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I think that if you learn to scale in and out of trades, you will be MUCH better off than if you do not.
Do you know how to predict a market's high of day? The low? No, you don't. So why pretend you do?
Admit you do not know how to predict those turning points in price to a precise enough location where you will be profitable, and then you can finally move on to reality.
I do not know where price will turn. I don't! Yet, with scaling, it does NOT matter! I am trading ES and I want to build a long, well, I sure as heck don't know if price will stop at 2010, 2015, or 2020, but what I do know is that it doesn't matter. I can scale in. I will buy some at every price point listed, which will give me a good average if we go higher, and a much better average if I lose!
All-in/all-out trader buys 3 lots at 2020 (stop loss at 2005) will take a 45 point loss (net). Meanwhile, if I buy one at each level, I will take a net loss of 30 points.
this time we use a different market move with same numbers:
- all-in/out trader buys 3 at 2020 and sells 3 at 2050. that's a 90 point gain
- scale in/out trader buys 1 at 2020 (market doesn't go lower) and sells 1 at 2050. that's a 30 point gain
as countless times discussed, there're good reasons to do both. I personally only do aiao with futures. mainly because of scalping. on the other hand, with instruments like stocks, I like to scale in and out. mainly because it's more investing and not trading.
However, you are assuming that the scaling trader does not scale up. I may only get one lot of at 2020, but hell, I would rather take a one lot winner for 30 points than a 3 lot loser for 45 points!
Anyways, like you said, there are benefits to both trading types. I think the key is to hone in on one and perfect it. For me, I would never have made it to the profitability heaven if it weren't for scaling (shout-out to @Inletcap for pointing the way). I was trying to pick areas where price wouldn't go against me more than a few points. This made me a poor trader and emotional trader.
Once I learned that I did not need to pick precise entries, but rather manage them better, I made a leap forward in my journey to consistency.
(PS, I do not "scalp" per se, but I think AIAO would be best for doing that, like you said.)
The goal is to pass a combine, then pass the funded trader prep, then build an account, then make some money, then make a living. I do believe it can be done with 10-15 ticks of risk per trade, and I also know that someday, with increased size, I will need to widen stops and trade bigger ideas. But that is for the future. Right now I am just trying to get consistent at picking good trades.
thank you for your examples. I still have to ask the question, if you analyzed each scale-in as separate trade over a large sampling of trades, shouldn't they be profitable on their own? If they are not, why do them? My point is that you should be able to make money on a single contract. You may not make a lot of money, but you should be profitable. Scaling in or scaling out might make you more profitable because you reduce basis or catch runners, but that first scale in and that first scale out should also be profitable on its own. Otherwise it is a drain on your account and serves no purpose other than as a psychological comfort.
I have tried scaling in the @Inletcap way on several occasions. I like the way he does it and would some day like to emulate his style. Pick a direction, determine a point when that direction would no longer be valid, then scale in, improving basis as it approaches the puke point.
I have usually used three scale ins of one contract apiece over a range of 30 ticks, with the last scale in at around 10 ticks from the limit. I have lost large chunks of money (in sim) each time. Why? because I was wrong. Each time. Simple as that. Oh sure, if I kept doing it I would catch my share of winners. But when you're wrong trading multiples like this the losses add up fast, even if you are reducing basis.
I found it very difficult to risk less than about 50 or 60 ticks, and that would blow out my combine. 30 on the first scale, 20 on the second scale and 10 on the third scale, or something like that. Bottom line is, whether you scale or go AIAO you still have to be right more than you are wrong.
But now, instead of comparing an AIAO trader who trades 3 contracts to a scaling trader who also trades 3 contracts, lets talk about a trader who only trades 1 contract compared to the scaling trader who trades 3 contracts. If the trader who trades 1 contract manages that 1 contract as if it were the first scale of a 3 contract trade, shouldn't he be profitable? Put another way, shouldn't all the contracts in a 3 contract scale be profitable on their own over the aggregate of a sampling of trades? If any one of the scaled contracts is not profitable on its own, what is its purpose?
Sorry for the late reply, but I live in a different time zone and usually switch off everything at 18h00 my time. I see several replies came in, and I also know you are trying to get funded by TST, which means your trading approach and goals will necessarily be quite different from mine.
In any case, that is one hell of an excellent question. I would say it depends on both the market and the trader on any given day, the only caveat being that both these approaches have different risk profiles as the trade progresses.
Regarding why I believe using multiple contracts is so crucial, I can only relay my personal experience. When I was still backtesting a ton, I very quickly came to a similar conclusion as you did with your post "Why do I make such a big deal out of 1R" (
Why do I make such big deal out of 1R? It's not because this is my target. The markets are fluid, targets vary based on S/R, etc, so targets should be determined based on conditions on the ground. The simple answer is that tracking this milestone …
). Getting a win % of 50% with your average win being double your average loser is pretty damn difficult. I spent some time testing most common indicators (and several combinations) of those, and could not come up with a robust and reliable way to increase my win %. What I also found was that the backtests that did best always seemed to be the ones that shot for the largest wins.
The answer to maximise gains seemed quite simple - just hold them longer for larger gains. Unfortunately as you also noted, the longer you hold, the more likely the market is to give back significant portions of that profit, or even stop you out for a loss. My first order of business, was to devise ways to move my stop to breakeven. This cured the closed-equity risk problem, but it still left me with an open-equity risk problem. By taking profits at certain points, I can reduce the open-equity risk, but it comes at the trade-off of potentially lowering gains on massive movers. I chose to do this, because not all trades are big winners and I needed some way to pay for the churn on the account.
As noted above, scaling out smooths out the equity curve, but I was not happy with the fact that losing trades needed big winners to offset them. This is purely because losing trades were taken on a "full" position and winning trades were always scaled back. Each time you scale back a winning trades needs more ticks to achieve another multiple of R. My solution to this problem was to pyramid in as a trade moves in my favour, while simultaneously moving my stop up to keep risk constant. If the 1st contract had a stop of 20 ticks, then I would move the stop to 10 ticks away from my average price. As @bobwest noted, this leads to a higher price and also a higher stop increasing the chance of being stopped out. Again, this is another trade-off I choose to make, because it makes me feel more comfortable with the risk I am taking.
The above describes a way where I can potentially get 4 1R losers a week, 1 5R winner a week, and perhaps a 10R or even a 25R winner a month. It is not perfect by any means and quite often I sit with a losing day or week, when @Inletcap has been pocketing decent money. This is merely my way of maximising the size of my winners while trying to not lose too much of my account waiting for those winners to come along.
My trade management method is merely one way to skin the cat and my approach was developed with the assumption that I can't get a 50% win % with a reward to risk ratio of 2:1. By trading this way, I am also not always bound to a screen merely due to the fact that once I have booked a decent gain, I can just let trades play out. Sometimes they work well, other times a 25R gain turns into a 10R gain, which is exactly what happened yesterday.
Edit: While typing up this post, I forgot to add the following - I notice you quite often refer to the fact that trading 1 contract should yield similar results and in my second paragraph I gave a quick "answer". It is a damn excellent question, and there is no real easy answer. Based on the rest of my post, I think it is obvious that I consider my position to be a "trade" and my goal is to manage a position. When you look at trading in terms of single contracts, you always get stuck in a linear relationship, i.e. if you had no stop no profit / loss profile would be a straight line. Once you add in a stop, your profit and loss profile changes to that of a call / put option. Limited risk / unlimited upside, but the upside movement will always be linear. By pyramiding I am attempting to change the linear profit curve into an exponential curve. Scaling out of course reduces the exponential effect, but at least it gives an initial kick to the return profile.
Now, all of that being said is the way I approach things. Several traders here (
Well, it's time to step into the light. I've lurked around BMT and futures.io for a couple of years now, wandering through the journals of others, sampling indicators, hearing stories of gains and losses and feeling quite at home. I came here …
) do things quite differently and some of them do much better than I do. I tried copying things the successful guys there do, and ultimately lost money doing so. Perhaps there is a skill in trading semi-random movements - if there is, I suck at it. I find it is easier to just try and hit home runs - I don't get them that often, but when I do, they tend to travel quite far out of the park.
