product or sell a service the variables involved

in earning an income like effort and competence are under your control they are not attached to an element of chance financial speculation is non-deterministic so it should only be done if basic needs are already taken care of capital gains wells in higher levels of the hierarchy the ideal scenario is facing retail trading as a hobby or as the high risk part of a broader long-term investment strategy but facing it as work is a terrible idea if you want to trade for a living your only choice is to become an institutional trader an institutional trader is

hired by a bank or a fund in that context the trader is providing value to someone else in exchange for an income the institutional trader sells his or her labor force to the institution he or she is not trading his or her own money in other words in the case of institutional trading we are talking about earned income when we talk about retail trading we are talking about financial speculation the conclusion here is that retail trading is not work and if you start to treat it as such you are going to be disappointed eventually because

of the non-deterministic nature of financial speculation so don't quit your job or don't drop out of college because you want to become a retail trader that's a terrible idea you must view retail trading as a hobby or a parallel activity to your main source of income unless you want to be an institutional trader that's a different story if you view retail trading like a hobby or simply like something you like to do it can be a healthy thing if you depend on retail trading to pay your bills you will enter a bad road that is

likely to destroy your financial life you might be wondering why institutions can rely on trading for survival if trading is non-deterministic the key here is to understand that the money that institutions make doesn't come solely from the returns they produce over their clients capital let's take the example of a fund the goal of a fund is to generate alpha over a benchmark that means that the goal is to generate a better return than a market index for example the goal of a fund can be to generate a better return than the s p 500 otherwise

the clients of this fund have no motivation to allocate their money in the fund they can simply buy the s p 500 instead the fund makes money in two main ways the charge administration fee which is fixed and a performance fee which is variable the administration fee is charged regardless of the fund's performance so it's a deterministic source of income for the fund the performance fee is charged when the fund can in fact generate alpha over the benchmark so it's a non-deterministic source of income for the fund unlike retail traders institutions can make money even

with bad returns because of the administration fee retail traders cannot charge administration fees because they trade their own money so they lack the deterministic source of income that institutions have the bottom line is that retail trading is not a job and if you want to trade for a living you need to be hired by an institution let's now move on to the question of whether or not you can become rich quickly with scalping we just tackled whether or not you should attempt to retail trade for a living hopefully you were able to see why retail

trading is not a job and how trying to transform it into a job will create problems now we need to attack a different problem which is the idea that scalpers want to become rich quickly while starting with almost no capital we'll use some of the concepts outlined in the last section and introduce new ones as well when we talk about trying to get rich quickly it's useful to analyze the situation mathematically using the compound return formula which goes as follows a is the final amount b is the principal or the amount you start with r

is the return and t is time in other words the final result is a function of three variables how much you start with how much return you get periodically and for how many periods you do it for example if you start with a thousand dollars and you get a monthly return of 2 percent for 60 months or 5 years the final result will be 3281.03 let's take a moment to analyze the three variables that affect the final amount and perceive unique properties about them the first thing to notice is that all three variables positively affect

the final amount meaning that an increase in each of these variables will cause the final amount to increase also the principal p is the amount you start with the larger the principle the higher the final amount with all else maintained equal for example if we use the same parameters from the previous example where p equals a thousand r equals two percent and time equals 60. we get an a equal to 3281.03 if we maintain the same parameters and change b to 3000 we get an a equal to 9843.09 the principle usually comes from outside trading

most people will devote a part of their earned income to start trading that means you can control the principle by enhancing your earned income outside of trading in other words the better your earned income is the better your final amount will be the main point here is that you can enhance your principal by enhancing the earned income which comes from work outside of trading next in line we have the return variable return is how much capital a person is able to gain in percentage terms over a given period return also positively affects the final amount

if you change the return from 2 to 4 percent with all else maintained equal we go from a final amount of 3281.03 to 10519.63 the return is a powerful variable in the formula but it's also the most difficult to control this relates to what we talked about earlier the future of price is uncertain because there is limited information about all the variables acting on price so predictions about the future of price depend both on skill and on the unavoidable element of chance beyond the return being a difficult variable to control it can also go against

you unlike the principle and time you can have a negative return but you cannot have negative principle and time only goes forward time is for how many periods the returns are compounded on the principle if we compound one thousand dollars at two percent monthly return for 120 months instead of 60 months we get 10 765.16 instead of 3281.03 time is a variable that is always on your favor despite not being able to control how time passes by the longer you compound returns on the principal the better the results going to be notice that out of

the three variables the return is the tricky one principle you can control by enhancing your earned income outside of trading and time only moves on your favor the return is the variable that is difficult to control and the one that can go against you if you try to get rich quickly while starting with almost nothing you are reducing p and t to a minimum and trying to compensate that with r the problem here is that r is too difficult to control because it's non-deterministic and it can also go against you notice also that time is

being used as an exponent in the compound return formula so it's a powerful variable that only goes on your favor trying to neglect the time variable is only going to make your life more difficult beyond that in order to compensate the minimization of p and t by altering r you need to get astronomical returns and this is where the villain called leverage enters the scene leverage is like putting returns on steroids there are many side effects to high leverage this section will analyze the most dangerous aspects of leverage the first thing about leverage is that

it increases risk here we have to define where risk means in finance risk is the standard deviation of returns this is the formula for standard deviation but we have a more intuitive way of understanding what it means standard deviation is how much something deviates from its mean imagine that we plot a trader's percentage returns on a histogram this traders use a small risk the returns will not deviate too much from the mean of returns however if the trader increases the risk the returns will start to deviate more from the mean of returns another important notion

here is of the upside and downside risk of side risk is the standard deviation of positive returns downside risk is a standard deviation of negative returns another way of seeing that is by observing how low and high standard deviation of returns would look like in an equity curve plot the green curve represents a strategy with low standard deviation meaning low risk the returns are small so each individual return doesn't deviate too much from the mean of returns in the red curve we have an example of a high standard deviation or high risk the equity curve

oscillates more violently meaning that each return deviates more from the mean of returns here comes the first problem of high risk caused by high leverage the leverage is too high your account will not have enough capital to sustain downside risk once again we can easily understand that geometrically upside risk is never a problem the greater the positive return you get the better for your equity however if downside risk is too great your account will break over and over again traders will often focus only on how much they can win in a certain amount of time

but ignoring the other side of the equation is obviously a mistake please understand that you can never know how much you are going to win but you have the obligation of knowing how much you can lose another problem of high leverage is associated with something not so obvious which is the s-shaped value function this is something part of the prospect theory which made daniel kahneman win a nobel prize in economics the value function measures how we perceive wins and losses imagine that we can attribute a value to a win and a loss with the same

magnitude for example let's imagine that we measure how a 100 win feels and how a 100 loss feels kahneman suggests that we perceive proportional wins and losses asymmetrically meaning that a next amount of dollars lost feels worse than the next amount of dollars when feels good in other words losses affect us psychologically more than wins even when we are talking about the same amount high leverage supercharges both positive and negative returns so it's easy to see that high leverage can create too much psychological distress when negative returns occur the implications of this are enormous depending

on the degree of leverage being used and the size of the negative return even hard-wired defense mechanisms of the brain can be triggered as we'll see later in the course leverage also creates the illusion of skill because traders will measure performance by the p l resulting from leveraged returns one idea that is absolutely necessary to have in mind is the difference between the leverage and unleveraged return for example if you buy a stock at forty dollars and the stock goes up to forty two dollars you made a five percent on leverage return it's unleveraged because

we are measuring the percentage change in price not the percentage change in p l however let's say that you use one to five of leverage in this particular trade your gain will be multiplied by five so a five percent change in price causes a 25 change in p l this is the leverage return reflected on the p l in summary the unleveraged return is the percentage in price that the trader is able to gain or lose in his or her trades it's a good measure of performance because it shows how much the trader can predict

the market without distortions the leverage return is the percentage change in p l that the trader is able to gain or lose with leverage this is a poor measure of performance because you can have a positive p l while having negative unleveraged returns this will create the illusion of skill skill here is associated with how much percentage change in price a trader is able to get not how much change in p l let's observe a quick example of that on the left column we have hypothetical unleveraged returns meaning the percentage change in price that a

trader is able to generate with his or her trades on the middle column we have the amount of leverage used in each trade on the right column we have the leverage return notice that the trader is varying the degree of leverage according to his or her own discretion the point here is that if we compound the unleveraged returns we'll get a negative return of minus 4.09 if we compound the leverage returns we'll get a return of 5.34 this raider will have the illusion of skill because he will measure his performance using the p l which

reflects the leverage returns but in reality the true performance should be measured based on unleveraged returns is actually negative you might be thinking that being able to get a positive p l with negative and leverage returns is a good thing but it's really not and here comes the pernicious detail about this the trader might be able to get away with this in the very short term but in the mid and long terms things change because of something called the law of large numbers in statistics the law of large numbers states that the larger the sample

the more the experimental probability will converge to the theoretical probability translating that into a simple experiment first let's think about a coin toss we know that the theoretical probability of heads or tails in a coin toss is 50 because there are only two possible outcomes and they are equally likely to occur let's imagine that we toss a coin three times in a row this is our sample to measure the experimental probability of getting heads for example we must take the number of times that the coin toss result in heads and divide that by the sample

size this case the experimental probability of heads is 33.34 notice that this differs a lot from the theoretical probability of 50 the law of large number states that the larger the sample the closer these two numbers will get let's see an example in this situation we have 12 coin tosses where 5 of them result in heads yielding an experimental probability of 41.67 if the sample was much larger you'll see that the theoretical and experimental probability would be very close to one another what all of this means is that iteration makes the two probabilities converge translating

that into the trading paradigm we can say that the reality of the trader's performance only emerges in the mid and long terms in other words the trader might get away with a positive p l by having negative leverage returns because of the effect of leverage this effect is doomed to fail as the sample of trades grows an additional point of complexity here is how the trader uses leverage some scalpers might argue that using leverage is a skill but the reality is that their use of leverage comes mostly from their emotional state abuse of leverage will

usually come from greed or desperation to save an account about the break since trading is a game of skill and chance simultaneously eventually the scalper will over leverage the wrong trait which will cause a large loss that will trigger a host of different behavioral and neurological patterns traders must understand that high leverage trading always leads to a slippery slope so the trader will not stop doing it until he reaches a point of no return so to speak we'll study this behavioral and neurological triggers in detail later in the course we must now move on to

the technical problems of scalping first and foremost we must define what scalping is precisely a lot of people believe that scalping is about trading lower time frames even though that is partly correct this is not what defines scalping the definition of scalping is the pursuit of small and immediate rewards but small and immediate are relative small in comparison to what immediate in comparison to what exactly because of this issue we must think about scalping not only as the pursuit of small and immediate rewards but small rewards in comparison to the risk associated with them and

immediate in comparison to how much time the trader is willing to wait in order to realize a profit that immediately translates into a certain type of risk management structure where take profit targets are small stop loss orders are large scalping usually occurs in lower time frames because traders want as much action as possible but since the idea of small and immediate rewards are relative you can theoretically scalp higher time frames also if you maintain this risk management structure this is partly why scalping is not necessarily the same as trading lower time frames another important notion

is that you can use lower time frames for training styles other than scalping the correct mode of day trading for example happens in lower time frames and yet the risk management structure is completely different than the one we find in scalping in summary scalping is not just about trading lower time frames it's about a certain risk management structure that inevitably arises from pursuing small and immediate rewards just happens to be that scalping is mostly done in lower time frames since calpers want as much action as possible here it's useful to think about trading approaches in

terms of where they sit in the risk reward spectrum imagine that on one side of the spectrum we have small take profit targets and large stop loss orders and on the other side of the spectrum we have large take profit targets and small stop-loss orders the risk-reward spectrum is all about the relationship between the entry the target and the stop the implications of different regions of the spectrum are vastly different here we can also introduce the very important idea of immediate and delayed gratification which as you'll see later has dramatic effects in terms of behavior

and for long-term sustainability of the equity curve small and immediate rewards with large risk are about immediate gratification meaning that the trader wants small and immediate rewards this is what scalping is all about large and later rewards and small risk are about delayed gratification this is where responsible trading fits in the point here is that immediate and delayed gratification produce vastly different scenarios for the trader for example immediate gratification tricks the brain into addiction while delayed gratification creates a sustainable environment for the trader not only technically but also psychologically that's not just the case with

trading there are many situations in life where immediate gratification will lead you down a bad path and delayed gratification will lead to a good path we'll return to this idea later on let's talk about the other technical problems of scalping the first one is called market friction market friction is the effect of trading costs on the equity curve no matter if you win or lose a trade you are always paying spreads or commissions in scalping traders will produce too many trades so the effect of market friction becomes augmented when you add the fact that scalpers

go after small rewards the problem becomes even greater the ideal scenario is the opposite of what scalpers do you should seek to trade with less frequency while aiming for larger rewards if you want to diminish the effect of market friction market friction is what makes brokers make more money by the way the more you trade the more the broker makes money that does not mean that brokers are evil or anything like that just means that they make more money with scalpers whilst calpers hardly ever have good results in the long term another problem that traders

face in a greater degree in scalping is the asymmetry between winning and losing trades meaning that losing gains is easier than recuperating losses the best way to understand this is by using an example let's say a trader loses 20 of his capital in order to recuperate his loss and go back to the starting point the trader needs a return greater than 20 for instance let's say a trader has 1 000 and he loses twenty percent now the trader has eight hundred dollars in order to go back to one thousand he needs to gain two hundred

dollars two hundred dollars on top of eight hundred dollars represents a 25 return in other words in order to recover from a 20 percent loss the trader needs a 25 return now let's imagine that the trader starts with a thousand dollars and then he wins 20 percent the account goes to twelve hundred dollars in order to lose the twenty percent return the trader needs a negative return that is lower than twenty percent in this case a negative return of sixteen point sixty seven percent is enough to wipe out a 20 gain given the situation you

can clearly see that losing your gains is easier than recuperating losses in the context of scalping since the winning trades are small and the losing trades are large you need to create an extra run of winning trades to recuperate a large loss in other words it's a lot harder to fight this problem when the winning trades are small and the losing trades are large another way of looking at this is that scalping supercharges this problem of the asymmetry between winning and losing trades it's easy to wipe out positive returns while it's harder to recuperate losses

another problem with scalping is the frequency of opportunities scalpers like to believe that the market is an endless source of opportunities and no matter what time of the day you enter the market you can find good opportunities that's not true for a few different reasons since the market is a complex system meaning that it has both elements of order and chaos simultaneously it's clear that there are times when trading is impossible and there are times when trading is easy that argument alone is enough to disprove the fact that the market is an endless source of

opportunities but there's more the market moves in what's called brownian motion due to the fact that buyers and sellers of different kinds and different buying or selling potential act for different reasons at different times this is the model for brownian motion for those who are more curious we are not going to go into it since this is a beginner's course that implies that good training opportunities only really happen when there is an intersection of different buyers and sellers acting in unison to the point where a significant reversal in price occurs that happens with good frequency

but it certainly doesn't happen all the time the rest of the market is noise that can sometimes be explained but not always successfully traded in other words instead of thinking about the market as an endless stream of opportunities you need to think about the market like 100 thinks about prey you need to wait for the right moment to attack and several sensitive factors must agree for that to happen in fact trading correctly means that you're going to wait for long periods of time for the opportunities to align properly it's not so much a matter of

the trader going after the opportunity it's more a matter of being in front of the opportunities when they appear in other words when trading is done correctly it's composed of long periods of waiting and analysis punctuated by the occasional pull of the trigger a hunter doesn't enter the wild shooting in every possible direction all the time that will be extremely wasteful and counterproductive it's not difficult to see why the scalping mentality is attractive it proposes a way to avoid the boredom of trading correctly however the consequences of the scalping mentality are many in summary high

quality trade opportunities don't happen every minute they are not as frequent as scalpers like to believe they are this problem leads directly to another problem of scalping which is how traders measure the quality of their trades scalpers usually measure their performance by the win rate which is simply the number of trades you want divided by the total number of trades for example if you make 100 trades and win 70 of them your win rate is 0.7 or 70 the win rate is an important metric without a doubt but by itself it paints an incomplete picture

about the trader's performance high wing rates do not mean skill when your targets are close to your entry point they are going to be hit more frequently simply because they are closer to the entry even the natural market noise will make her targets get hit sometimes if even the market noise can make her take profit targets get hit that tells us that hitting a small target is not just about skill high win rate also does not mean anything without the contacts provided by the risk reward ratio for example you can have a 95 win rate

and still break your account if the risk reward ratio is bad or you can have a 40 win rate and make money if the risk reward ratio is good judging if the win rate is high or low depends on the minimum win rate you need to make money according to your risk reward ratio the risk reward ratio is simply the ratio between the target and the stop for example if your stop loss is 10 and your target is 30 you have a risk reward ratio of 3. the minimum width rate you need to make money

with a given risk reward ratio is given by the following formula 1 divided by 1 plus the risk reward ratio if we use a risk reward ratio of 3 we have a minimum rim rate of 25 percent that means that you only need 25 percent of your trades to be successful in order to break even so it logically follows that any win rate above 25 will make you money and therefore any win rate above that is in fact good in this example we use a risk reward ratio where the target is a few times larger

than the stop let's observe what happens when the stop is many times larger than the target like what happens in scalping strategies for example if the stop is 5 times larger than the target the risk-reward ratio will be 0.2 the minimum win rate at that level is 83.34 in other words you need a much higher win rate just to break even because the risk reward ratio is very poor in scalping the trader needs a super high win rate and even if the trader does manage to get it it still doesn't guarantee anything because when losses

occur they devastate a large portion of the winning trades that has psychological and neurological ramifications is the fact that the risk management structure of scalping generates overwhelming losses that make scalping particularly bad in summary the win rate means nothing without the context provided by the risk reward ratio you can break your account with a 95 win rate and you can make money with a 30 win rate for example the keys lie in the context given by the risk-reward ratio and the psychological and neurological effects produced by large losses another dramatic technical problem scalping is the

opportunity cost in economics the opportunity cost is everything you need to give up in order to act in a certain way people usually think about the financial cost of doing something but there are other implicit costs as well for example if you spend a lot of time watching tv there is not a significant cost in terms of capital but there is a significant cost in terms of time think about everything else productive you could be doing with that time instead scalping has a ridiculously high opportunity cost in terms of time scalpers sometimes spend several hours

in front of the computer screen scalpers will argue that they are working but as we already saw financial speculation is a form of capital gain not earned income so if you spend too many hours trying to scalp for a living you are wasting your time this is also the problem with day trading where too much time is spent in front of the computer this is why responsible day trading is only done in small doses that case swing trading might be a better idea before we move on to the behavioral and neuroscientific aspect of scalping i

want to talk about two very important notions in finance these two notions will change the way you approach the pursuit of profits the first idea relates to how you should measure the quality of a return in the financial markets you often see people bragging about how much they made in a given amount of time they will say something like i made x percent return in a matter of y number of days for example to understand the problem with that let me ask you a question which alternative do you prefer a a ten percent return with

a two percent risk or b twenty percent return with a five percent risk most people will choose alternative b because they think the higher return is better that's because they are looking at the return while ignoring the risk that is associated with this return another way of looking at this is that they are looking at the size of the return instead of its quality the right way to view this is to look at the returns quality you need the alternative that yields more return per unit of risk for example in alternative a you get 10

return while assuming 2 risk defining the return by the risk you get 5 units of return per unit of risk in alternative b you get a 20 return while assuming a 5 risk if you divide the return by the risk you get 4 units of return per unit of risk in other words even though the alternative a yields a lower return the quality of the return is better because it yields more return per unit of risk so when you see someone saying that they got x percent return in y amount of time you should ask

them if they know how much risk they assumed in order to get a return most people will not be able to answer that question the intuition you should get from this is that the right way of measuring a return is by measuring it against the associated risk meaning how much return per unit of risk here's a small lesson about leverage consider the following alternatives a ten percent return with a two percent risk b twenty percent return with a four percent risk c thirty percent return with a six percent risk and d forty percent return with

eight percent risk according to what we just saw all of these alternatives have the exact same quality because they all yield five units of return per unit of risk if they are all the same in terms of quality you might be thinking that you can pick the one that uses more return but that's incorrect alternative d has a higher risk which will translate into more psychological distress by using leverage you are increasing risk without changing the quality of returns while increasing psychological distress in summary higher returns do not mean better returns the other notion you

need to have relates to the overall goal when dealing with risk and rewards the goal is not to have the highest return possible as we just saw a higher return is not necessarily better the goal is to maximize returns while minimizing risks there's a limit to how much you can do that but there is certainly a lot of room for optimization in other words you should aim to squeeze the highest amount of return per unit of risk that's what's going to make you safer in the market in order to maximize your rewards while minimizing your

risks you need to be able to enter your trades near the reversal points of the market chances like that don't happen as often as calpers like to believe as we saw earlier let's now move on to the study of the behavioral economics of scalping when we talk about scalping there is a series of different emotions and biases that take place the study of behavioral economics is quite extensive so in this beginner's course we'll only take a brief look at the most relevant ideas we'll talk about some cognitive biases that shape certain kinds of behaviors in

scalping like the motivation to use a scalping strategy the illusion of skill the illusion of control over emotions and why scalpers keep trying the same thing again even after repeated failure first of all we should define what a cognitive bias is cognitive bias is a systematic error in thinking a pattern of thought that deviates from rational judgment these errors are present in all human beings and they have their evolutionary purpose but that's another story for this course you should know that cognitive biases are faulty thinking patterns that steer people's behavior away from rationality let's begin

first by analyzing the motivation to use a scalping strategy we can say that this motivation comes from a combination of two cognitive biases in other words the motivation to use a scalping strategy comes from the intersection between two errors in thinking the first error or cognitive bias is called action bias the action bias is the tendency people have to prefer action over inaction when trying to reach a goal even when not acting is a better choice in other words we feel better acting than not acting if we're trying to achieve something even when not acting

makes more sense in the trading context there are a lot of times when not trading is better than trading but because of the action bias traders are always compelled to trade when traders don't trade for a longer period of time they begin to feel boredom which is interpreted by the brain as psychological pain and that is in part what drives them to action even when not acting is a better choice in a good trading strategy the trader has to constantly fight this feeling of boredom and exercise patience to wait for the right moments to trade

scalping strategy where the trader pulls the trigger all the time creates a false solution to the boredom of under trading in other words the trader will over trade to compensate boredom not necessarily because a good opportunity appeared in the market the second error in judgment that adds on top of the action bias is something called hyperbolic discounting which is the tendency to prefer immediate rewards rather than rewards that come later in the future even if the immediate rewards are smaller a cognitive bias perfectly mirrors the risk management structure of scalping which is composed of small

targets and large stops hyperbolic discounting occurs because people are mostly risk averse so an immediate and smaller reward seems less risky than a greater reward in the future even though it seems like a smaller risk the iteration of decisions like this creates a larger risk in the end the alignment between the action bias and hyperbolic discounting creates the behavioral basis for scalping next we are going to talk about two areas of thinking that can generate the illusion of skill the first error is called hot hand fallacy which is the tendency to believe that a winning

streak is likely to lead to further success this tends to happen in the beginning of a scalping strategy and it relates to what we talked about earlier regarding the law of large numbers the hot hand fallacy makes scalpers believe that small samples of winning trades are representative of a successful long-term scalping strategy they assume their performance will continue going like that forever the other bias that adds to the illusion of skill is called dundeen kruger effect which states that a person with lack of knowledge tends to overestimate their abilities in other words the lesser trader

knows about trading the more confident the trader tends to be above his abilities if we look at the geometric representation of the dunning-kruger effect we'll see that confidence rapidly rises with minimal knowledge about any given topic this is a situation where arrogant incompetence and illusion of skill can occur as more knowledge is gained level of confidence drops because there is an increasing perception that things are more complicated than what the person thought them to be in the first place if the person continues to gain knowledge however the level of confidence begins to rise again this

time the confidence level matches the level of skill obtained with true knowledge the denny kruger effect happens because those who have shallow knowledge about something also don't have the insight to see their own limitations in that area the hot hand fallacy and the dunning-kruger effect feed off each other in the context of scalping the initial winning streak of a scalping strategy creates the illusion that small samples of data are representative of large samples of data meaning that an initial winning streak will continue happening in the long term and also creates the illusion of skill in

people with superficial knowledge about the markets next we can talk about couple of cognitive biases that cause traders to have the illusion of control over their own emotions the first bias is called restraint bias which is people's tendency to overestimate their control over impulses the restraint bias occurs because of another bias called empathy gap which describes people's inability to correctly identify how emotions impact behaviors in other words the fact that we don't accurately identify how emotions impact behaviors creates a certain kind of illusion of control over our own emotions in the future for example you

overestimate how much you can tolerate hunger in the future when your stomach is full in the present this is critical for high leverage scalping because calpers overestimate their ability to control their emotions when extreme situations happen for example if a scalper sees an over leveraged trait going against him his emotions are likely to take over we talk about how emotions take over from a neuroscientific point of view but the point here is that traitors overestimate how much they will be able to control their future emotional states that will inevitably lead them to situations that they

cannot control these are just a few examples of the issues of scalping in the light of behavioral economics this is just the tip of the iceberg of course the study of behavioral economics goes much further much deeper than this so i encourage you to study this subject on your own time if you have the interest now i want to talk about something that i never see anyone talking about on the internet in the context of trading at least now with the seriousness that it deserves which is the fact that scalping can become a form of

addiction if taken to an extreme just like gambling addiction for example i want to grab your attention to the mechanism that creates this problem to understand the mechanics of addiction we need to understand something called the pleasure trap which is a paradigm where the modern environment fools our ancient neurochemistry and things like addiction and health problems emerge before we understand the pleasure trap we need to know another concept called the motivational triad the motivational triad is what motivates us towards any goal in life biologically speaking we are hardwired to seek pleasure avoid pain and conserve

energy that's the motivational triad in other words we move towards things that gives us pleasure we move away from things that causes us pain and we want to conserve as much energy as possible in the process since our energy is limited to illustrate this let's use an example outside of trading first imagine that you are hungry and you need to get some food you have basically two choices you can go to the grocery store buy healthy whole foods go back home cook it and then eat it this might take a few hours to accomplish an

effort on your part the other choice is ordering fast food online about half an hour the hyper palatable meal will be at your door without much effort on their part beyond that the high calorie high sugar and high fat fast food activate the pleasure centers of the brain much more than the healthy food will because of this higher density of things that gives us pleasure for your brain the fast food not only tastes better meaning that it gives more pleasure but it conserves energy also it's quicker and easier to get the problem is that fast

food is a modern invention so it's not natural our bodies did not evolve to deal with fast food in this way we are only supposed to eat healthy foods found in nature because that's what our bodies evolve with the point here is that the abnormal environmental cue created by fast food ends up fooling the brain it makes the brain believe that it's being efficient because it's gaining more pleasure at the same time that is conserving energy let's look at the situation geometrically when we eat healthy foods that we evolve to eat our perception of pleasure

is natural and sustainable because it doesn't create chronic diseases like fast food does you can binge on healthy foods all you want and you're not going to get sick or overweight as soon as we start to eat fast food our perception of pleasure skyrockets the problem here and this is critical for the pleasure trap is that our brain gets used to these abnormally high levels of pleasure as a defense mechanism meaning that it dulls down the feeling of pleasure and you end up getting used to it in other words nyu created a new standard for

your pleasure seeking behavior now the pleasure you get from fast food is relatively similar to the pleasure you would get from healthy foods in the first place however we know that eating fast food leads to a series of health problems so let's say you stop eating fast food and now you decided to be healthy again and only eat whole foods and etc your brain will not get the normal pleasure used to get from healthy foods and you will have the sensation of diminished pleasure and you will desperately try to go back to the new standard

of pleasure that you have created going back to normal is a long and tedious process because you need a period of under stimulation to compensate for the period of overstimulation you need to reset the pleasure centers of the brain so to speak and that takes time and under stimulation the point here is that you cannot keep eating fast food to maintain your new standard of pleasure because that will cause a series of chronic diseases over time the trap is that while you are eating fast food your brain believes that you are being extremely efficient because

of the motivational triad so you feel good you are gaining pleasure avoiding pain conserving energy but all you are really doing is undermining your health in summary the pleasure trap makes us feel good when we go towards something bad it makes us feel bad when we go to wear something good if the environmental cues are disproportional that's the case with any form of addiction fast food addiction social media addiction drug addiction gambling addiction and yes scalping addiction have you ever wondered why you cannot stay for too long without checking social media on your phone or

why you cannot seem to choose a series to watch on your favorite streaming service or why you have a difficulty to watch a youtube video until its very end alright it's so easy to eat incorrectly in our modern society the answer is the pleasure trap when the disproportional and unnatural environmental cues of modern life fool our ancient neurochemistry let me give you another example this time in the animal kingdom just for the sake of illustration again imagine a moth flying at night the moth is an insect that evolves to fly towards light and celestial objects

for navigation it's an amazing feat of biological evolution that took who knows how many thousands of years to develop however when a moth encounters a porch light which is a relatively modern invention compared to the biology of the moss it creates a disproportional environmental cue the moth will fly towards the porch light thinking it's being extremely efficient after all it's the brightest light in the night sky needless to say it will keep hitting against the porch light until it dies in summary a disproportional environmental cue makes the moth believe it's being efficient but in reality

it's flying towards its death bringing this paradigm to the context of scalping we have the same problem the immediate gratification created by leverage and the peculiar risk management structure of scalping creates a disproportional environmental cue every winning scalp trade tells you that you are moving towards your goal efficiently however that's just the environment fooling your neurochemistry if we look at scalping under the light of the motivational triad we see that as calpers brain perceives that more pleasure is obtained through hyper returns produced by leverage more pain is being avoided since scalping bypasses the boredom of

trading correctly more energy is being conserved because calpers don't have to wait for opportunities to align properly for trades to run their natural course however just like in the example of a healthy food and fast food doing the wrong thing feels right and doing the right thing feels wrong when the environment creates disproportional environmental cues like any other form of addiction the long-term implications of scalping are terrible scalpers are liking moth flying to the flame they think they are being efficient but in reality they are flying directly towards their death metaphorically speaking the natural course

of a trade opportunity if you will is the absence of leverage and letting the trade run its course with small risk and large potential rewards larger targets usually take longer to get hit what i'm saying is that the correct way of training requires a lot of patience and it's about delayed gratification here we find that tension between immediate and delayed gratification once again immediate gratification feels good and motivating but it leads to destruction delayed gratification feels boring and uncomfortable but it leads to constructive sustainability this is of course an immense paradox created by the tension

between modern technology and ancient neurochemistry the only way to avoid it is to know how it works the ultimate mind trick to bypass the pleasure trap is to accept that building something substantial in any domain is not about seeking pleasure it's about managing suffering the feeling of delaying gratification is bittersweet it's uncomfortable but it's also motivating and pleasurable if you think about the future outcome immediate gratification feels motivating engaging and pleasurable in the short term but it creates damage chaos in situations that are overwhelming in psychological and neurological terms in the long run delayed gratification

feels boring uncomfortable and tedious but it's the stuff that creates positive consistent and solid outcomes in the long term the key point here is that even though delayed gratification is tedious and boring it's not overwhelming meaning that moderate self-control is enough to overcome it that's not what happens with the slippery slopes created by immediate gratification over time immediate gratification will put you in situations where ancient biology will take over and irrationality will prevail even though scalping can become a form of addiction it's not like drug addiction which is far stronger and more serious so do

not use this as an excuse to continue scalping if you are aware that you are addicted to this form of trading take some good time off so your mind can recover and then go after learning better things about trading understanding the mechanics of how scalping can become addictive is usually enough to overcome it another thing that helps to overcome an addiction is to substitute it for something positive last but not least i want to talk about a situation that happens with scalpers from a neuroscientific point of view you saw that the immediate gratification quality of

scalping leads to a bad road even though it feels right part of this bad road i'm talking about is a situation where the more primitive parts of the brain take over rational thinking as a defense mechanism this is also something that traders cannot control no matter how much willpower they think they have one of the hidden dangers of irresponsible scalping is related to the neuroscience of risk taking risk is associated with danger detection and the human brain has several ways of dealing with danger depending on how you deal with risk your brain will sabotage your

behavior as a defense mechanism before jumping to this specific situation i'm talking about we need to learn a few things about the human brain we begin by talking about the triune brain model which is a model proposed by the neuroscientist paul mclean and it shows that the human brain is divided into three different regions that play different roles and developed in different times throughout the course of biological evolution the oldest region of the tree is the r complex also known as the reptilian brain this is the oldest of the three and is composed by the

brain stem and cerebellum the art complex is responsible for things like heart rate breathing body temperature and balance in other words very basic survival mechanisms that are common among many different animals the art complex first appeared in fish around 500 million years ago the second region is the limbic system which is composed by the amygdala hippocampus thalamus hypothalamus basal ganglia and the cingulate gyrus it's the part of the brain responsible for emotions since it can record memories of behaviors that create agreeable and disagreeable experiences the limbic system appeared in small mammals around 150 million years

ago the third region is the neocortex the most recently evolved part of the brain responsible for language abstract thought imagination and consciousness the neocortex appeared in primates around two to three million years ago these three regions play different roles but they are connected to one another for the purposes of this course we are particularly interested in a part of the limbic system called amygdala the amygdala is an almond-shaped structure located near the hippocampus in the frontal part of the temporal lobe it's a critical structure for the feeling of certain motions and also to perceive certain

emotions in other human beings remember once again that the amygdala is part of the limbic system the important point here is that the amygdala seems to modulate our reactions to events that are perceived to be life-threatening in other words things like danger and fear stimulate the amygdala the new cortex is responsible for thinking and reasoning in summary the new cortex will interpret information coming from the outside world and the limbic system produces emotional responses to this information this is an oversimplification of course but the point is that knowing and feeling are things produced in different

regions of the brain we have to understand a little bit how the environment causes emotions in the brain the sensory information from the outside world like sight and sound for example enter the brain through a structure called thalamus which is a sort of sensory gateway of the brain the thalamus connects to the neocortex where this information will be interpreted for example light enters the eyes the sensory information travels to the thalamus from there it goes to the visual cortex where it will be interpreted this is the pure interpretation of what you are seeing which is

different from how you feel about it to produce some sort of emotion this information has to travel from the new cortex to the amygdala and the hippocampus the hippocampus is responsible for memory and the amygdala produces the appropriate emotional response to a memory for example if you see something you fear the neocortex interprets the image associates it with a bad memory in the hippocampus and the amygdala produces the appropriate emotional response in summary the neocortex understands what's going on the hippocampus remembers stuff for you and the amygdala is what produces emotions this is what happens

under normal circumstances the information enters through the thalamus goes to the new cortex and comes back to the limbic system this paradigm you are able to use self-control to manage your emotions because your neural cortex is turned on counterbalancing any emotional response that might be too disproportional coming from the limbic system it's the battle between reason and emotion however the brain has a defense mechanism against emergencies the thalamus also connects directly to the amygdala that means that depending on the information that arrives at the thalamus the amygdala will short-circuit the neocortex and produce the fight

flight or freeze response that happens when you are in a situation that is too emotionally charged your brain detects that you don't have the time to deliberate about the situation and you needs to react quickly so the amygdala hijacks the neocortex by activating the hypothalamic pituitary adrenal axis from that point onwards irrational behavior emerges this is known as the amygdala hijack because the amygdala hijacks the function of the neocortex as a defense mechanism this evolved successfully in a time where human beings had to run away from dangerous animals in the wild but the mechanism still

remains intact and still gets activated if we face extreme situations bringing this to the trading context if you see your account being destroyed by the second because you over leverage the trade that is going against you your brain associates this with a bad memory of losing money and everything that goes along with that and because the situation is too extreme and happening too fast the amygdala will hijack the neocortex and assume control of the situation it's important that you understand that this sort of thing is not under your control anymore than many of the stuff

that happens in your body that you are not aware of if the danger detection mechanism of the amygdala senses that you are in desperation there is nothing you can do about it because the rational you in this context is the neocortex which is being hijacked by the amygdala which is the irrational you in a way when the amygdala assumes control your behavior will be entirely emotional there is no rational thought abstraction or deliberation taking place because the new cortex is shut down it's not difficult to see that behaving like this will never produce a good

outcome in trading it's impossible to intelligently manage emotions that are too extreme because of the amygdala hijack the trick is to avoid situations that are too extreme that's one of the reasons why it's not a good idea to over leverage your traits with overconfidence the more leverage you use the more you run the risk of the amygdala hijack another way of looking at this is that the connections from the limbic system to the neocortex are stronger than the connections from the new cortex to the limbic system in other words the limbic system which can be

violent and irrational can easily override the deliberative and thoughtful neocortex this is the danger of putting yourself in extreme situations not just in trading but in life in general traders like to talk about how important it is to manage emotions but there are certain motions that are impossible to manage the key element in emotional control in trading is not discipline nor willpower it's how much risk you take the amygdala can sense how much risk you take so risk is directly proportional to the probability of an amygdala hijack once the amygdala hijack is triggered the traitor

hits a point of no return emotionally this sort of thing can also be exacerbated if your life depends on the outcome of your trades that is another reason why you cannot rely on trading to pay your bills this concludes this free course about the dangers of retail scalping i hope you are able to learn something new and hopefully this information will steer you away from bad behavior if you are interested in scalping i suggest you move away from retail scalping and begin to learn about institutional scalping which is a completely different world throughout this course

you learned that retail scalping is fragile and vulnerable to the uncertainty of the markets however there is a way to scalp the market that goes in the opposite direction meaning strategies that gain from the inherent uncertainty of the markets instead of being destroyed by it that's what institutional trading is all about in the financial markets the only certainty is that there is going to be uncertainty based on that premise institutions developed a way of training in which uncertainty itself generates profit a paradigm shift makes it possible for traders to make money regardless of market direction

and also when bad news hit the market unexpectedly however explaining how all of that works is outside the scope of this video if you want to understand more about that access my website in the video description and go to the ebook section or send me an email with your questions if you enjoyed the material i produce please consider clicking the like button subscribing to the channel activating the notifications button sharing the video and leaving your feedback below in the comment section thank you very much for watching and take care you