How We Set Up Trades & Scratching

I now want to recap the ideas from the last few chapters and put them together into
what a trade should look like when it is filled.
We start off by judging liquidity and value. These require a few pieces of
information. If we have decided to join the 15bid bid on a 15b/16o spread with a
good queue position we should expect to get a quick fill. If we are correct in our
judgment of value we should also expect others to come in behind us on the 15bid.
So, when we are filled (in a slower market) we are buying at 15 and we expect the
market to still be 15b/16o after our fill. This is the perfect set up that we are looking
for. It means at the time of our fill we have set up a profit or scratch scenario. We are
long at 15, we will then immediately offer 16 to make a tick but if 15s start to trade
and look like trading out then we can scratch the trade. If we are filled by small
traders then it is very possible to achieve this set up.
If you find that you are filled by a bigger order and after being filled at 15 the market
is 14b/15o, if it shows no sign of immediately going back 15b then you would work
to scratch the trade but not wanting to miss the maximum 1 tick loss of selling 14s. If
this type of scenario continues to happen to you then either your judgement of value
is slightly out or you should look to place your order a further tick away (at 14) while
still trying to get a quick fill.
So we try to set up trades that offer us a profit or scratch set up. Most retail traders set
profit targets and stop loss limits; for them every trade is either a win or a loss.
If you are to make the transition to become a more professional style trader you must
change you mindset. You must target trades that offer a profit or scratch set up.
Change your mindset from win or loss, to win or scratch. The difference between
losing even just 1 tick on a trade and scratching the trade will be significant when you
factor in how many trades we do. With scalping, everything we do is compounded
perhaps hundreds of times a year. So learning to scratch rather than take a 1 tick loss
can be another vital step to profitability. It can literally be worth thousands of dollars
per year.
True professional futures traders have always understood the importance of
scratching. In fact in the floor days, we got rebates from the exchange for scratch
trades because they knew we did so many and it was a vital part of providing
liquidity.When I am studying the trading stats of my clients one stat I look for is to see a
higher number of scratches than losses. It tells me two things. First that they are
setting up trades correctly. Second, they are disciplined enough to exit at the scratch.
It’s one thing to set up a trade as a profit or scratch but then you must have the
discipline to exit at the scratch if it looks like the trade hasn’t worked as you wanted.
Remember that we expect to exit the trade quickly so if you are still in the trade after
you thought you would be out of it, then you should be looking to exit.
For faster markets that are jumping around a few ticks at a time, whether you have
the opportunity to scratch will depend on your order placement. If your orders are
placed correctly then you should still have the opportunity to scratch. If you find that
you never get the chance to scratch and your bad trades are always 1 or 2 or even
more ticks offside, then your orders are being placed too close for the current
By moving them further away you should eliminate these bad trades which is what
we usually want to do even if it means missing a couple of good ones. The reason is
that we are aiming for a high percentage win rate which itself provides the
opportunities to scale up a bit. We don’t want to become big traders but if we have a
high win rate then we would like to increase our size. In my opinion win rates of 55%
or 60% are too inconsistent for scalpers to scale with.

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