Tuesday, April 24, 2007

Death by a thousand cuts?

One of e-mails I recieved on a previous article deserves a separate post since I hear this question often enough.

It essentially asked "Isn't scalping a way to death by 1000 cuts?" Well, if you lose money trading, you lose it - scalping or not. What it comes to is whether you got good at trading, whatever your style is, or not. With scalping, you will lose slowly, in small increments - until you learn to win. In any other trading approach you will lose probably faster, in bigger increments - until you learn to win. If you go through "grinding it out" learning curve where losses are practically unavoidable, it's imperative that you keep them under control so you are still in the game when the critical mass of knowledge and experience is reached. In this sense, scalping is doing exactly this: since the risk control is very tight, it slows down the rate of losses thus giving you more time to learn.

Sure, slow bleeding is bad. I, however, fail to see how it would be better to blow up one's trading account in a few broad strokes. Maybe it feels more heroic, but you simply don't stand a chance to collect enough lessons (each loss is a lesson, right?) if you experience fewer losses of a bigger size. Capital preservation is the name of the game for the newer trader. If losses is inalienable part of this stage of learning process, my pick would be small ones.

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