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Techniques for scaling in
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Techniques for scaling in

  #1 (permalink)
 Vendor: diversifyportfolio.com 
PTA, Gauteng
 
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Techniques for scaling in

Hi All,

I would like to discuss techniques for scaling in to trades as a discretionary trader.

I am generally an all in, scale out trader but sometimes price action and risk may force me to scale in. I prefer to place my stop based on price action instead of a fixed number (eg: above/below a swing high/low or above/below a breakout). I will then determine how many contracts I can trade based on the size of my stop (risk). This means that although I might typically trade 2 contracts as a result of my maximum risk allowed per trade, I might have to reduce that to 1 contract if the logical stop based on price action is too big.

My problem then comes in when trying to figure out when to add that 2nd contract. I have attached a pic showing a breakdown of price below a support line. There is then a pullback before the downtrend continues. At that point I would typically enter short. However in my mind there are two options for stop placement. One would be above the pullback (lower high), the other would be above the breakdown (prior support). Personally I will typically place my stop above the prior support because I feel that price may be more likely to retrace to that point turning the prior support into resistance.

In this example my stop would be too big to trade 2 contracts so I would instead trade 1 and look for another entry at a later time. Fortunatly in the attached example price pulls back again this time allowing a smaller stop and a chance to increase size. However, sometimes this kind of a pullback doesn't happen and price just continues down.

If that second pullback didn't happen, when would you add to your position if you wanted to?

In general if you decide to enter a smaller position to limit your risk, what techniques do you use to add to your position?

How would you mange your stop on the 2nd half of the position? Again refering to the attached example, the 2nd trade stop has been placed above breakdown area. However if I were to get stopped out at that point, most of the profit from the 1st trade would have been lost. So would you take profit (or use a tighter stop) on the 1st half while allowing the 2nd half more room?

I realise that as with all things in discretionary trading there is no one right answer and no two trades will be exactly the same. So please post your thoughts.

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cheers.

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  #3 (permalink)
Fortitudo et Honor
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I've found that the only advantage to scaling on effective systems was relative reduction in drawdown.

On fairly poor/inferior systems, scaling in (at a better price) can improve the system, simply because the optimal entry points aren't being utilized.

On efficient systems...I find that there's really not much advantage (if any) in terms of net profit....as for every trade that features a drawdown against you and ends up profitable....there are other trades that do not drawdown enough for you to pick up that extra positionsize and so you're left with half your capital in play.

In essence, you're going to hit ever loser (although not as squarely, but slightly) and you're going to hit SOME trades that drawdown then recover to win.

It helps with drawdown (sometimes) but usually, you have your money sitting on the sidelines when it would have been better off working for you (assuming the system is viable and healthy).

If you're scaling in at a less advantageous price......the opposite problem happens.......you're going to get a smaller portion of profit on your secondary add in for every winner, but that's going to be diminished or wiped away for every run up that hits your scale in and then ends up a loser (larger than your initial position).

Again, it can be helpful for drawdown and you have to do the necessary calc's to see if the reduction in drawdown and increased leverage you can incorporate, outweigh the drop in net profit (on a per contract basis).

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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Thanks for the reply. Some good points. However im not really trying to discuss the pro's and con's of scaling in. I am looking to discuss techniques traders use to add on to their positions. What do they look for that tells them it's a good time to add to a position.

As per the original example, the 2nd pullback provided a nice place to add to a position. But sometimes a market doesn't provide that kind of a chance. So what else do traders look for.

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  #5 (permalink)
Fortitudo et Honor
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DarkPoolTrading View Post
Thanks for the reply. Some good points. However im not really trying to discuss the pro's and con's of scaling in. I am looking to discuss techniques traders use to add on to their positions. What do they look for that tells them it's a good time to add to a position.

As per the original example, the 2nd pullback provided a nice place to add to a position. But sometimes a market doesn't provide that kind of a chance. So what else do traders look for.

What I'm saying, is that if you're waiting for that second pullback to add to your position, if that were truly smart and edgeworthy and profitable, (moreso than your original entry) then THAT's where you should have waited to enter.

If it's NOT as profitable or edgeworthy as your original entry, then by holding additional capital in reserve to find add in opportunities, you're actually reducing your overall profits.

Scaling is simply a method for smoothing equity curves and managing drawdown on already efficient systems.

Look at your system efficiency (entry, exit and overall) and take all your ideas for scale in points, and compare them to your original system......if they're BETTER then that should be your first entry point, if they're WORSE then you should stick with your original entry and simply lean into it from the get go.

Again, I've never found scaling (in or out) to be favorable on an already effective system. I've only found it to be able to reduce drawdown, and in THAT effort, if the drawdown (combined with paired entries) on a per/contract basis is reduced enough to where you can use additional leverage (i.e. less drawdown margin held/contract) then the overall result can be better. (this of course assumes that you're employing leverage and increasing your position size with profits).

Scaling can make marginal to bad systems perform better, but only because the second entry is better and what you should be using as your original entry.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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