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Scaling in is often confused as averaging down. It is not the same, but the rookie will treat it as though it is.
Scaling in requires a well thought out plan and is an advanced technique. It is not for "I was wrong, lets try again".
Scaling in can be both scaling in while price is in your favor, and scaling in while price is against you. But never, I repeat never would you scale in to a losing trade that itself has turned against you.
For a trader with larger stops (50-100+ ticks) you can scale in as price moves against you, so long as the trade itself does not move against you. So if you are short you don't scale in on a series of HH+HL.
Yes I agree with Mike. Scaling in is an advanced procedure to be implemented only when the setup is still valid. That is, all the conditions of your original setup are still holding true even if price is moving (temporarily) against you within the range of your stop loss. If you scale in to a position that is moving against you while the original setup criteria are still valid then that is fine if you have the skill and stomach for increasing your risk in a losing position. This is a type of averaging up/down and there is nothing wrong with that.
However, if price moves against you AND you no longer have the original setup conditions then your operating on hope and possibly a prayer. This is also averaging down/up. The main difference here is that now you no longer have a reason to be in the trade since the setup conditions are no longer valid. At this point your throwing good money after bad.
I think the original post made mention of the rational for doing this; that is to keep 'accumulating' a position (essentially averaging up/down) until price turned around, if only temporarily, and allow the trader to scalp a profit. This CAN be done however it is extremely risky and you need to do a number of things for this to work.
1. You need a lot of capital. Much more than you can imagine. As price continues to move against you you need enough capital to keep averaging up until price turns in your favor so you can scalp profits. If you run out of money and price continues against you. You're screwed and you WILL lose big money.
2. You need to average up/down in a ratio of at least 2:1. So if you have one contract you need to buy 2 contracts to average close enough to be able to scalp a retracement. When price continues against you with 3 then you need to to be prepared for an additional 6 contracts. Now you have 9 so as price moves against you you need to enter with 18 and now you have 27 contracts. So now what happens if price continues to move without any significant retracement? Who among us has that kind of money? By now of course the trader is at a loss for several thousand dollars. Is it worth it?
3. You need to have a stomach of iron. Few retail traders have the guts for this kind of gambling.
4. You need a cyclical market that is predictable and has enough volatility to scalp. the problem is that markets change. On week your in a cycling market with lots of predictable movement up and down and the next your in a market that's in a panic to buy or sell and price refuses to retrace. You just can't know when that could happen.
I know this from experience! Last October I did exactly that. I made a lot of money trading that way and because i was always averaging up/down I almost never had a losing trade. I was scalping over and over throughout the day and was averaging close to $1000 per day as I got close to the end of the month as I perfected the 'strategy' but something awful happened. It's called a bull market and it steamrolled me. One day us equities just decided to go straight up and not come back down. I was short. 5400 loss. A few days after dusting myself off, bam! 7000+ loss. I never want back to that. I was psychologically ruined.
So, if you want to try scaling in, go ahead but never lose site of those conditions that got you in the trade. If you lose those, it's time to get out, not the time to increase your position.
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"I've missed more than 9,000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game-winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."
- Michael Jordan, 5-Time NBA Most Valuable Player, 6-Time NBA Champion
Trading: Emini ES, Emini RTY (TF), Crude CL, Eurex DAX, Euronext CAC40, EuroFX 6E, and Hang Seng HSI
Posts: 47 since Mar 2011
Thanks Given: 125
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In general, during high volatility market conditions...I tend to all in and then scale out. In contrast, during low volatility market conditions...I tend to all in and all out. Yet, if volatility changes dramatically in the middle of a trade...it will also cause me to adapt and change the original plan of how I manage my trade.
