Consistently profitable traders - To scale or not to scale
- Thread starter DEM BONES
- Start date
The advantage of scaling in is to reduce risk while maximizing gain. For example, when a setup occurs you enter a 3 lot position. If price goes against you, you cover your 3 lots and take the loss. On the flip side, if price begins moving in your favor, you can add to the position in smaller increments, like 3-2-1. This will ensure that you have double the position size when you are correct, thus maximizing your gain potential. Basically, you are cutting your losers short with smaller position size, and letting your winners run with larger size.
A lot of traders scale that way, but it's adding to a loser. So you will be stopped out with more lots. This is exactly opposite of what you should be striving for. If you enter one lot countertrend and the market continues, just exit the 1 lot...small loss. When it finally does turn you can take another shot at it and add when it proves correct.... larger winner.
If you can call tops and bottoms, scaling in will lower your profit. You will want to get the most shares at the best price.
If you can't call tops and bottoms:
Adding to a winning position with smaller subsequent lots can help you profit in a big trend.
Adding to a winning position with larger subsequent lots will raise your average cost and potentially turn a big win into a loss with a little move against you in price.
Adding to a losing position will give you a better average cost which can be very advantageous if price turns around and will cause you to only require a smaller move in order to break even. If not, you will suffer even largers losses than originally.
So it probably depends on your strategy if any of these will help you or not.
If you can't call tops and bottoms:
Adding to a winning position with smaller subsequent lots can help you profit in a big trend.
Adding to a winning position with larger subsequent lots will raise your average cost and potentially turn a big win into a loss with a little move against you in price.
Adding to a losing position will give you a better average cost which can be very advantageous if price turns around and will cause you to only require a smaller move in order to break even. If not, you will suffer even largers losses than originally.
So it probably depends on your strategy if any of these will help you or not.
It would all depend on your strategy, and your trading leverage from my view.
If you use 3-1 leverage and a trend following system it makes alot more sense to scale in and allow large enough steps to cushion against any loss and still allow youself to apply that extra position size with your leverage.
If you measure your position size based off of your margin you can get really hurt by small movements, but if you measure your position size based off your equity, you are letting a huge advantage pass you by.
This is something I have thought about a fair amount and have come up with no magic formula, but if you have say a 10k account, and were trading 5 positions, 2k allocated to a position with 3-1 leverage, so 6k per position total.
I would use a simple approach of a 10% stop, scale in at 5% gain then again at 10%, moving your stop up every time you scale in.
Really simple and basic, but how else would you do it?
If you use 3-1 leverage and a trend following system it makes alot more sense to scale in and allow large enough steps to cushion against any loss and still allow youself to apply that extra position size with your leverage.
If you measure your position size based off of your margin you can get really hurt by small movements, but if you measure your position size based off your equity, you are letting a huge advantage pass you by.
This is something I have thought about a fair amount and have come up with no magic formula, but if you have say a 10k account, and were trading 5 positions, 2k allocated to a position with 3-1 leverage, so 6k per position total.
I would use a simple approach of a 10% stop, scale in at 5% gain then again at 10%, moving your stop up every time you scale in.
Really simple and basic, but how else would you do it?
Always! If my trade goes against me with the initial position then I rarely ever add to it. I just set a stop with it and get out. If it comes back then I reconsider the trade and if I still like it then I will add to it when it goes in my favor.
If the trade goes with me right away I add small amounts until the price has built a base above my average price. Then let it run.
More importantly in my opinion is the scaling out of positions (I have to say this is one of my weaknesses). I find it difficult to not get everything out around the same area. I have improved over the years of trading but this is where the real $$ is.
I believe it's a question of fixed vs dynamic exit/stop levels, if you trade fixed you know in advance what the risk is and what the expected return of the trade is. The dynamic approach usually is "running trends" and do use a trailing stop or similar as exit trigger so there the outcome is unknown and one might want to reduce risk initially.