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Thursday, March 06, 2008

Scaling in on Trades according to Plan


To scale in or not to scale in, that is the question.
I can find good entries, but the addition of contracts to the original position is where I mess up a lot of the time. I notice I add to winners with buy/sell stops, but these adds are placed at bad places because the majority of the adds occur on price spikes. After the add to the original position has taken place on a price spike, the trade retraces and the trailing stop is hit, turning a winning trade into a breakeven to losing trade. This brings up the question, to scale in or to scale out of the trade? I say, only scale in if the trade is giving another signal. Don't scale in just because the trade is a winner and looks like its running, because many of these "runners" occur during price spikes and will likely retrace and bring your average price on the contract down to breakeven or even losing.

Here are some examples-

Good trade gone bad by adding at the wrong place-



Good trades following the plan-



My trades-

6 comments:

tapeworm on 12:10 AM said...

i've experienced the same problem with scaling into positions...since i've relegated myself to 1 contract it doesn't matter anymore...however, when i do move up, i'll just go in with the allotted amount (depending on the stop level)

from what i've read scaling in is something most successful traders do, so we are obviously missing something...hopefully, you'll find it soon..then i'll look forward to the post proclaiming your "eureka" moment

Ben Dare-Dundat on 5:39 PM said...

If you're good at finding original entries, then why are you scaling in? You should be scaling out at set exit points. Read some Mark Douglas books.

eddie on 8:34 PM said...

Hey guys. this is exactly what im doing with the april 117 calls on the diamonds. When the dow got to 11,820 I believe, ( 200 points down today) I got into 10 calls on the DIA. So the plan is to sell a bounce. But if not then anything lower than this will be a new low or some sort of panic selling, this is where Ill hit it with 20 more calls, and after that its a waiting game.
Please give your input. thanks.

HPT on 11:21 PM said...

ben, did you read the whole post?

"only scale in if the trade is giving another signal. Don't scale in just because the trade is a winner and looks like its running, because many of these "runners" occur during price spikes and will likely retrace and bring your average price on the contract down to breakeven or even losing."

Eddie, what is your time horizon for this trade to play out. What month calls did you go for. I'd hate to see time value decay eat away your profits if you bought march calls. I'm starting to see relative support in ER2 compared to YM/ES, which may mean that there is some short covering and support may be near (because ER2 is the preferred index to short). I'm actually waiting for a long signal when the 30yr bond yields drops down into the 4.3-4.4 range,(if it ever gets that low again). If it does I'm thinking about going short ZB and going long ES.

HPT on 11:23 PM said...

A hedge for the trade would be to go long ZF and short ER2 or NQ.

eddie on 8:21 AM said...

Im looking for any kind of bounce in the next week. I bought the april calls, I usally dont buy them any closer than 6 weeks to expiration because thats the time when time decay begins to accelerate exponentially.And I usally dont keep options any longer than a day or two, 1 week max.
ps Im a little new to all of thi, what is er2 ym/es, zf, and nq. thanks

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