The Fastest Scalp: Profit Scraping in Algorithmic Trading

In algorithmic trading, there’s a strategy that aims to capture small but consistent profits – the art of scalping. Imagine being able to extract tiny gains from the market, swiftly and efficiently, to accumulate significant returns over time.

The idea of scalping goes something like this: If you had a robot that could get in and out quickly to grab a tiny profit of, say, 1 cent every 20 minutes, then you’d make about $3.60 per week safely, consistently and passively, since going for 1 cent shouldn’t be too risky. Now if $3.60 per week is too little for your appetite, then as long as you have more capital, this robot could be set to make $1 each time instead – then you’d make $360 per week (that’s $1440 per month) completely passively.

Profit scraping is all about capitalizing on fleeting market movements. It’s a strategy that involves executing rapid trades to skim off small profits, often within a narrow price range. While the gains per trade may seem minuscule, the goal is to leverage the frequency of these trades to accumulate profits over time. This approach requires precision, speed, and a deep understanding of market dynamics.

If you’re intrigued by this concept and have put two and two together, you’ll realize that our current feature that presents a challenge about making 1 penny as fast as possible is, by no small coincidence, tightly related to the idea of scalping. In this article, we’d like to offer an unconventional insight that might change your expectations (in a positive way) about scalping strategies, and give you an edge in mindset.

Rethink risk-reward

If you’ve read into trading before, you’ve probably come across the term “risk-reward ratio”. For example, you may have heard that a good trade setup has a 2:1 risk-reward ratio, meaning that you should try to make sure you risk $1 for the chance to gain $2. In technical traders’ speak, that means setting your take profit level at 2x the gap of your stop loss level.

The idea of a high risk-reward ratio also gets mixed up with an unrealistic expectation on return on investment. For example, the 2:1 risk-reward ratio ethos could make you think that if you put down an initial $X to pay for a venture, you should liquidate only if it’s now worth 2x; if not, you should wait longer or go broke (i.e. hit stop loss).

Now, let’s think about that for a second.

• If you were to buy a house, you don’t need it to be worth 2x before selling it. Usually a small percentage gain is considered a success.
• If you were to put your money in a bank or managed fund, an interest payout of 5% or above is fine, considering that it’s passive.
• If you were to put your money in a managed investment property, you might be offered to passively gain something like 15% over a few years.
• If you were to put your money into starting up a business, your business would be considered successful by large investors if it’s systematized and has a profit margin of 5% or above.

Taking just the four examples above, we encourage you to take a step back and rethink the risk-reward ratios or profitability percentages you’ve been hearing about.

We can see from these examples that perhaps you should already be very happy if you have a scalping system that grows your account by 5%. We also see that it’s normal for businesses to risk a large amount of capital up front in order to support modest growth, but it is growth nonetheless. Businesses have the largest growth in valuation out of any type of asset for investment, so we can take their numbers as a guide for what’s considered successful in profit-making activity.

So, if you see numbers like 100% or 200% in trading, that’s great. But just know that you don’t need to make that much to be considered to have a highly valuable system. If you treat your trading system as a business, that is, a profit-making activity, then the successful business economy tells us that:

1. It’s pretty normal that you make a large initial down-payment, and aim for modest growth. The risk is high, like any business venture.
2. If you systematize it, you should be happy if you gain a consistent growth of any amount. And if it’s 5% or higher, you’re considered a successful business that investors would invest in or look to acquire and scale.

These lower percentages should make you feel a lot closer to your goals, and understand that large risk is part of any business, while profit margins are modest. You may be overshooting if you think you need to make more to be successful.

Moreover, in any single trade, it’s not possible to risk less than 1 cent. Therefore when looking into the case of a 1 cent scalp, we can naturally see that a larger down-payment (at least to fund the account and to withstand the drawdown) supports the business profit-making activity of generating a 1 cent profit. And that’s normal.

Even further, it’ll be necessary to have a larger stop loss than the profit you aim to gain, since it doesn’t make sense to set a stop loss at 1 cent and stop yourself out immediately. It’s like saying that we want to earn interest from a bank savings account, but we only want to put $1 in the account because the interest earned would be $2. In actuality, most of us expect to support that $2 passive interest earning with a much larger deposit in the savings account. So, trading activities need the same consideration.

This idea is very important, because a big reason for trading account upsets is hitting a stop loss that’s been set too close. That’s why it’s important to rethink the idea of holding out and not taking profit earlier, just because of an ethos of waiting for a 2:1 risk-reward ratio.

Learning in layman’s terms

On a side note, we know that the terms ‘profit margin’, ‘risk-reward ratio’ and ‘return on investment’ are different ideas in finance. Therefore, you may come up with a rebuttal on why we’re wrong because we’re mixing up all the concepts. Or you may have a different reason. If so, kudos to you! We encourage you to think critically for yourself.

Our goal is to coach and challenge you in a fun way, in order for you to be empowered in independent critical thinking skills. We won’t bombard you with jargon to confuse you even more in this industry. Our approach is to use layman’s terms to look at things in a simple way, because there’s power in simplicity. By seeing the simple side of things, we understand better and can do things.

So now, you should have a more positive view about the normal levels of profit to expect, and the risk to take on, to be considered successful – it’s positive to see things in a more modest light, because overreaching based on unattainable numbers isn’t helpful.

What now?

The next questions from here: How much capital safely facilitates a consistent 1 cent profit? How fast can it be done?

Much like starting a business, there’s no better way of learning than practical experience. And in this unique industry, as they say, you need to find your own edge. You really need to find out for yourself by testing, but being smart about it by using assistive tech. That’s what our current feature aims to do; to bring you through building tech that helps you experience the 1 cent grab for yourself, and launch your own further discoveries from there.