forex-scalping.com

Sunk cost on a one-minute chart

Sunk cost feels like a swing trader's problem, but scalpers fall into it too. A trade has been open for three minutes, price is slightly adverse, and the time already spent watching creates a desire to see it through. The mind rationalizes that exiting now would waste the effort.

On short timeframes, the logic is flimsier still. A scalping setup has a limited window of validity. If price has not moved as expected within a certain number of seconds or bars, the premise has weakened, regardless of how much attention has been invested.

A time stop is a clean remedy: if the trade has not hit the target or shown progress within a defined time, exit at market. The rule removes the temptation to hope.

Test the time stop in the data. Look at how winners and losers distribute by duration. Many systems show that trades lasting beyond a certain length have a much lower win rate.

That threshold becomes the exit rule.

How long do winners last compared with losers in the log, and is a time stop in use?

Checked my own log for this. Winners on my EUR/USD scalps had a median duration of about 2 minutes 40 seconds. Losers had a median of about 6 minutes. Trades still open after 8 minutes won only about 30 percent of the time, against roughly 58 percent overall. So I added a time stop at 7 minutes: close at market if the target isn't hit. Over the next few hundred trades, average loss shrank a bit and the overall expectancy improved by around 0.2 pips per trade.

I had a version of this that I only recognised after reading my own notes. On a bad morning I'd written the same sentence three times, something like "give it until the next candle", and each of those trades turned a small planned loss into a larger one. The time already spent staring at the chart was what kept me in, exactly as you describe.

What worked for me was a hard bar count instead of a clock. On the five minute chart I allow the trade three closed bars to show progress, meaning price has to be at least a third of the way to the target by then. If not, I close it at market and write down "stale" in the journal. After two months, those stale exits averaged a small loss, while the trades I'd previously held on hope had a much worse average.

The harder part is applying it on a day when I'm already down. That's when the urge to wait is strongest, so I print the rule on a card next to the screen.