Scaling into positions .. Smart or silly?

[Jemook]

I've never scaled into positions before until 10.5 and I can't work out if this is the most effective and efficient way of capturing a move. I think a few of us are confused about this so let's hear some discussion on this.

What is the best way of capturing a 100 pip move?

For each of these scenarios we will be trading AUDUSD and place our first entry short @ 1.0000 with a TP @ .9900 which is 100 pips away.

Scenario 1: We open 1 full lot @ 1.0000. If it hits TP @ .99000 we would profit 100 pips or $1000.

Scenario 2: We stagger 10 sell stops of .1 lots each (total of 1 lots) like this:

1.0000 (+100 pips if TP hit)
.9990 (+90 pips if TP hit)
.9980 (+80 pips if TP hit)
.9970 (+70 pips if TP hit)
.9960 (+60 pips if TP hit)
.9950 (+50 pips if TP hit)
.9940 (+40 pips if TP hit)
.9930 (+30 pips if TP hit)
.9920 (+20 pips if TP hit)
.9910 (+10 pips if TP hit)

If price hits our TP of .9900 we would profit 550 pips or $550.

So straight away we can see that scenario 1 (full position) gives us $1000 reward whereas scenario 2 (scaled) only gives us $550 reward. So what about risk?

Let's say price moves to 1.0100 which is 100 pips away from our first entry.

- In Scenario 1 (full position) if price moves to 1.0100 (100 pips loss) we are down $1000.
- In Scenario 2 (scaled) it depends on how many of our sell stops get hit before reversing to 1.0100.

1.0000 -> 1.0100 -$100
.9990 -> 1.0100 -$110 / 2 positions triggered = -$220
.9980 -> 1.0100 -$120 / 3 positions triggered = -$330
.9970 -> 1.0100 -$130 / 4 positions triggered = -$460
.9960 -> 1.0100 -$140 / 5 positions triggered = -$600
.9950 -> 1.0100 -$150 / 6 positions triggered = -$750
.9940 -> 1.0100 -$160 / 7 positions triggered = -$910
.9930 -> 1.0100 -$170 / 8 positions triggered = -$1080
.9920 -> 1.0100 -$180 / 9 positions triggered = -$1260
.9910 -> 1.0100 -$190 / 10 positions triggered = -$1450

So Scenario 2 (scaled) doesn't seem so good if price jumps back the other way and you've got all these positions opened!

Also in Scenario 1 (full position) if price moved 90 pips in your favour and then reversed back to breakeven you wouldn't be in a loss but in Scenario 2 (staggered) you'd be looking at a loss of -$90-$80-$70-$60-$50-$40-$30-$20-$10 or a loss of -$450!

So any tips? I'm at a loss here maybe I should just be risking a fixed % over 1 position with a SL far away from price action and just close any position goes against me way before it gets anywhere near SL?

J

[spotdespot]

I think fixed lot size position isn't the answer either and I may end up switching to risking a fixed % over 1 position with a SL way past the other side of the 240 line and just close any position before price gets anywhere near the SL.

I think you might be right. It makes the whole process more complicated though unless someone has a clever script. EDIT: Misread your post - I thought you meant fixed % risk over multiple positions. ie. 2% split in to x trades with various lot sizes based on SL.

I am convinced (with no supporting evidence just gut instinct ) that scaling in and setting trades to breakeven AT SOME POINT avoids the negatives of scaling (and your DD in the example above). The AT SOME POINT is the problem as do it too early and you end up with lots of BE trades.

I might do some calcs to see if I can work out a reasonable point at which to set trades to BE e.g. 50% TP target reached etc.

I do suspect that the "correct" MM answer to this will vary significantly person to person based on risk appetite. e.g. Gertje likes the scaling and I am fairly sure won't want to move trades to BE often, whereas others might like to scale and not care about loads of trades hitting BE as avoiding DD might be their prime goal. Most, like me, will probably be somewhere in the middle and some will just hate the idea of scaling completely.

As a side note re. your risk % spread across the trades and placement of a SL - I have generally been using the ADR as a SL. So far it seems to be working well and my losses have come from lack of faith when price retraces and closing out early only to see price never get near the SL and go exactly where I was expecting it to when I placed the orders.

Anyway - the most important point is as you said in the main thread Jeremy- it's a hell of a lot of fun and any of the potential MM methods should still be profitable.

Cheers,
Dave.

[spotdespot]

I just noticed the script I have been using with fixed lot sizing allows you to scale in based on a set % and fixed SL. So you could have the following type of scenario:

Set positions as follows with 2% total risk, fixed SL @ 1.100, TP @ 0.9900, 10 pip steps:

Price Lot size
1.0000 1.0
0.9990 0.90
0.9980 0.78
0.9970 0.66
0.9960 0.56
0.9950 0.44
0.9940 0.32
0.9930 0.22
0.9920 0.10

Obviously the actual lot sizes are just indicative - dependent on account size/risk.

I am not sure what I think of this yet but it offers another option.

Cheers,
Dave.

[kelisa]

I kinda agree w jemook's scaling method. I used to scale 1/3 x 3 of your trading lot size across the chart towards my targeted tp. This way, we can spread our risk a lil more and yet can reap the pips when price is in favor to our direction.

[kelisa]

On the other hand, bob would just place one position, and if it turns green towards another SR level, he would go a second helping.

[pips400]

I've never scaled into positions before until 10.5 and I can't work out if this is the most effective and efficient way of capturing a move. I think a few of us are confused about this so let's hear some discussion on this.

What is the best way of capturing a 100 pip move?

For each of these scenarios we will be trading AUDUSD and place our first entry short @ 1.0000 with a TP @ .9900 which is 100 pips away.

Scenario 1: We open 1 full lot @ 1.0000. If it hits TP @ .99000 we would profit 100 pips or $1000.

Scenario 2: We stagger 10 sell stops of .1 lots each (total of 1 lots) like this:

1.0000 (+100 pips if TP hit)
.9990 (+90 pips if TP hit)
.9980 (+80 pips if TP hit)
.9970 (+70 pips if TP hit)
.9960 (+60 pips if TP hit)
.9950 (+50 pips if TP hit)
.9940 (+40 pips if TP hit)
.9930 (+30 pips if TP hit)
.9920 (+20 pips if TP hit)
.9910 (+10 pips if TP hit)

If price hits our TP of .9900 we would profit 550 pips or $550.

So straight away we can see that scenario 1 (full position) gives us $1000 reward whereas scenario 2 (scaled) only gives us $550 reward. So what about risk?

Let's say price moves to 1.0100 which is 100 pips away from our first entry.

- In Scenario 1 (full position) if price moves to 1.0100 (100 pips loss) we are down $1000.
- In Scenario 2 (scaled) it depends on how many of our sell stops get hit before reversing to 1.0100.

1.0000 -> 1.0100 -$100
.9990 -> 1.0100 -$110 / 2 positions triggered = -$220
.9980 -> 1.0100 -$120 / 3 positions triggered = -$330
.9970 -> 1.0100 -$130 / 4 positions triggered = -$460
.9960 -> 1.0100 -$140 / 5 positions triggered = -$600
.9950 -> 1.0100 -$150 / 6 positions triggered = -$750
.9940 -> 1.0100 -$160 / 7 positions triggered = -$910
.9930 -> 1.0100 -$170 / 8 positions triggered = -$1080
.9920 -> 1.0100 -$180 / 9 positions triggered = -$1260
.9910 -> 1.0100 -$190 / 10 positions triggered = -$1450

So Scenario 2 (scaled) doesn't seem so good if price jumps back the other way and you've got all these positions opened!

Also in Scenario 1 (full position) if price moved 90 pips in your favour and then reversed back to breakeven you wouldn't be in a loss but in Scenario 2 (staggered) you'd be looking at a loss of -$90-$80-$70-$60-$50-$40-$30-$20-$10 or a loss of -$450!

So any tips? I'm at a loss here maybe I should just be risking a fixed % over 1 position with a SL far away from price action and just close any position goes against me way before it gets anywhere near SL?

J

Hi Jem

I've attached a spreadsheet I put together which is a Scaling Pips Calculator. I am finding it useful to calculated various potential scenarios. e.g. what happens if if price moves to this level then closes at this level etc, hopefully the spreadsheet is self explanatory.

Cheers

Pips400

Scaling Calculator.JPG

[mjws00]

I don't think there is a mathematical edge in scaling in this way. Your average cost is still changing with every position added, and you still must determine exactly how much loss you will take on retrace. The expectancy on the trade remains constant.

The trade off is: Scale slower-> Allow for more break even retrace. Scale faster -> Allow less.

However, if we look at it within the context of the system. There may be some advantages for us as humans. There may be a timing benefit, or a psych benefit that reduces our errors. Essentially you are taking the timing out of your entry, and deciding to take around the midpoint of the move as your average cost. If your edge is true, why dilute your average cost?

Obviously the pip counts as calculated by the indicators will be MASSIVE. It is misleading, as they can not consider the series and average cost as a whole. Break that position into 100 trades and see where the pips fall 10,000 pip days anyone?

There may be an advantage to us as traders. But it isn't in the math. I love to scale in. The first 'small' scout adds a level of connection to the market if we are trading discretionary. Planning for a second entry when it goes against us might get us in with the smart money taking stops. Adding to a winner can ensure we are only risking 'house' money. Setting pendings to add to our winners, allows us timing flexibility. You can bias trading from entries to management and exits. Pip counts are neat, possibly even good for our confidence and trading.

It can also stick you with a large position in deep drawdown should they spike your pending entries and miss your take profit. Now you are heavily loaded, and wrong. If it gets away from you it will HURT.

Fun topic, one I think about a lot.

Mike

[Jemook]

Mike that was awesome thanks. I'm kind of leaning towards your POV. It's the pip hauls that look great on paper but I'm more interested in account increase. I'm going to trade differently today and see how I go.

Cheers mate
J

[rosst]

Yes Mike - good points...

[spotdespot]

Mike that was awesome thanks. I'm kind of leaning towards your POV. It's the pip hauls that look great on paper but I'm more interested in account increase. I'm going to trade differently today and see how I go.

Cheers mate
J

I agree lots of good points Mike - thanks for taking the time. I also agree the pip count situation is a little "crazy". However for me the attraction of the scaling is mitigating risk a little. My POV might change when I get more confident in the reads but I am still making mistakes that at the moment aren't costing me too much.

Cheers,
Dave.