Question from SML:
1. When you are scalping and adding to losing trades how do you determine to go for 1 or 2, or.....8 points? Do you hold for more points (greater than 1 point) when you need the profits to recover a scaling in loss?
There are three things about every trade: Probability, Risk, and Reward.
If volatility is low and market moving slow…bars are small..I go for less points but will increase size. High probability usually means less reward and more risk.
Scaling into a losing position aka averaging down is done to increase the probability that the trade will end up a successful trade. How is that? It sounds counter intuitive to do so and well it ….actually is actually counter intuitive. So how does scaling in increase probability? It does so because it lowers the amount of distance price has to travel or move to get you into profit compared to the distance it has to travel to get your initial position back in profit. You may actually lose on that initial position or BE on it but your subsequent entries will pull you into profit. That is the idea. Of course like anything else it doesn’t always work. None of us can be 100% sure that our initial entry is the exact perfect entry. We have our setups but none if us can be sure the market will accommodate our setups and render us a profit. In very short-term trading averaging down very often works if the larger context supports doing so because it deals directly with the uncertainty of the markets and our initial entry. It should not be done on a whim as the context must be right. The idea is to increase probability of making money on that trade overall even though you may in fact lose or BE on some of the contracts.
What makes it often work are two things:
1) implementing it in the right context
2) the tendency of the market to probe all session long back and forth searching for fair value and places where more transactions will take place.
Now we have to understand if we increase the probability that the market will reach a profitable point by averaging down (because it will now have to travel less distance to render a profit) before it reaches our SL then we are affecting the other two things in our trade, namely we are increasing our Risks and reducing our Reward in terms of distance in points and money in points PER Contract. But the way we overcome this is by increasing our size. That gets us enough reward to make the trade profitable. So there are always tradeoffs. Rarely can any of us make the perfect trade i.e. small risk, high probability, big reward. So, if we take a position and subsequently add to that position before exiting it, as it moves against us, then we are increasing our probability of making money on the trade but at the same time we are increasing our risk as we are adding more contracts. And since the market has moved against us we are also reducing our reward in terms of points or travel distance. That is we should not expect to hit the profit target of our original and initial entry. The market has moved against me and will require a bigger move in distance to make the amount points I was trying to originally make.
Now to answer your question. No, I don’t typically go for more points to make up for a previous loss. But it really depends on the volatility of the moment. But typically I will:
1) increase the size of the position on my next trade, without averaging down, and get my loss of the previous trade back in one or two trades but will trade for LESS points, not more. Thus I am increasing the probability but reducing the reward per contract and increasing my risk as the position size is bigger. But the size is what makes my previous loss back. For instance if I lost on 3 contracts of ES if conditions appear ok I will double to 6 contracts. The distance needed for another 3 contracts to give back my loss from the first 3 contract loss is bigger as opposed to doubling up . By doubling up I get my loss back get in 1/2 the move in terms if dustance distance.
3) if the context is conducive to averaging down I will in equal amounts at predetermined places say every 2 point move against me and wait for a probe in my favor help me recover my previous loss. So if I started with two contracts at two points against me I will add two more contracts …..so on and so one. Usually 2 or three times. Then wait for a probe in my favor.
3) if in a hurry and the context is conducive I will martingale. Say I start with one contract. on my first scale I will add 2 contracts. So now I have 3 contracts on. On my next scale I will add 6. Then I will go for a smaller move in distance so less profit per contract than say my initial PT but it has to move less now even less than equal amounts of averaging down. and soon I have my loss back and a profit. If it works out. Of course sometimes it doesn’t.
Bottom line to get a loss back i prefer to up size and go for smaller moves and if it takes 2 or even 3 trades to recover so be it. Often I can recover in one trade. The loss is made back by size not distance or points.
Anyway I am not telling or advising anyone on ET to do any of this. You asked a question and even though I may have used we, us, our, you, your I am really talking about myself and how I see and deal with the situation you brought up. It takes a lot of practice to know how and when to employ such tactics. So, don’t think I am telling you or anyone else to do this! I am not.
))