Scaling Into Profitable trades

[trendie]

If you take a trade.
You risk 1R to make 1R. (for example, 100 pips).

What if you decide to scale in if the trade is profitable?

For example, 1R = 100 pips.
Your risk is 100 pips. SL =100.
Your target is 100 pips also. (1:1)

What if you decide to scale in once its profitable?
eg, if the market goes 50 pips into profit, you take a second trade.
You now have 2 positions shooting for 100 pips.
Your stop-loss can be either break-even, at 25 pips.
Or, you still risk 100 pips by moving your stop-loss to -25. (original trade loses at 25, and the new trade at 50 pips loses 75, nett -100)

If you take the stop-loss, you're out for B/E. (assuming you reset your SL to 25)

If the trade goes to 100pips, you nett 100 pips plus 50 pips.

For a risk of 1:1, your return ends up being 1.5R. (100 + 50).

Of course, if the trade goes to B/E, you run the risk of bailing out on an otherwise winning trade.
But, would this offer an edge from a money management standpoint?

Just a thought.

NB: The above assumes you already have something an edge, and wish to exploit it further. I am not suggesting a losing system can be made winning by playing with numbers!

 

[Hotch]

If your original trade has an edge, it does not mean your addition will. I only really like to make additions where I would enter anyway, and I am especially against adding every x pips, for the same reasons I am against moving stops to break even blindly.

The theory is that as the market has moved in your direction your idea was correct, and so an addition is correct. However I would think that one of the trades has a better edge, and so why not just go with that one (either enter full size at the start, or enter it when it hits your addition point)

This also may be relevant, and just generally good reading:

http://en.wikipedia.org/wiki/Parrondo's_paradox

 

[meanreversion]

I did used to scale into positions, in the style of the Turtles. However, although I had a clear set of rules on how to add, I found it tricky from a logistical standpoint, i.e. I kept making mistakes and missing orders (not always my fault, there were times when I didn't have internet access for example).

When adding to a trade, I increased my risk.. I didn't try to move the stop to a point where the amount staked was the same (backtesting didn't show this to be very effective).

I ended up ditching scaling in for two reasons

1. Too labour intensive
2. Win ratio too low

Although 2. "shouldn't" be an issue, in practice it is, as it makes the system harder to follow.

I know this doesn't exactly respond to the original post, but it may be of interest.

 

[Albert Carey]

Backtest your method. See if it works on historical data.

 

[Splitlink]

I did used to scale into positions, in the style of the Turtles. However, although I had a clear set of rules on how to add, I found it tricky from a logistical standpoint, i.e. I kept making mistakes and missing orders (not always my fault, there were times when I didn't have internet access for example).

When adding to a trade, I increased my risk.. I didn't try to move the stop to a point where the amount staked was the same (backtesting didn't show this to be very effective).

I ended up ditching scaling in for two reasons

1. Too labour intensive
2. Win ratio too low

Although 2. "shouldn't" be an issue, in practice it is, as it makes the system harder to follow.

I know this doesn't exactly respond to the original post, but it may be of interest.

The few times I've tried this, I've lost on what started as a profitable trade.

I know that it was my fault and that, in more able hands, the trades should have ended better. I'm, just, an in-and out-trader with one stake for the whole thing.