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Good point IS, but here are some things to consider under that strategy:
1) You are hoping the position GOES AGAINST you, so you can get a better price, but not too much so your stop is not endangered... Seems counter-productive to me - you want to lose initially, but not too much. |
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I think there is some confusion here about the difference between scaling in vs. averaging down. They are not the same thing. In averaging down, you load up the boat on your first entry. Let say you are comfortable trading a max of 8 contracts with a loss of 5 pts/contract or 40 pts. If the market moves against you, you then overload the boat above your 5 pt stop increasing your load to 16 contracts. If the market continues to move against you, you are now in deep doodoo. You are trading beyond your comfort range. You can't stand the possibility of taking a loss so you add more contracts and you are really sweating it. But of course the market continues its relentless pursuit against you. Eventually you lose a bundle. This is what averaging down is all about.
Now consider scaling in.
Let say you are normally comfortable trading no more than 8 contracts with a stop loss of 5 points, 40 pts total . At entry however, you only trade 4. Reason- you think you may have to scale in. The market moves against you 5 pts. Your down 20 pts., so you are not uncomfortable (remember your risk tolerance is 40 pts). You reconsider the trade. If it still has possibilities on the long side, you load the boat. Loading the boat means adding 4 more contracts. The market could drop another 2.5 pts. before you would be out 40 pts total (4x7.5 +4x 2.5=40). But interestingly enough, the market only has to revert 2.5 pts to the upside, for you to break even. So in reconsidering the trade at the 5 pt down entry, you have to decide whether the probability for the market going up 2.5 pts is greater than the probability for it going down 2.5 pts. If it is not, don't scale in. If it is, pull the trigger.
The difference then between scaling in vs. averaging downs has to do with planning and an understanding of your risk tolerance. Scaling in is not a helter skelter event which averaging down is. You should always be undertrading, in the event that scaling in or reversing becomes a necessity.
As an aside, every day trader should have scaling in as one of his or her strategies. And in addition, every day trader needs to learn how to reverse a trade when the situation warrants.
JERRY