It is about letting your winners run.
Say we want to attempt to hold our trade for 1 day. Now most of use would say to do that we're going to trade on the hourly or 4 hourly chart and have a stop size of what, going on average range on hourly, say 2 times that, 50 to 100 pips? To capture how many? So our R:R if we win end up being say 1:1-2:1. Not that impressive. We can then compound the error by moving our stop to break even or trailing our stop to obvious levels, constantly getting stopped out for our troubles.
Now consider this idea. We scalp the 5 min with 10 pip s/l for 1% risk. We make 1%. Then on our next trade we use the same position sizing but this time use our additional 1% and invest it back into our stop loss i.e. we now use the same position sizing but now have a 20 pip stop, with a 20 pip stop we should be able to hold for longer. Will this be an easier trade to profit from? If we lose we still only lose 1% of our capital. Trying it any other way will lead to constant whipsawing.
OK. Now scaling..with that in mind. Say we want to hold for a day but we're trying to enter on 5 minute, for argument sake using a 10 pip stop. Assuming we are good scalpers with a very high win rate, big assumption, but in theory it's easier to gain 10 pips than 100 pips. Now we do not want to use a larger stop because our win size is killed by doing so and we do not want to move our stop to break even because we will also get killed long term by doing that. So we know with 80% certainty that our entry will go to 10 pips giving us 1:1, at that point if we scale out half of our position we are effectively moving our stop loss to 5 pips (but in reality it stays at 10) and so on.
The idea behind doing it is that we are going to hold on to the 50% or 25% of initial position for a significant time, not just 1 or 2 extra pips - we're trying to capture the daily range or more. Imagine trading based on the weekly chart using 0.5% of your account at risk but with only a 10 pip initial stop. What's the weekly range?
Basically the general idea is hinged around you being extremely good, and I mean EXTREMELY good at scalp entries, it won't work if your initial win rate is poor, in fact you'll get slaughtered and then minimising your risk for the 'hold'. A hell of a lot of trades will get stopped out but it doesn't take many to take off to get the payoff.
Do I do this? At the moment no, but I know the theory and we can all but dream.
