G-d forbid someone would suggest adding to positions that actually make money. That would be unacceptable.
Scaling in as it moves is one’s favor is an ok tactic if one is a swing trader. But it doesn’t work too well if I am intraday scalping say the ES for 1 to 6 points which is generally how I basically trade. Scaling into a losing a losing trade (aka averaging down) is a tactic if done properly under the right circumstances can be profitable and increase win rate and profits and reduce losses.
Example: PA has been trending down in a channel. The channel is about 6 points wide. I would only scalp this channel instead of intraday swinging it. By intraday swing I mean 2 or more legged moves within the channel.The strategy is to scalp in a way that fits the size of a min scalp, the width of the channel, the general context, the present PA, and the odds.
1) the size of a min scalp in the ES is 1 point. In other words, if I don’t think the odds favor a trade will give me at least 1 point in the ES then I skip the trade. To generally capture the min scalp the average size bar in the range needs to be at least the size of the min scalp I would be going for and I prefer it to be bigger. Just a visually glance is usually enough to confirm this. With the Es most bar are going to be a point or more anyways.
2) width of that channel needs to be at min 3 times as wide as the min scalp I would attempt to take. Therefore, the BIGGEST scalp in this 6 pt channel is 2 points. Of course, if it gives me more I will take it but when deciding on setups I ask myself “looking at the PA in the moment, and considering the overall context, do I think price will move in my favor 2 points before it would take me out on my SL.” The min scalp I would attempt is a 1 point scalp and that could be quite often.
3) General context = weakness it is a bear channel which means lower highs and lower lows. Pressure is down. What was the prev context before the bear channel began? For examples sake lets say it had been in a range and the channel on the 5 min chart was a BO south of the range. The general context thus make the channel more conducive to shorting setups as opposed to long setups. However, I must keep in mind that bear channels on a 5 minute chart are bull flags on a larger TF (...15 min..30..60...) and that bear channels usually end up with BO to the upside. That ALWAYS has to be in the back of my mind. This channel needs to have at least 20 bars in it to be called a channel otherwise it is just a bull flag, a pause, or a BO in whatever the market was doing before the flag started.
4) the present PA ...lets say it is at the bottom of the channel. Do I short? No no. But price is going down should i not short? Heavens no. What should I do? Best=nothing. Next best= go long for just a 1 point scalp back up towards the middle of the channel or wait for PA to get back up to the top of the channel and look to short. If PA is at the top of the channel I will look to capture short 2 points.
5) The odds. They are actually good. In channels most BO attempts fail and price goes back into the channel. Average of 75% of the time BO’s top or bottom will fail. Probably more like 85% topside BO attempts will fail and price will go back down into the channel. And 70% bottom-side BO attempts will fail and price will go back up into the channel. Why a higher percentage of topside BO fail? Because it is a bear channel and inertia...pressure is down.
BASED UPON THE ABOVE THE TACTIC IS:
Short in the top 1/3 of the channel. Add to that original position if price moves against you. That is; average down. Even if it goes above the channel a little ways. As long as it doesn’t BO above the channel with subsequent Higher High FT bull bars outside the channel. If it does I look at exiting with the loss immediately. Then I double up and go with the new direction. In these shorts I try to get 2 points. Sometimes settle for 1. At times I will make money on all contracts. Other times, I will make money on all, but BE on the original entry.
If attempting to go long I do so at the bottom of the channel and try and capture just 1 point not 2. It is more risky to average down at the bottom of the channel in this senario as general pressure is down but it can be done. I just can’t greedy. 1 point scalps from the bottom side is the goal. This is a tight channel I am extracting profits from.
Note: entries top and bottom I like to make with limit orders ONLY. NO STOP ENTRIES.
At the top limit order entries at the top of flags..previous bars..close to DT..ETC. Entries at the bottom limit orders at the bottom of flags..prev bars..close to DB..etc.
SL’s are outside the range 2 to 3 points on topside or bottom. Dump point is any BO with subsequent FT bars or SL. By FT bars I mean multiple bull bars in sequence with gaps between close of the bar and prev bull bar or PA staying above the range for 4 or 5 bars. Turn the concepts around for bottom side.
No channels on 5 min chart this morning. However there was a range and I will show chart of trades taken while I was typing the above on how to make money in a tight range without averaging down ...have a high win rate..etc. And basically pull money out of a tight range that is going nowhere and to do it by scalping using some of the above concepts.
There I just posted how to extract profits in a tight channel scalping 1 to 2 points. Am I afraid that I have given away a secret that will stop working if too many do it? No! First of all most won’t believe me nor accept the concepts. Second, those that do won’t have the discipline to pull it off. Third most institutions are out to get my position on such small moves. They are after each other's money and bigger moves. Fourth if too many do it then it will actually work better!
Might wanna test the ideas out on a sim. Have fun.
Will post the charts shortly. Gotta make some coffee for the wife.
