Scaling into a position - any suggestions on how to manage the downside?

Discussion in 'Strategy Development' started by DEM BONES, Feb 11, 2010.

  1. I'm a new trader and have found that,for me, scaling into a position can have a high success rate per trade.

    Many trades that go against me more than anticipated can usually be worked out for a flat trade or small loss/gain. I stress the word many because obviously there are some that just keep going against me to the point I have to throw in the towell and take a big loss.

    The dilemma I have is that when a stock is moving against me more than anticipated - the more I average in the better chance I can avoid a loss.This also sets me up for a big loss that can wipe out lots of hard work.

    Any suggestions on how I can take advantage of the higher success rate scaling provides without the risk of oversized losses?

    I have some ideas myself but would love to hear from traders with much more experience.Thanks
  2. have a series of stops

    Stop 1 - tighter for more speculative capital..

    Stop 2 - basic wide stop for the position in general

    Stop 3 - profit taking stop , create after price has gone up or down according to your target..
  3. Thanks,PSYTRADE,I appreciate your feedback.

    The stops you mention make a lot of sense especialy when trading the more speculative/volatile stocks.

    What I need to do is find the right balance of when to kill the trade and when to dig in and salvage it.
  4. With all due respect I have to advise against scaling in. I realize that it improves your hit rate and others claim to do it successfully.

    Philosophically you're adding to a losing position when scaling in.
    Reverse scaling has a better mathematical basis. i.e. adding to a winning position and taking smaller losses on losers.

    Suppose you have a moving average crossover system. One MA crosses above another so you wait for significant movement to confirm the bullish signal (this sort of thing has been analyzed before and shows it improves your odds). Now you have a cross plus a nice confirming move so you buy 1 lot (whatever your size is). Instead of moving in your direction, price reverses. But since price and the 2 MAs are still stacked in your direction you begin scaling in, buying another lot.

    Your plan is to continue buying lots as long as you're still bullish. i.e. the MAs are still stacked bullishly. You've been scaling in and you're now 4 levels deep and the MAs cross in the bearish direction. Now you're in a bearish setup but you're long 4 lots. Do you pull the plug on 4 lots because you received an opposite signal?

    For me this would be disastrous; I'd much rather take a series of small losses than a single big one.
  5. schizo


    Correct me if I'm wrong but what you're referring to is "averaging down", namely adding to your loser. Scaling in, on the other hand, is adding to your winner. Say I bought XYZ for $10 and it's now trading at $11. According to my meager estimate, the damn thing should reach $12, so I add to my existing position with the stop placed at $10.50. If I get stopped out, I break even so I lose nothing. If my price target gets hit, then I'm richly rewarded.

    But suppose I don't place a stop and the stock immediately reverses on me and retraces back down to $10. Now I'm in the red and I have a tough choice of either bailing out with a loss or riding it out in the hopes of a reversal. Before I could even decide, it goes even lower. Now it's trading at $9.50, at which point I'm in a real bind. So I delude myself into thinking that doubling down will lessen the pain by allowing me to get out at $10. Before ya know it, however, the damn thing is flirting around the $9 area. You can clearly see where I'm going with this.

  6. If my first entry is only 20% of my total position size, why is your advice good advice?
  7. To clarify what I do,right or wrong, is look for very strong stocks and look to start scaling in in a zone after what appears to be a healthy pullback.Same goes for shorting - look for the weakest stocks...

    I need to figure out where my line in the sand will be that will keep me from getting out too soon yet prevent the big loss.
  8. It's all semantics.. some people say scale in, average down ..
    but we know what they are trying to communicate.

    Yep, you don't go into the position with max risk already achieved.
    You go in with a plan. Scale in increments until a position is achieved, but you are sure not to go over max risk for the entire position if you were to get stopped out.
  9. Scaling in, averaging in, averaging down: it's all the same. Adding to a loser.

    Reverse scaling is adding to a winner as price continues in your direction.

    Don't scale into pullbacks. Wait for the pullback and enter there with a tighter stop. If it doesn't pull back and you get left behind? So what? There are other fish in the sea.
  10. I have a 10 pt gain. I double my size (adding to my winner because it's what all the books say to do) and now am at a 5 pt gain. Price suddenly turns 10 pts against me in the other direction.

    Now what?
    #10     Feb 12, 2010