http://www.crownfutures.com/Public/Resources/ScaleTrading/index.cfm?requesttimeout=500
Scale trading is a disciplined, mechanical approach to medium to long-term investment in commodity futures. It is a methodology based on the assumption that commodity prices ultimately move on factors affecting supply and demand. Two basic principles guide the scale investment strategy.
Is it a bargain price?
Are the supply and demand dynamics about to change in a significant and favorable way?
If the answer is yes to both questions, the investor begins buying the commodity at progressively lower prices until it stops declining. Once contracts are bought, they are then sold at progressively higher prices.
Choose a market that is trading in the lower 30% of its historical price range. Commodities that are produced and consumed are preferred for scale trading. Paper assets such as currencies and stock indexes are generally avoided.
Evaluate the seasonality of the commodity in question. Timing when to start a scale can make a big difference in the performance of your scale account.
Review fundamental factors. What are the short and long-term supply/demand expectations for the commodity? This means, with soybeans, for example, planting intentions, acreage planted, crop conditions, previous year's crop carryover, exports, etc. This additional information not only helps in determining the probable areas of price support -- i.e. will the commodity's price hold at or above its historic lows? -- but more importantly helps determine when significant changes are imminent.
If the above criteria is supportive, then a scale investment plan, based upon available capital, is constructed. The plan begins with purchases near the probable low and makes additional purchases at specified price intervals down to the lowest projected price. There should be at least 30% of capital left in reserve, after allowing for any losses on open positions as well as margin requirements (margin requirements are deposits required by the exchange and the amount required can change without notice).
Enter limit order GTC (Good till Canceled) to purchase the commodity (going long, never short) on an incremental scale all the way down to a level determined to be a "worst case" scenario. Keep in mind that stop-loss orders are not used since the purpose is to accumulate contracts at lower prices.
As each buy order fills, enter a limit sell order to close out the position at a pre- determined price that normally captures a $250-400 profit (net of fees and commissions). This profit objective will vary depending on the investor's personality and market conditions.
As each sell order is filled, then reinstate the original buy order. As prices fall, contracts are accumulated. As prices rise, those contracts are sold at a profit.
Continue this process until the commodity bottoms and rallies up to the point at which your first contract purchased is sold. You have now completed your first scale.
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