T2W Trading Community

Trading Capital - Funding Your Trading Account

It is alarming that many traders use either borrowed money or money they really cannot afford to lose or risk. This usually will set the trader up for failure because they will be subject to the market's emotional manipulation since the trader cares too much about the outcome of each trade.

In simpler terms, the trader is nervous about losing the money and therefore each stop out creates more anxiety up to a point where the trader may not want to get out when suppose to and take the loss, but instead hope the trade comes back. It takes both responsibility and discipline for accepting the trading loss and getting out. This is the same type responsibility and discipline the trader did not have when he or she decided to trade with money that shouldn't be traded. So, it is not likely the trader will have the discipline nor have the responsibility to trade successfully. If you do not have sufficient risk capital to trade, begin "Paper Trading" to improve your trading skills while you are saving enough risk capital to begin trading with real money. This way when you are ready to trade with real money you will have practiced your trading skills so that you will do better.

The Psychology Behind "Scaling" Out Of Trades

"Scaling" out of trades can be incorporated into your money management game plan since it is a component of risk control.

"Scaling" out of trades is a great technique that actually can convert some losing trades into profitable ones, reduce stress, and increase your bottom line! As you all know by now, I am a big advocate of reducing stress while you're in a trade. This way you can focus on the trade and not be subject to emotions such as fear and greed which usually hamper your trading. Properly "Scaling" out of positions can not only at times make you more profitable, but it can also reduce the stress that some traders incur during trading.

In order to "Scale" out of trades the initial "trade size" must be large enough so you can reap the benefits of "scaling." The technique is applicable for both long and short positions, and for all types of markets like futures, stocks, indexes, options, etc. The key here is that the initial position must be large enough to enable you to cover your profitable trade in increments without incurring additional risk form such a large opening position. Remember, we want less stress, not more!

Your initial position or "trade size" should always be within a 2% risk parameter. Therefore, the key now is be able to initiate a large enough "trade size" while not risking more than 2% on entering the trade. There is only two ways to do this. One way is to find a market that you can initiate a large enough "trade size" with your current trading account size based on a 2% or less loss if this initial position is stopped out. The other way, is to add additional trading capitol to your trading account that will allow for a larger position because 2% of a larger account allows for a larger "trade size." There is even another way, and that is to use the leverage of options, but you must be familiar with options, their "time value" decay, delta, etc. Using options would be considered a specialty or advanced technique, and if you are not familiar with them, this method could lead to increasing your stress!

Here is an overview of "scaling" out of a position and how it can help your trading. This technique works on all time frames from intra-day to long-term term monthly charts!

"Scaling" Out Example

Let's choose the e-mini as an example. In our example, your account size is $25,000 and you choose to risk 2% on this trade. 2% of $25,000 is $500. Your trade entry is 1037.75 and your exit is 1036.25 so you can buy approximately 6 contracts and stay within your risk parameters. Now this means if you get stopped out before having a chance to "scale" out, your loss would only be 2% which is acceptable from a "risk-of-ruin" stand point and therefore, this potential risk should not create any stress. Note, that if you add risk capitol to this trading account, you would be able to increase your initial "trade size" and still maintain a 2% risk. Let's say we enter this trade and it starts to become profitable. Here is where "scaling" out comes in and there are many variations to "scaling" out, so you will need to "paper trade" this technique to find which way works best for you. The idea is, as soon as the trade is profitable enough, cover part of your position and liquidate enough contracts so that if you are still stopped out, you make a small profit! If the trade becomes even more profitable, then you may want to liquate some more contracts to lock in more profit as well. The idea here is that as soon as your trade is profitable enough; liquidate enough contracts so that even if your original stop-loss is triggered, you make a profit. If your initial stop-loss is never triggered, then you should be able enjoy the rest of the trade and let it go as long as the trend takes it knowing that no matter what happens, you should at least make a profit on this trade. Knowing this is a great feeling and you will even have more fun trading!