Can scaling/averaging down be a viable trading system?

Bill Duryea teaches the scaling in method in conjuction with trading the Market Profile. Works well for him. The point is to get in at edges of the price rotation or a place of previous high volume where the market should slow down and even if it goes against you it will vascilate enough to cover first positions. He uses a set stop or at least has a place in mind where if it reaches he knows the market is breaking against him. It's very important to be able to read the data and discern if the market is just extending its range or breaking out against you.

So in short, the system you're trying will work if you understand its strengths and weaknesses. But that's the way it is with any strategy. Over 70% of the time, in Market Profile, the scaling method works in your favor. that other 20 some percent though can kill you if you've not made preparation for the possiblity of a breakout. What you committed was the novice error "It's gotta' come back." No it doesn't.

Sharpen your entry points. Scaling in will not make up for poor entries.
 
I think people are having far too rigid opinions here. Also people automatically assume that scaling/averaging down means something that it does not necessarely mean i.e. the kind of action that the starter of the thread described.

If done as a part of a good trading plan which definately has a stop loss point and good money management (neither of which the thread starter seemed to have) scaling in when price moves against you is a very viable option when doing fade trades and does not increase risk at all.

In my trading when doing fade trades (by which I mean fading the most immediate price action) I sometimes scale in. I have a "price window" of x ticks inside of which I do the scaling and a definite stop loss few ticks outside the price window. So if I trade for example 3 lots I take the 3 lots at 3 different prices one lot at the time as the price moves against my position inside the price window instead of taking 3 lots at one price, such as at the midle of the window.

There is no more risk in this compared to taking the whole lot at a single price.

I think the key differences are: Having a definite stop loss and not exceeding your intended trade size (i.e. you scale INTO your intended size, you dont "average" a trade that allready is at your intended size).



Trent
 
Trent.....good point. I also believe scaling in can be a part of a good trading plan as long as all the details are in place before the trade is palced (such as # times to scale in, and maximum stop point if proved wrong). I believe once the initial trade is placed I can place all the other trades in the market. For example if I Buy 1 contract, I can then place two other buy orders at specific price points and a sell stop order to sell all 3 if wrong. If the trade goes my way immediately, I can cancel the other 2 buys and stop and move a stop for 1 contract to breakeven or something. Should I place all of the orders in the market? Based on my tendencies I believe so.
 
This is the most interesting discussion I have seen in ET for some time ... maybe I'm not reading the right threads. Great to see some of the thoughtful comments guys.

I am a entry/stop trend direction trader most of the time so I understand and appreciate the "you must learn how to be wrong, well" point of view. In this mode I take additional contracts at X% back to my stop because the risk reward on these positions is actually better than the initial contracts and allows me to increase position without being adversely affected by the thinness of the market.

I also have a mean reversion system that returned 100% to 300%pa when daily range in the indexes was higher but last year I realised the returns had dropped (not enough 1pt moves) but the trends had not disappeared so the uncle events were too frequent and would sooner or later remove my accumulated profits. So I stopped. I am currently reviewing it to decide a) when I would restart it; and b) if there are some changes I could make that would re-enable it.

The great thing about the markets is that there are so many ways to make or lose money. Enjoy, everyone :)
 
Kiwi,

I agree with you on the 1pt moves requiring much more time. I actually have had to switch to taking my entire size in the first two ticks in the FDAX because scaling in has been costly. Every move has everyone pushing the other way now and ranges have dramatically decreased... to the point of collapse. We went from 80 pt days to about 28.5 pts now in the FDAX and much of that happens in 2 moves per day.

For the time being, scaling in is not as effective as it has always been due to much lower volatility and tight ranges. I don't think I said that averaging down is impossible or won't work for some traders. I did say that this is not a good strategy for most guys here though. To average down into an MP zone, you need to be well capitalized and you need to be ok with taking a big hit if a breakout takes place and stops are run. Certainly, there are guys here making money with it. However, the majority should stay away from this technique because it has tremendous potential for monetary and psychological damage.
 
FuturesTrader71

Sounds good, I agree but I believe scaling in works better in lower volatility and tighter ranges. I tend to do well in channels where I can scale in back and forth and price reverts to the mean. In higher volatility markets and breakouts I suffer the painfully high "heat".
 
Quote from MacroEvent:

moussaka------then you miss all the repetitive profit accumulations minute by minute. in your case the ratio would change with price movement but no accumulation of 1 point covers. you MUST do this in separate accounts {no extra cost from the broker so who cares} that are cross-margined. to be long and short properly at the same time you need multiple accounts.
More...

I still don't understand, why do you need multiple accounts? What's the difference with just putting all of your capital in one account and doing the exact same buys/sells as you would with multiple accounts? More accounts doesn't give you more margin.

Why would you not still accumulate 1 point profits using one account? Can someone explain to me how the total net would not be different if exact same trades are placed?
 
I do this occasionally (average down) but never more than two more times, and find that it depends on the market I'm trading. Has as much to do with my confidence in that particular market or stock, meaning have I won or lost in this particular security. If I have a bunch of winners (Natural Gas, Bonds, ABLE) , I get expansive, relaxed, tolerant and just seem to think better about what is going on. If I have had to struggle and claw my way out of a hole, wasting resources (mental as well as monetary) a few times in this particular market (copper, crude oil) then I tend not to give it too much rope (already have enough marks around my neck).
If you are a system trader, then your plan already answers the average down question. It is the discretionary trader, especially the intuitive trader with multiple markets and variable time frames that has to come to grips with the age old question, " Is this a normal variant, or is this bastard going to eat me?"
Albert
 
Albert said
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If you are a system trader, then your plan already answers the average down question. It is the discretionary trader, especially the intuitive trader with multiple markets and variable time frames that has to come to grips with the age old question, " Is this a normal variant, or is this bastard going to eat me?"
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I agree with Albert. If you still believe you want to average into a position it would be in your best interest to become a systematic trader. You could still use your discretion to pick your entry time/point. Then you must allow your ats(automatic trading system) to take over. I believe this is the only way you will not self destruct.

I have not met a discretionary trader who adds to losers and makes a "long term" living trading. I know many traders who have had long periods of profitability adding to losers, but sadly most of them did not stop until they lost all of their profits. I know traders who made millions and lost all of it.

Adding to losers works if you trade with the long term trend. For example, during the bull market in the stock market(late 90's) everyone who added to losers from the long side looked like a genius. The problem was most people did not stop adding to losers when the market turned!!

If you are confident that you are good at picking your entry "range" why not develop a system to execute your trading plan for you. Their are software developers/products available if you cannot do this yourself.

Check this demo out from eFLOORTRADE
h t t p: / / w w w .efloortrade.com/?a=tp&b=01&c=eMarketMaker.

They provided a demonstration of their software at the CME. Their software is designed for scalpers looking to scale into a position. It also enters a stop loss order.


Scalper12
 
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