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Follow these two rules to preserve and grow capital

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bobwest View Post
Rule 1: I follow this one religiously. However, I recall both Mike and Gary in the old days of the spoos thread "scaling in" -- adding to positions that were going against them because they would improve their average cost basis, and they were willing to be wrong if it came to that (they would bail quickly if they found they were wrong.) They were right often enough to make it work. I never understood how to do this, and obviously it takes deep, deep pockets -- and if you're wrong very often or very big you're in deep trouble -- but some people can do it.

I'm not one, but it's not necessarily a universal thing. (Note: "Gary" is Tigertrader, for the non-OG's. )

...I know that if I permit myself to scale in, I will end up at the bottom of a deep, deep well, so I simply won't.

IMO the only really good reason to scale in is if the trader is throwing size that actually would have an observable market impact. Even Gary was not that big in ES.

The logic goes like this for me: if the zone that one wants to scale in over is X ticks wide, then certainly the target is at least 4X away or so, right? With a target that is sufficiently far away, whether one adds on the way down or on the way up won't make that much difference.

What usually happens when people scale in, from what I've seen and my own experience, is that when it does actually begin to work (the market looks ready to actually move their way), they are still able to buy at prices equal to or better than the initial ones they bought at. For example, they buy 2700, then 2698, then 2695, then 2690. It pops to 2696, finally starting to look good; meanwhile, their average is only 2695.75 -- so, they could just buy now, and still be in at roughly the same price, without having incurred the risk.

Of course, the other scenario is that they begin to scale in and it goes their way, and they at least have something on at smaller size at a better price than they would have if they waited until higher prices to buy. But, they're still small, and if they want to be bigger, they'll have to pay up anyway.

Either way, I think too many people use scaling in as an excuse to get sloppy and early with entries. Also, I think it makes it more difficult to add later, as it places the emphasis on "getting in early." Some of the absolute best trades are the ones where the market has already tipped its hand a bit, and an explosion is imminent; adding on the way up (or down) in these cases is the only way to get in with size, and they're the best trades to be in because you will often take no heat at all.

The above two rules are not meant to be universal, but IMO any trader who is in the "capital preservation" stage, or early enough in the "capital growth" stage would benefit simply from never adding to a trade which is not in the black.

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