Introduction to Guerrilla Trading

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Introduction to Guerrilla Trading

“Guerrilla trading,” as the colorful phrase implies, refers to the approach used by agile traders who dart in and out of the financial jungle in brief skirmishes with the goal of generating rapid returns while minimizing risk. The distinguishing feature of a guerrilla trader is an extremely short-term trading timescale that is even shorter than that of a scalper, making a day trader seem to be a long-term investor. Only electronic trading systems, such as high-frequency trading systems, trade with shorter timescales than the guerrilla trader.

Guerrilla trading’s success is dependent on cheap fees, large leverage, and, most crucially, narrow trading spreads since the goal is to generate tiny gains in repeated transactions. While guerrilla trading strategies may be used to any financial market, they may be most suited to foreign exchange trading, particularly on big currency pairings with significant liquidity and low spreads.

Characteristics of Guerrilla Trading

The strategy of a guerrilla trader is to generate small absolute profits each deal, but to trade numerous times in a session such that the aggregate winnings are large enough to warrant the risk involved in such short-term trading. Guerrilla trading has the following qualities, according to this profile:

  • Very short-term trading period: A guerrilla trader’s typical transaction lasts just a few minutes and seldom surpasses this duration. This is because the longer a transaction is held, the higher the danger that it will go against the trader.
  • Small gains, even smaller losses: A guerrilla trader is happy to make 10 to 20 pips on a forex transaction, but a scalper may aim for more than double that amount, or 25 to 50 pips. This implies that the guerilla trader cannot risk more than a few pips on a single transaction, with maximum losses restricted at 5 to 10 pips.
  • Large number of deals: When trading circumstances are favorable, successful guerrilla traders may execute more than 20 to 25 trades in a single trading session. This is more likely to occur when major economic data, such as monthly US payroll figures or trade statistics, is published.
  • Due to their short-term emphasis, guerrilla traders often depend on technical analysis to time their trades, and are skilled at utilizing tick charts or 1-minute charts to determine entry and exit positions.
  • Cheap fees and spreads: Guerrilla trading relies largely on poor commissions and narrow trading spreads due to its high trading volume and low return. Guerrilla traders consequently stick to large currency pairings where liquidity is guaranteed, rather than exotic currencies with more profit potential but substantially lower liquidity.
  • Guerrilla trading is often the domain of veteran traders who have the trading savvy to have lasted for a number of years. It is not advised for new traders since such rapid-fire trading might quickly deplete their risk money.
  • Measured risk-taking: Because guerrilla traders take calculated risks, such as having a stop-loss of just a few pips each transaction, they may often opt to wait on the sidelines when markets are too volatile and the chance of loss is too significant.
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Introduction To Guerrilla Trading

Example of a Guerrilla Trade

Consider a guerrilla trader who has $50,000 in risk capital to utilize as margin in a forex trading account with a large bank. The bank has a 2% margin requirement, which means it may provide leverage of up to 50 times. It also has EUR/USD trading spreads of 2 pips and costs of $35 every $1 million transacted. Assume our trader conducts ten EUR/USD transactions on a given day, each with a position size of one million euros. Six winning transactions with an average gain of 12 pips and four lost trades with an average loss of 6 pips have been completed by the trader. Assume that the EUR/USD exchange rate is at 1.3000. Each pip is worth precisely $100 based on the average position size of 1 million euros. As a result, the trader’s profit and loss (P&L) statement looks like this:

Profitable trades = 6 x 12 pips per trade x $100 per pip= $7,200
Less: Losing trades = 4 x 6 pips per trade x $100 per trade =($2,400)
Gross P&L =$4,800
Less: Trading commissions **$455
Net P&L =$4,345

**10 transactions x EUR1 million x 1.3000 = $13 million total trade value x $35 per $1 million exchanged = $455 This is clearly an oversimplified example of guerilla trading. However, as the example shows, the success of such a trading strategy is heavily dependent on the trader’s ability to rapidly cut losing positions while allowing successful positions to run just long enough to create significant profits to more than balance such losses. At $100 a pip, a single loss of 50 pips would wipe out the majority of the trader’s winnings for the day.

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Could You Be a Guerrilla Trader?

A successful guerilla trader has the following characteristics:

  • Quick decision making: Because forex markets are famously volatile, a successful trader must be able to make trading choices quickly in order to maximize profits and avoid losses.
  • Emotional detachment: Successful traders are emotionally detached from their trades; they do not fall in love with them (that is, they do not stand by a losing position), nor do they live in constant regret over their trading mistakes.
  • Adequate risk capital: A good trader has adequate risk capital and understands how much to risk on each individual deal and overall.
  • Trading experience: They are likely to have honed their skills in high-pressure trading environments over time.

Guerrilla Trading Tips

Individuals with the trading expertise, risk money, and mental fortitude to engage in guerilla trading should keep the following guidelines in mind:

  • Stop losses are essential: Guerrilla trading is based on keeping trading losses as low as possible, with the idea that profits on winning positions would more than compensate for these losses. Automatic stop losses that are triggered when a certain trading level is breached are an excellent technique to implement such trading discipline.
  • Rather than taking a contrarian position, trading a strong short-term trend—for example, long USD-short EUR after the publication of solid US economic data—may be the greatest approach to produce rapid gains.
  • Use the skills of professional traders: The trading professionals’ trademark is risk minimization via loss caps. As a general guideline, avoid “averaging down” by adding to losing positions, and prevent runaway losses by swiftly closing a losing position.
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The Bottom Line

Guerrilla trading is not as simple as it seems at first glance and should only be tried by experienced traders with enough risk capital. Novice investors who are tempted to attempt it would be better off starting with scalping or day trading, since the trading abilities necessary for success, although daunting, are still fewer than those required for guerilla trading.

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