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Old 06-21-2007, 12:05 AM   #1

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Scaling In and/or Out

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.
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Old 06-21-2007, 12:32 AM   #2

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Re: Scaling In and/or Out

OK, I figured out why some traders may not scale in - trying to do the math on how your trades play out at 12:30am is not easy.

I'll have to come up with an Excel sheet or something on how to run this.

Example:
  • Short this AM with average price of 50.50 on the ES (short 3 levels as illustrated above)
  • 1/3 of the contracts are taken out at 48.00 & reversed long here as well
  • the other 2/3 to reverse long do not fill
  • the new 1/3 at 48.00 stops out at 46.00
  • meanwhile still have 2/3 short from 50.50
  • initiate new short of 1/3 at 45.50
  • cover and go long 1/3 at 45.50, 1/3 at 45.75, 1/3 at 46.00
  • cover and short 1/3 at 45.00
  • cover and go long 1/3 at 47.00
  • meanwhile still long 2/3 with average at 45.75

Anyways... you see where this is going all day.

Wed was a great example for me to look at this as a good handful of my losing trades would have never filled at 3 levels. Quite a few only filled 1/3. What I am seeing is:

1) Winners guaranteed to fill completely.
2) Losers may only fill partially.

This accomplishes a few things:

1) Commissions are lowered
2) You may take some 'shake out' trades, but not on the full load. It's kind of like testing the water before diving in.
3) Winners can actually net quite abit more b/c the shake out trade only took out a portion of your contracts. So in my short example this AM, I was short at 50.50 with a full load. Had I exited fully on my next setup at 48.00, that's +2.5. Not bad. The catch is that at that entry where I covered my short, I also went long, which stopped out for -2.00. Now if I was fully out on my short (which I was) at +2.75 (not scaling in) and then getting fully stopped on the next trade for -2.00 your net is easily calculated at +.75 before 6 full round turns. See how the numbers can really change?

Off to bed here but for our math whizzes on the board, any help on how to easily calculate this would be great and much appreciated.
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Old 06-21-2007, 12:54 AM   #3

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Re: Scaling In and/or Out

Nice Thread here Brown, its not easy to scale in as it is to scale out... very few people (retail traders )have this skill developed... I think one nice way to scale in is as you get pullbacks against you with your timing entry criteria still present... now ES its not easy as you dont have much range... so there are not too much fractions there to be able to scale without being so near to your stop... thats why I never been able to be good on ES... its a very professional traded future... cheers Walter.
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Old 06-21-2007, 09:22 AM   #4

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Re: Scaling In and/or Out

After some sleep and playing out some of yesterday's trades, one item jumped out:

If you are using your exits as a place to also initiate a new position (as I am) the math can get even more sketchy.

Example - if short a full 3/3 and you get a reversal signal and get ticked in at ONE level, you stay short, but only for 1/3 of your contracts.

Let's say you are short at 1520, 1519.75 and 1519.50. A full 1/3 at each level.

You then take a reversal long at 1518.00. Only one level gets filled, but since this is a reversal long, your order should be resting for 2/3 of your contracts (you would need to have your orders lined up for 2/3 at each level). So you would stay short, but for only 1/3, which kind of defeats the purpose.

From what I can see now, this seems like a very viable strategy if you do not flatten and reverse a position at a new entry level. Just depends on how you trade really.

Looks like it's back to the simple method here.

Just when I thought I might have found a way to complicate things.
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Old 06-21-2007, 09:44 AM   #5

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Re: Scaling In and/or Out

How many contracts are you trading? I would scale in only if i were to trade a heap of contracts. This is how professionals build up their portfolio so as to attract as minimal attention as possible and vice versa when they sell it off.

Also on what time frame are you thinking of scaling in your buy orders? If your going in and out pretty quickly then is it worth all your trouble? Maybe if your swing trading then you can scale in your position on pull backs it can work but for day trading time frame seems like too much of a headache!
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Old 06-21-2007, 11:41 AM   #6

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Re: Scaling In and/or Out

Quote:
Originally Posted by Nick1984 »
How many contracts are you trading? I would scale in only if i were to trade a heap of contracts. This is how professionals build up their portfolio so as to attract as minimal attention as possible and vice versa when they sell it off.

Also on what time frame are you thinking of scaling in your buy orders? If your going in and out pretty quickly then is it worth all your trouble? Maybe if your swing trading then you can scale in your position on pull backs it can work but for day trading time frame seems like too much of a headache!
Nick - the headache aspect of this does not concern me if it betters my results. And that was the initial thought behind this. Again, I think it could warrant attention even if just trading a 2 lot. Since the majority of my trades are done with a reversal trade this not only is a headache, but the math behind it doesn't always work in my favor which was my goal to begin with.
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Old 06-24-2007, 03:05 PM   #7

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Re: Scaling In and/or Out

I believe going all in at once is a bit unwise given the nature of the markets, which will almost always allow you to get in at a better price.

Let's say you want to go long 3 contracts in YM.

You get in with one contract at 13000. You keep the remaining 2 just in case you can get a better price within your stop loss range.

In this case, if you lose straightaway you only lose on 1 contract.

If you win straightaway, you'll win on 1 contract...yet it'll be a very easy and almost stress-free trade because it went your direction immediately. And I like that even if it's only a 1-contract position!
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Old 06-24-2007, 03:50 PM   #8

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Re: Scaling In and/or Out

Quote:
Originally Posted by ItalianSharp »
I believe going all in at once is a bit unwise given the nature of the markets, which will almost always allow you to get in at a better price.

Let's say you want to go long 3 contracts in YM.

You get in with one contract at 13000. You keep the remaining 2 just in case you can get a better price within your stop loss range.

In this case, if you lose straightaway you only lose on 1 contract.

If you win straightaway, you'll win on 1 contract...yet it'll be a very easy and almost stress-free trade because it went your direction immediately. And I like that even if it's only a 1-contract position!
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.

2) On your winners where you do not enter more, it will be too easy to kick yourself in the butt thinking your profit could have been double or triple in your example.

3) You would need a 'generous' stop level in order for this to work. Since you want price to go against you so you can buy/sell more, but not 'too' much, your initial stop level needs to be at an area where you can enter more and not get quickly stopped. This can work, but I personally have stops of 4-5 ticks on average in the ES.

4) On trades that stop out, you could easily have a FULL LOAD of contracts getting stopped out and on winners might only be able to get 1/3 of your contracts into the trade... All of a sudden those winners need to be fairly large to cover the losses even if the losses are 'small' b/c you averaged down, but it was on a full boat. I personally think averaging down is a loser's game as illustrated here.

The idea could work depending on your trade setups and rules. I think your stop loss area would have to be larger (and too large for me personally) and your mentality has to accept a very counter-intuitive way of thinking.
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