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Follow these two rules to preserve and grow capital

  #6 (permalink)

vancouver British Columbia/Canada
Trading Experience: Intermediate
Platform: Ninja Trader
Favorite Futures: CL
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Posts: 583 since Jan 2013
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josh View Post
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.

It's clear that these rules are the result of tough lessons that have left you wiser but also more humble (a top notch human quality if you ask me). Because of this and the humility you are writing with I have been giving much thought to what you are saying and trying to factor it into my trading plan. I'm still wrestling with it as my current plan has me scaling in at a couple of different predetermined levels but I've noticed there is definitely a point where I get the feeling that "this is now requiring an abundance of hope" which never works out well. I am grateful for you sharing your hard earned lessons here...and happy to learn from them.

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