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Regarding Van Tharp's R-multiple methodology, I can't seem to find any information on how R-multiples are calculated for a trade that has was scaled into or scaled out of (or both at the same time).
Should the R-multiple be calculated for every individual scale in, keeping each scale in as a separate position, or should they be summed to one combined trade, or something third? And what about scaling out?
Thank you,
Andreas
Can you help answer these questions from other members on NexusFi?
I'm starting to read Tharp now, as it seems you are also?
In The Definitive Guide to Position Sizing he discusses some scaling methods, and from what I think I understand at a glance, 1R is still the risk per unit of the initial trade.
For scaling he touches on ideas like "current risk to original equity" vs "total risk to original equity" vs "open risk" and more. Do you have this book? I haven't read that far yet (in fact am still reading Super Trader) but took a look because of your question, and it's quite interesting.
He advocates:
Adding to profitable positions. From what I can see doesn't average in; he only pyramids.
Only doing this 3 to 4 times max.
Raising his stop with each additional position.
Being aware of the dangers of adding to positions.
This doesn't really sound like it's connected to, for example, using an algo to scale into a large equity position without rousing the natives, so to speak. Rather he's discussing adding new individual positions to an original one, seemingly of the same size as the original, and then considering their cumulative risk profiles.
Can you give a trade scenario? It's an interesting topic. What purpose does your scaling in and out serve? Is this in equities?
R is something you decide.
It is the amount you are willing to risk on any one trade.
It can be a percentage of your account, support or resistance, or a function of ATR.
Your R =risk will be the difference between your entry and your stop times your position size.
As for scaling in using R this is how I do it. (I swing trade stocks)
If the trade moves in my direction I add when it reaches entry plus the R value.
I continue to add every time it gains R.
If I'm trading 100 shares of a $20 stock and my stop is at $19 my R=$1
At $21 (entry + R) I will add 100 shares.
I'll move my stop to $20. My risk remains the same. The initial trade will break even and the second trade has $! risk.
At $22 I add another 100 shares and move stop to $21.
The trade is now risk free. At $21 the initial trade is $1 in profit, the second trade is break even and the 3rd trade is down $1.
Rince and repeat until you have a full position.
Once you have a full position you can trail a stop or scale out.
Not sure if that helps
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
So when you scale in to a trade 3 times, how do you journal this trade? Do you journal it as 3 different trades?
How do you determine how many R you made on the trade when you scale in? What about calculating the R when you scale out?
I am not sure there is a definite answer, but what do is that I look at it as one position and look at my max risk at time of initial order and at each scaling in. For example:
1st trade: Buy Entry = 100; Stop = 90. R = 10.
2nd Trade (Scale in): Entry = 105; Stop for both = 100. 1st trade R now = 0; 2nd Trade R = 5. R for both = 0+5 = 5. Max risk was 10 during time of opening my first position and is the most I've ever risk during the trade, so my R stay as 10.
Example 2:
1st trade: Buy Entry = 100; Stop = 90. R = 10.
2nd Trade (Scale in): Entry = 105; Stop for both = 100. 1st trade R now = 0; 2nd Trade R = 5. R for both = 0+5 = 5 which is less than my initial 10 R, so 10 is my max risk at any time and is my current R.
3rd trade: Entry 110. Stop for all open positions = 100. 1st Trade R = 0. 2nd Trade R = 5 (105-100). 3rd Trade R = 10 (110 - 100). Total R = 0 + 5 + 10 = 15. Max Risk now is 15 and this becomes R.
I will journal the trade as a single trade if I exit all at once.
If I scale out it could be journalled as several trades.
I keep my paper trail mainly for tax purposes. I have to report cost and proceeds of each exited trade.
To me R= my risk. It varies with each trade on a dollar basis. It is the difference between my entry and my stop and is determined by when I think the trade is no longer valid.
What is consistant is the percentage of my account that I'm willing to risk on each trade and that also varies depending on what the market is doing. I risk more when the market is trending and less when the market is choppy.
R is not something I track. My R/R ratio is calculated by average win / average loss and will change as each individual trade is closed.
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
The picture shows an Algo I coded many years ago - for Scaling In and Scaling Out. It does NOT Scale Out - on all the trades - as it depends on what is happening in the market.
