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Introduction To Guerrilla Trading

Investopedia Staff

"Guerrilla trading," as the colorful term suggests, refers to the technique employed by nimble traders who dart in and out of the financial jungle in short skirmishes that aim to generate quick profits while keeping risk to a minimum. A guerrilla trader’s defining characteristic is a very short-term trading timeframe that is even smaller than that of a scalper, and makes a day trader look like a long-term investor. Only computerized trading systems such as high frequency systems have shorter trading timeframes than the guerrilla trader.

Since the objective of guerrilla trading is to make small profits in multiple transactions, its success depends on low commissions, high leverage and, most importantly, tight trading spreads. So while guerrilla trading techniques can be used in any financial market, it may be best suited to foreign exchange trading, especially the major currency pairs that have abundant liquidity and low spreads.

Characteristics of Guerrilla Trading
A guerrilla trader’s modus operandi is to make low absolute profits per trade, but to trade multiple times in a session so that the overall gains are substantial enough to justify the risk incurred in such short-term trading. Based on this profile, guerrilla trading generally has the following characteristics:

  • Very short-term trading timeframe: The average trade for a guerrilla trader only lasts a few minutes, and hardly exceeds this timeframe. This is because the longer the time spent in a trade, the greater the risk that it can go against the trader.
  • Small profits, even smaller losses: The guerrilla trader is quite content to make only 10 to 20 pips on a forex trade, compared with a scalper who may have an objective of more than twice this amount, or 25 to 50 pips. This means that the guerrilla trader cannot afford to risk more than a few pips on a single trade, with the maximum loss capped at levels as small as 5 to 10 pips.
  • Large number of trades: Successful guerilla traders may execute more than 20 to 25 trades in a single trading session when conditions are conducive to such frenzied trading. This is generally likely to happen when important economic data such as the monthly U.S. payroll numbers or trade data is released.
  • Technical analysis: Due to its short-term focus, guerrilla traders usually rely on technical analysis for timing their trades, and are adept at using tick charts or 1-minute charts to pinpoint entry and exit points for their trades.
  • Low commissions and spreads: Because of its high trading volume and low-return nature, guerrilla trading is heavily reliant on low commissions and tight trading spreads. Guerrilla traders therefore limit themselves to the major currency pairs where liquidity is assured, rather than exotic currencies that may have greater profit potential but significantly lower liquidity.
  • Experienced traders: Guerrilla trading is usually the province of experienced traders who possess enough trading acumen to have survived for a number of years. It is not recommended for novice traders, as such rapid-fire trading may wipe out their risk capital in a few sessions.
  • Calculated risk-taking: Since guerrilla traders engage in calculated risk-taking that entails having a stop-loss of only a few pips per trade, they may often choose to stay on the sidelines when the markets are too volatile and the risk of loss is too great.

Example of a Guerrilla Trade
Consider a guerrilla trader with risk capital of $50,000 to be used as margin in a forex trading account with a major bank. The bank has a margin requirement of 2%, meaning that it offers leverage of up to 50 times. It also offers trading spreads of 2 pips on EUR/USD and charges commissions of $35 per USD$1 million traded.

Assume our trader executes 10 EUR/USD trades on a given day with an average position size of EUR1 million. The trader has six profitable trades with an average gain of 12 pips and four losing trades with an average loss of 6 pips. Let’s further assume that the EUR/USD exchange rate is about 1.3000.

Based on the average position size of EUR1 million, each pip is worth exactly $100. Therefore, the trader’s profit and loss (P&L) position 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 trades x EUR1 million x 1.3000 = $13 million total value of trades x $35 per $1 million traded = $455).

This is obviously a highly simplified example of guerrilla trading. However, as the example demonstrates, the success of such a trading strategy depends to a very large extent on the trader’s ability to cut losing positions quickly, and let the profitable positions run just long enough to generate sufficient gains that more than offset such losses. At $100 per pip, even a single loss of 50 pips would wipe out most of the trader’s gains over this trading session.

Could you Be a Guerrilla Trader?
A successful guerrilla trader possesses the following traits:

  • Quick decision making: As forex markets are notoriously fickle, the successful trader has the ability to make trading decisions very rapidly so as to maximize gains and minimize losses.
  • Emotional detachment: Successful traders are emotionally detached from their trades; they neither fall in love with them (that is, they do not stand by a losing position), nor do they face perpetual regret about their trading decisions.
  • Adequate risk capital: The successful trader has sufficient risk capital and knows exactly how much to risk both on an individual trade and in total.
  • Trading experience: He or she is also likely to have cut their teeth in high-pressure trading situations over a number of years.

Guerrilla Trading Tips
Individuals who possess the trading experience, risk capital and mental fortitude to take the plunge into guerrilla trading should take note of the following tips:

  • Stop losses are the key: Guerrilla trading relies on keeping trading losses as low as possible, with the expectation that gains on profitable positions can more than offset these losses. Automatic stop losses that are triggered when a specific trading level is breached are a great way to ensure such trading discipline is enforced.
  • Trade the trend: Trading a strong short-term trend – for example, long USD-short EUR upon the release of positive U.S. economic data – may be the best way to generate quick profits, rather than adopting a contrarian position.
  • Use pro traders techniques: Risk mitigation by capping losses is the hallmark of the trading pros. As a general rule, refrain from "averaging down" by adding to losing positions, and avoid runaway losses by cutting a losing position quickly.

The Bottom Line
Guerrilla trading is not as easy as it may seem at first, and hence should only be attempted by experienced traders with sufficient risk capital. Novice investors who are tempted to try it, however, would be better off trying scalping or day trading to begin with, since the trading skills required for success – formidable though they may be – are still less than those required for guerrilla trading.

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