bobwest 

More on @Inletcap and scaling in (and out.) This is turning out to be an interesting thread. Many (or most) people basically look at scaling into a losing trade with disbelief and incomprehension, and most (I am one) have no interest in trying something that has lost them money many times in the past. But then, why does anyone who is not either a rank beginner or essentially crazy ever do it? Hmmm.... must be a reason. Inquiring minds want to know. Let me put down a couple of thoughts based on what Ed ( @Inletcap) did in his trading when he was active here. He was sort of an extreme case of a scaler-inner, more so than almost any others. This is just my own take on what he did, and I'm not offering it either as what anyone should do, nor even as necessarily what Ed did, although I think it is pretty accurate as a summary of his trading. I watched him develop as a trader and we went back and forth often while he was posting trades (he would post and do updates several times a day), so it's probably at least somewhat right. For starters, he would formulate a "thesis" -- which was not necessarily anything more than a decision about how he would initially trade. He was pretty loose about this. He told me many times that his big breakthrough as a trader came when he realized that he could make any trade he wanted to and still make money. (Bear with me, this will start to make sense -- I hope .) His thesis would have something to do with levels that he thought were important (floor pivots, opening range, VWAP, that kind of thing) as well as relative volume, what price was doing, and other stuff. He would use these factors but would not necessarily try to deduce what the market would do based on them. He wanted to get into a position that was somewhat reasonable and then manage it aggressively by both scaling in and scaling out, based on what it did. He would have a clear idea of when he would have to give up the thesis because price had just not borne it out, and he would have multiple targets (based on those levels) where he would take partial or full profits. After that, he would just trade the hell out of it so long as his thesis stayed valid. He would scale in when price went against him (down to his bail-out level) and would very often take partial profits when he had them, and would definitely add when the move was strong. For instance, he might be long, add to the longs as price declined (which improved his basis -- average cost), and then sell a few contracts if it turned up a bit, especially if some contracts had gone into a profit, cutting his loss and perhaps going net positive. If price went in his favor, he might scale out a few contracts, buy some back in on a pullback, and/or scale in as it went in his favor to maximize his return. And he did this all day long. This inning and outing let him move his average cost up and down, minimizing the damage when price was against him, pushing hard when it went with him, and taking partial profits often. You might say something like, "Well, if you're going to be in and out all the time and you're any good at it, why not just always go all in and scalp short-term with full positions? Basically, he wasn't doing this for scalping profits. He wanted to build up a big (-ish) position and hold it for a long haul (10 or 20 points in ES, or at least a large percentage of the daily range.) He just wanted his basis to be a good one and he was willing to take some heat to get it. Now, you may think that this is lunacy, but he was very successful at it. If someone thinks, "Well, he probably went broke because he's not posting here any more," the last time @michaelleemoore posted about the old group, he indicated that Ed is still trading and doing well. (He manages client money and decided he couldn't post trades publicly any more for professional reasons.) I'm putting this up only to show that not everything has to agree with what's in the books, or what most traders do, or even what makes sense to you (or me.) It just has to work. ( ). "Work" means, work for the person who does it. Lots of things work for someone else that I can't use, after all.... (By the way, some time ago FT71 gave a demo in a webinar of how he scalped, taking a position to see what it would do and then going in and out as price moved with and against him. Basically, not too different in principle. I couldn't do that, either, and wouldn't want to try. There have also been a few people, many on the old spoos thread, including tigertrader and @Big Mike, who would scale into initially losing trades successfully as a way of establishing a position in a trade that eventually worked.... but overall we have seen only a few.) As I have said before, I came down on "Never scale-in, period" in the poll, but that's just me. There's more in the world than just what makes sense to me, or what works for me, either. I can also appreciate something that doesn't work well for me, but not feel any need to do it. Bob.

Nice post. I was just sitting here thinking about how erratic the market can be. I was long the 30 yr, in a nice profit. Exited on a whim - no technicals, order flow involved. Then, in a microflash, the ES order flow has a huge buy on Jigsaw, and almost takes out the o/n high. The 30 yr tanked in a heartbeat right back to almost my entry point. So here's the point: you never know what the market is going to do. Intuition comes with experience. Sheer luck getting out of the bond trade a few minutes ago before it tanked was just that - sheer luck. At the time I felt it was going higher. The ES was at a low, numbers looked good etc.

The most difficult part of this business is the element of randomness - there are some things you just can't know.

Anyway, as I'm writing the ES tanked down again and the 30 yr is back to almost my exit point. It's snowing outside - I think I'll take the pups out for a romp in the snow - I think randomness might be the order of the day!

Awesome post Bob. I think the whole discussion highlights the fact that we, as traders, need to find and use what that we can personally identify with, the tools and methods that really resonate with us. One has to take all of this and make it their own. Good stuff.

Do you happen to remember which FT71 webinar that was? I'd like to check it out.

Rrrracer 

Awesome post Bob. I think the whole discussion highlights the fact that we, as traders, need to find and use what that we can personally identify with, the tools and methods that really resonate with us. One has to take all of this and make it their own. Good stuff. Do you happen to remember which FT71 webinar that was? I'd like to check it out.

Thanks. I agree completely that whatever we do has to resonate somehow with us, and it might only resonate with us, not anyone else.

I'll try to track down that webinar, but it'll take a little while. I'll post a link when I've got it, probably in a day or so.

Bob.

phantomtrader 

Anyway, as I'm writing the ES tanked down again and the 30 yr is back to almost my exit point. It's snowing outside - I think I'll take the pups out for a romp in the snow - I think randomness might be the order of the day!

LOL good call! Now THAT dog... is equipped for the environment Are you in the mountains?

Rrrracer 

LOL good call! Now THAT dog... is equipped for the environment Are you in the mountains?

Yes. Lake Tahoe area. And I have two of them - siblings. They go nuts in the snow!

bobwest 

More on @Inletcap and scaling in (and out.)

Nice post which I think gives people a fairly good idea about Ed's style.

I just wanted to mention that Ed's overall trading experience is probably nearing 20 years. That, to me, means he definitely knows what he's doing.

I keep labouring the point but I think it's a fundamentally important one: there are people that, for a variety of reasons, never manage to "break the wall". There's a video of Josh Kaufman where I seem to remember he calls that the 'stupidity barrier', not because people are stupid but because they feel like they are struggling and they feel stupid (nothing could be further from the truth).

So, in trading unfortunately many never manage to break the threshold (I believe the main reason is psychological, the second is probably lack of capital, although that could be somewhat overcome), but those who do, or are in the process of doing so, suddenly 'get it', and @Inletcap reached an expertise level that allowed him to fine-tune his positions throughout the day through scaling-in/out, using 'rinse and repeat' techniques, etc. - but he could do so because he - in my view - had seen it all before. You simply don't get through 10+ years trading in the markets without experiencing many setbacks but never giving up.

Back to the topic at hand, I too selected "Never scale-in,period", but I also selected the two "Often scale-in" choices. I selected those 3 because I think they represent the stages of development that people could go from and to.

I never heard of people that "always scale in", but that's just me.

xplorer 

I just wanted to mention that Ed's overall trading experience is probably nearing 20 years. That, to me, means he definitely knows what he's doing. ... So, in trading unfortunately many never manage to break the threshold (I believe the main reason is psychological, the second is probably lack of capital, although that could be somewhat overcome), but those who do, or are in the process of doing so, suddenly 'get it', and @Inletcap reached an expertise level that allowed him to fine-tune his positions throughout the day through scaling-in/out, using 'rinse and repeat' techniques, etc. - but he could do so because he - in my view - had seen it all before. You simply don't get through 10+ years trading in the markets without experiencing many setbacks but never giving up.

That 10+ year experience thing is a very important point.

When someone's good at something, it seems "intuitive" to them -- they "just know" what to do. We don't always realize that anything is "intuitive," once you've thoroughly learned it and done it long enough and well enough. Until then, not so much -- and there's struggle and unproductive effort.

All that time in the trenches was definitely part of how Ed could do something easily that seems difficult to the point of being incomprehensible to most of us. (I include myself .)

Bob.

“Does Averaging in Work?” by Ernie Chan.
Quantitative Trading: Does Averaging-In Work?

"Why you should add to winners and never add to losers" by me!

Why you should add to winners and never add to losers Why you should add to winners and never add to losers I recently got an email from Kevin Davey of KJ Trading, aka kevinkdog, regarding his latest blog post entitled Peel Off Trading (. Kevin is a highly respected member of nexusfi.com (formerly BMT) …

Interesting this topic comes up now because it was being debated in the discord yesterday, and I myself have been testing different ideas with multiple contracts.

The big thing that I have learned is that scaling in really needs to factor in the average ranges of your instrument. I will try to explain with ZN as an example because it's ranges are small.

The average rotation in ZN is 4-5 ticks. That's not to say that it doesn't get to 8 ticks or even 16, just that it is by far the most common rotation. It may be hard to get filled on one side as well so it's not uncommon to take a 2-3 tick winner in ZN or a loser of the same. So lets say you get in, and it goes two ticks against you. The trade still looks good so you you add a second contract. It goes two more ticks against you so you're now at -4 + -2 = -6 ticks. Of course now you're at the bottom of a 4 tick range which would be a place of interest to buy, but you've already taken on your max risk. You end up stopping out right at the bottom of the move, and we all know how crappy that feels.

On the other side your original target from the first contract is going to be +4 ticks. So if it goes down two ticks against you and then up 6 ticks from there to your original target you actually make 4+6 = 10 ticks. Yes, that's more than the -6 you lose on the bad trade, but what is your probability? It requires more movement to get to that target. More than the average rotation which means it is significantly less likely. So then maybe you have to take your profit at 2 ticks above your original entry for only +6. Now you're just spinning your wheels.

What if you only do it when you're winning? It goes up 2 and so you add another contract. If it keeps going you get +6 on the average rotation. You could even take one off for the +2 and let the rest run for maybe more. What if it goes against you though? Well if it drops that average 4 you're now down 6 ticks or more.

Now imagine that the average range is something like 10 ticks, and we're averaging in over a range of 2-4 ticks? That whole scenario plays out very differently doesn't it? So averaging into a trade isn't necessarily bad. It just kind of depends on your instrument. If the spots you are adding a second contract is half the average rotation, then you get these problems. The ranges are such that you can very easily end up buying highs or selling lows with averaging in. Not saying it shouldn't be done. In ZN I can sometimes trade across that range 2-3 times and get my theoretical average well below that stop. There's big advantages to that, but not if you're taking -6 or -8 on the losers. You have to have rules and precautions to ensure that you don't fall into that issue. Let someone else buy it, let the range get established, then start averaging in. Then you're much more likely to be able to grab a tick or two and start building a buffer.

Now on the other side I've met a lot of traders through discord, and almost every big disaster was caused by averaging into losers on a trend day. Misuse of such strategies blows up more accounts than anything else, no doubt about it!

cory 

FT71 in one of his previous online personality also traded a method called accordion trades, it needed 2 accounts I think.

And what is the Accordion Trades method?

Not cryptic for 'According to XXXX' I assume