Entries & Scaling in

[jhooper]

Hi, maybe I'm the last guy in the whole trading world to realise this, but this month's SFO mag in the US had a different way of scaling into entries than i had considered before. The article is freely available at :
www.sfomag.com
(see bottom of home page for "Trade like a Dealer(avoid death by a thousand stops)
Instead of buying (for a Long trade) the full amount of contracts at one point (eg a 38% retracement), the author suggests buying increasing number of contracts as the price is dropping (presumeably still making sure the trend is up (in higher timeframe)).
I've seen a similar version once the support area has been hit and price is rising, but never this way.
Has anyone any experience of using this in their trading???

Thanks,
John

 

[TheBramble]

the author suggests buying increasing number of contracts as the price is dropping (presumeably still making sure the trend is up (in higher timeframe)).
I've seen a similar version once the support area has been hit and price is rising, but never this way.
Has anyone any experience of using this in their trading???

It's the way most newbies trade. Average down. Doesn't make any sense unless you're sure the higher trend is still up.

And if you were that smart, you'd wait until the minor correction reversed before piling in at all.

Why buck even a minor trend?

 

[c6ackp]

Hi John

It's an interesting article, but I don't really get it. Why would a trader want to trade like a dealer?

I could understand buying during the pullback (as the price is going down) if you're an investment bank trying to build a huge position without driving the price up too much in the process. But for spread traders, surely it's best to wait to see if the next leg really does materialise, i.e. wait for a another +ve signal.

Look at GBP/USD 1min just after the NFP announcement on Friday - the pullback failed (another drive-by?) spectacularly - you wouldn't want to be scaled up to the hilt just before the sudden 100 pip drop

NFP-time is a very volatile period, but pullbacks regularly fail to produce another impulse in "normal" trading.

My view - 1yr experience only - maybe I'm missing something though - anyone?

 

[ardhill]

Personally, I prefer to fully load at the start, then scale out.

OK, you have a trading plan, no matter what your plan is, you know the point where you want to put on a trade, it doesn't matter if that is from a pattern, indicators or whatever. We all have (or should have) an idea when to enter a trade.

The reason you came to that plan is because you felt that the price will move your way just after you enter the trade - are we OK so far?

The further we move away from your entry, the weaker your signal.

So, I would rather take the 'lions share' of the main move with my full trade size, then as the move started to look weaker, start to scale out, finally leaving some of my position (in my case 1/3) to continue with the trend or get stopped out (I give my last stop a bit of space).

But scaling in when the price isn't going in my favour just doesn't make sense to me - private traders just don't trade a big enough size to warrant that in my opinion. Hey, there are times I would love t be able to start the market off in my direction, by my stock purchase, but I don't buy that much in any one trade.

 

[barjon]

Agree with the views so far.

Mathematically (there's that word again ) the most favourable reward to risk strategy is the inverted pyramid where you add to your original position as the price moves in your favour then scale out after half your reasonably expected profits are gained.

ie: 10 +5 +2 (half expected profit) -2 -5 -10

There's only one absolute rule: no unsuccessful secondary position should be allowed to offset the entire profits of the prior positions.

good trading

jon

 

[ardhill]

There's only one absolute rule: no unsuccessful secondary position should be allowed to offset the entire profits of the prior positions.

Hi Jon

Maybe my mind has slowed down a bit here, but... What are you saying? I don't understand that statement.

As I said it could well be me.

 

[turtle trader]

I suspect what barjon means is that if your original position is in profit and you subsequently add to it, you should manage the 2nd position to ensure that if it turns out to be a loser, the loss isn't so large that it wipes out the profit you already had on the original one. This might be achieved either by ensuring you can place a tight enough stop, or by reducing the size of the subsequent trades (10+5+2), or both.

I hope that's about right jon, it makes good sense to me (although i'm not sure i've explained any more clearly).

Simon

 

[ardhill]

Thanks Simon

Yes, your explanation was the same as one sent to me by PM by another kind T2W member.

I think the reason it was difficult to understand it that my mind just doesn't think about adding to positions. I understand that it can work for long term trades, but in shorter term, it is just not in my thinking.

 

[barjon]

Yes, thanks simon - I was off piste!

You enter at 100 with a position of 10
It gets to 110 and you add 5 and you're now running a total position of 15.
You place a stoploss @ 103 on the total position.
If it's triggered you gain 30 (10x3) from the opening position but lose 35 (5x7) from the addition.

Thus, as simon says, correct stop(s) adjustment is crucial.

ardhill

I'm not sure what set ups you trade, but what if you get a repeat signal whilst your trade is running? Do you just ignore it? Treat it as an entirely separate and different trade? Or might you think of an addition?

good trading

jon

 

[ardhill]

what if you get a repeat signal whilst your trade is running? Do you just ignore it? Treat it as an entirely separate and different trade? Or might you think of an addition?

Basically yes, I just look at it and think, that is confirmation that my trade is still moving my way. There is one instance when I might add to the position.

As I mentioned earlier, I generally enter with full position, then scale out as I get further away from my entry signal. If I had sold some of my position off, then I got a new positive trading signal, I may add back on the shares I had taken profits on.

This suits me and my psychology, I appreciate that other traders may be successful by adding to their position - whatever works for you is good.

I know that the biggest moves I get in my short term trades are most likely to happen just after I enter the position, thus I have most shares on at the start, and less nearing the end of the move as it fades out. The down side of course is if it goes wrong, I am wrong with my full position and not just a part.

 

[jhooper]

Thanks folks for all the replys.
It made me think even harder about this entry!
As Ardhill said, its down to psychology and whatever works for you.
My thoughts on these replys, especially Bramble's, were these:
The article says that the professional dealers are using this technique and that it's not averaging down-I can see their point. You're right that you'd have to make sure that the main trend was still up at subsequent entries but I can see that because you're still sticking with the same (for instance) 2% stoploss youre not just averaging down. The 3 part (for instance) entry with increasing number of contracts as the price, possibly, decreases (for a long entry) does at least give a lower breakeven point if you're right. If you're wrong you still have the same 2% stoploss. For me, as a Fib trader, I can see the benefit of not having to bet the whole ranch on a 38% retrace entry when I could enter a small amount at this level and more at a 61% retrace level -Only if as you say, the context/trend are still with you. It seems to make psychological sense to me, but I guess everyone's different and I wondered how others had fared with it in the markets. This seems to also cover C6ackp's point. I'm assuming in my scenario with this scaled entry that I'm getting a positive signal for the first entry (say at 38% level), but that if the price dropped to the 61% level and I still had a positive signal that I would scale up again for another Long entry.

Waiting for the turnaround as you said may help, but I find i end up chasing a stocks price up when the spreads are widening! It's possible I guess to go to an even smaller timeframe once the turning around has occurred and use this magazine article technique on that timeframe ,to pick a retracement where your risk is even smaller.

Hope that made sense!,
Thanks,
John