Scaling Into Trades for Profit
Scaling into positions is something that many traders do the opposite of, to their detriment. Certainly, it is a known technique, but how many apply it when they are spread betting their favourite financial instrument?
Scaling into positions entails buying more of a winning trade you have already entered. Perhaps that is why traders are averse to doing it – after all, you must pay more for the new spread bets than you did for the original ones in the same security, and that goes against the grain. But the way that many novices trade is bound to cause some problems in the long run – what they do is scale into a position if it falls in value.
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Adding to Winning Positions
It is now fairly recognised amongst experienced traders that one of the best trading strategies you can adopt is to add to a WINNING position (as opposed to a losing position/averaging in). The other is of course to take profits before the trade turns into a loser!
This is easier said than done in practice because the theory is (which is against human nature, because when you lose you tend to try harder). Human nature dictates that if a share was worth buying at the previous price, it must be even more worth buying if the share price has gone further down. But this is flawed logic, as the original reason for entering the trade in the first place was in the expectation that the share price would go up, which it plainly has failed to do so far. So while it may feel unnatural, adding to winning positions essentially demands that you buy more when the share price has gone up, because then your position has started to look like a good one.
Adding to Winning Positions: Add to a winning position, setting break even stop losses as the winners come in. So in a worst case scenario you lose nothing or just very little. In a best case scenario you stand to make a huge profit.
However what most people do is:
Adding to Losing Positions: Add to a losing position. Worst case scenario is bankruptcy. Best case scenario is breakeven or a small profit.
Very easy to type, but very difficult to do in practice… You place the stop loss at breakeven and then open a new position. Then, in my experience if the market goes against you it gets harder to keep the stop on the first position. If you do keep it and it gets hit, then by that stage your second position will be in loss making territory and you may get stopped out for an overall loss. There’s someone who trades at a high level I know, who has a huge number of breakeven trades or small losses everyday – but occasionally he gets a big winner. Because he backtests his strategies he is confident that adding to winners and running them (if that is his strategy for that market) will get him sufficient profits overall to absorb the losses when adding doesn’t work.
Small Losses and Bigger Winner
NOT
Small Wins and Big loser
Note: Needs to be a momentum trade (bolly breakout for instance) on a trend not a range trade, use a smaller timescale to identify periods of consolidation and use a OTO above the short term pause in price to make successive entries so only adding on resumption of momentum.
Treating your money like a poker ‘roll’
This is a bit like winning at poker and moving to a higher limit table. If the cost to sit at a table is $100 you need say $3000 to play that level, when you get to $6000 you move to a table where the buy-in is $200. Similarly when you lose you move down to a $50 buy in table.
So if your capital is divided into say 200 ticks and you risk 10 ticks a trade you have enough for 20 positions to go against you. As you win, the process is exactly the same but the stakes increase as you improve. But most people will lose half their money and throw the lot in on a double or nothing Hell or Glory play. So in the end it all comes down to discipline.
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