In my ever pursuit of maximizing gains and minimizing losses (if possible) I'm wondering if anyone is currently trading with a scaling in and/or out methodology. As I've mentioned previously, I like to keep things simple (one entry, one exit) but I had a little idea today that if I scaled into my entries, perhaps losses could be kept smaller.
I suppose it really comes down to the exact entry method you use, but for me, I typically enter with
Buy Stop Limits or
Sell Stop Limits. By using this type of entry, I'm wondering if I could keep losses smaller in cases where my full contract lot does not get filled.
Let me explain...
In this chart I am assuming that we have a long entry and put 1/3 of contracts at 3 levels (just one tick apart) on the ES:
So in order for the trade to fully 'confirm' 3 price levels would need to be taken out to the upside. Obviously if going long, you'd like to see price moving up. The problem with this is that your overall net fill is going to be the average of all 3 (mid-point level in this example) and you could have your full boat riding at one tick better. But in my mind, that one tick better for the winners could be offset by taking much smaller losses. Let me explain further:
In this chart I am assuming that my entry gets ticked in and 1/3 of my contracts get filled and then a stop loss occurs:
The reasoning behind this is that I have seen trades where with a buy/sell stop order that price can just peak it's head through enough to trigger my order and then retreat. Since I am mainly trading the ES, it's realistic to consider that it can hit one level of my entries and then retreat. So why be exposed for the full amount at one level... That's the idea currently.
The issue here is that on the winners you are going to wish that you got it all in at that one price level. But by spreading your orders in thirds over three levels, your net average is simply the middle price level. And assuming that you just go one tick above each previous tick on the ES, it doesn't appear to be a big sacrifice in consideration of the winners, but could result in considerably less in the losers.
I'm going to have to examine this some more but thought I'd open it up for some discussion here.