Scaling your way in.

C

c.chugani

Say you have established a trend. You want to capitalise on it, but are not very sure whether your assessment is correct.

You place your first bet, and the market confirms your initial intuition. What criteria do you use to add more stake to your initial position?

The problem of buying after being proven correct is that the dollar value at risk is higher.. prices have moved in your favour and any other additional buying will increase your cost basis. Also, in the case of a reversal, you experience a higher drawdown for the same reason mentioned previously.

At the same time, risking your full stake in the beginning also increases the amount you lose if you get stopped out. If the market doesn't react the way you had initially determined, you would lose more than if your initial stake was lower. Conversely - if you are proven right - you would have wished that you had your full size on since the very beginning!

How does one balance this issue of money management? Are there any general principles and criteria to look for or follow? How about reverse pyramiding - ie. buying at higher prices but less quantities than your first bet?

Looking forward to different insights and advice. Thanks.
 
How long is a piece of string!

There is a very simple way to keep you in the game, and it is the % sign.

A simple spreadsheet will tell you exactly how many shares to buy, and you should never buy more than what you have set yourself, you can of course buy less.

Reverse for shorting, as only betting on one side of a market is a mugs game!

The answer can only be got from yourself, as you are the one who has to take the losers, and the winners, and come up with the money to place the bets!

A winning trade should never become a losing trade, no matter what!
 
Quote from c.chugani:

Say you have established a trend. You want to capitalise on it, but are not very sure whether your assessment is correct.

You place your first bet, and the market confirms your initial intuition. What criteria do you use to add more stake to your initial position?

The problem of buying after being proven correct is that the dollar value at risk is higher.. prices have moved in your favour and any other additional buying will increase your cost basis. Also, in the case of a reversal, you experience a higher drawdown for the same reason mentioned previously.

At the same time, risking your full stake in the beginning also increases the amount you lose if you get stopped out. If the market doesn't react the way you had initially determined, you would lose more than if your initial stake was lower. Conversely - if you are proven right - you would have wished that you had your full size on since the very beginning!

How does one balance this issue of money management? Are there any general principles and criteria to look for or follow? How about reverse pyramiding - ie. buying at higher prices but less quantities than your first bet?

Looking forward to different insights and advice. Thanks.
More...

Please keep in mind I'm speaking from the perspective of a day trader. I usually scale into positions by 1) buying a 50% position (75% if the move looks particularly strong) when I get a signal to enter, and then 2) set a buy limit at the logical place (pivot, etc) where the retracement will take it--and odds are VERY good it WILL retrace-for the other 50 or 25%. That way if it never retraces I am at least am in the trade, and if it does I'll get in before the bounce heads in the original direction.
 
Quote from c.chugani:


Looking forward to different insights and advice. Thanks.
More...

Consider this easy way to trade a trend. Place your second, third, etc. trades only after the previous trade has been moved to breakeven. That way your risk remains constant but your reward becomes openended. You never know how far a trend will persist, however fat tails indicate this is a winning strategy for markets/timeframes that trend above normal. You'll lose on the last trade and as long as you do at least one add, you'll do no worse than breakeven on short duration trends.

Ex.

L 1 at 100.00 with stop at 98.00
L 1 at 102.00 with stop at 100.00 and previous stop moved to breakeven at 100
L 1 at 104.00 with stop at 102 and previous stops moved to 102 to lock in a gain should the trend die.
etc.
 
Quote from acrary:

Consider this easy way to trade a trend. Place your second, third, etc. trades only after the previous trade has been moved to breakeven. That way your risk remains constant but your reward becomes openended. You never know how far a trend will persist, however fat tails indicate this is a winning strategy for markets/timeframes that trend above normal. You'll lose on the last trade and as long as you do at least one add, you'll do no worse than breakeven on short duration trends.

Ex.

L 1 at 100.00 with stop at 98.00
L 1 at 102.00 with stop at 100.00 and previous stop moved to breakeven at 100
L 1 at 104.00 with stop at 102 and previous stops moved to 102 to lock in a gain should the trend die.
etc.
More...

Don't give out the best kept secret in trading just like that! :D I have been using this simplest golden nugget for ages :cool:
 
Scaling into trades:

Higher % of wins
Higher avg loss size that can be difficult emotionally to trade, especially for the newbie. (dont know your experience exactly)

Also if you get caught in a couple of trades that you scaled into for losses for 2 or 3 in a row because you get caught in a trending market then.... can be 50% drawdown or time to refund account.

IMO opinion stay far away from ever adding to a losing position. Recipe for disaster.
 
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