Disclaimer: This is not advice, this is my experience.
I define scaling as entry and exits at multiple prices. For example if I want to be long the ES_F I will work bids at 1000.50 (2), 1000.25 (4), 1000.00 (4) stop at 999.00 (10) and offers at 1001.25 (2), 1001.50 (2), depends on volatility (2), and initially left open. This assumes I get filled on all bids.
Scaling is an important skill. It has the potential to remove binary (win/loss) results. It has the ability to make a trade less wrong and also less right. If your system relies on strict mathematical equations you can stop reading now. At times it affects your risk/reward ratios in a bad way. I will get back to this later.
A signal post.
When scaling in you have to accept that you will not always get filled on your whole position. You need to have a plan for this. How you get filled reveals a lot about your prices/techniques. Depending on volatility, my first price is to guarantee a fill, the second is my price to the tick, and the third is to dollar cost average. If I do not get filled on all my prices it usually is a good price.
I scale out because I do not expect every trade to be a homerun. For me, trading is like catching a fish; you do not how big it is till you hook it or till it gets close to the boat. I could know instantly, it may take a handle, or 5 handles. I just do not know.
I know that, unless I am being an undisciplined fuck, I have my initial set exits. My exits are partly determined by volatility and average trading range (ATR). It is like riding a bike for me, I do not have to think about it. It relaxes me.
If I have a weakness as a trader it is how I relate money and trading. I am trying to figure this out and it is one of the things that separate good and great traders. I digressed though. I find it much easier to accept or come back from the outcome of only making 4 handles on a 2 lot than breaking even on a 10 lot I had four handles in. I give up guaranteed profits for potential profits.
Let the market be the market.
If you have a solid enough trading plan and enough screen time very few things have to be a decision. It is possible that most situations can be executed by a reaction. I never expect to have a 10 handle winner but knowing I have already banked profits makes it easier to hold. Easier consciously and subconsciously, some days I am emotionally drained. This is usually a result of subconscious stress. Many times I will add on or re-establish a position. That is a whole different skill that isn’t as important if you scale out.
Running a marathon.
If I were going to run a marathon, I wouldn’t, but if I was I would build my tolerance. Reality based risk tolerance is built over time. Scaling out allowed me to trade larger. I am extremely uncomfortable trading a 25 lot. 4 years ago I was I was uncomfortable trading a 3 lot. I was able to build up my risk tolerance by taking part of my position off immediately.
Smoothing out the highs and lows.
Scaling is like hedging. I will not have many trades where I make 10 handles on a 10 lot. Those opportunities do present themselves but not often enough to base my trading strategy around. I am a micro term opportunistic tape reader. I find it much easier to make $500 on 2 trades than I.
A big caveat and one many traders may disagree with.
I was always taught that you must risk half of the expected reward or 2 to 1 reward to risk ratio. I think that is complete bullshit. How do you know what the expected outcome is until you are in a trade? It is the fishing principle again. You can do all the back testing you want but what happens to your models when the market changes. There is no way to calculate all of the factors that make up a market because some are immeasurable. Ok so you risk 2 points and your out is 4 points. What happens if it goes 3.75 points? What happens if goes 3.75 points 4 times in a row? What does the risk reward look like then?
The most important question.
How often are you right and for what distance? I have lost more money in open profit than I want to think about. In fact I thought about it so many times I had to implement a scaling strategy. The common denominator in top traders is they get on the best tick. They never give up coulda money for real money, at least not till they are up big. If you hit your max target 51% of the time, statistically speaking, you should not scale out. You better hope to that you are not wrong the 49% of the time first.
I am not as analytical as some traders. I do not back test. My back testing is my trading journal. We live in a 24hr market and news cycle. Things change. I study charts and see what patterns are developing and what has been working. As it gets to my prices and I am in a trade, I read the tape.
Hitting for the cycle.
My .75 cent handle is a bunt. Unless I am completely off this objective is hit a majority of the time. The 1.50 handle target is a single. Once again as long as I am not being a jack ass, this is not hard to accomplish. The next target is a double, so on and so forth, you get the point. Each target is hit less frequently depending on how good the entries are.
Let’s do the math.
I am not going to run you through all the scenarios. If you want me to make a spreadsheet leave me a comment or send me an email I will run the numbers for you. I look at my exits in terms of swing money. For example after first target is hit I made $225 in swing money. $75 in real money and $150 in reduced risk. Second target results in $300 in swing money $175 in real money and $125 in reduced risk. After my second target is hit worst case scenario is -$75 if I don’t move my stop. Each tick I move up my stop on the remaining 6 lot is $150 in swing money.
If your entries do not get to 1.50 handles more than 50% of the time than this strategy is not as good. There is a potential for significant opportunity costs, there are times when I miss a good reversal trade. This happens because my last exit is in a place where there is a good short. Scaling also forces you to know your position, I know this should not be a big deal, but it can be catastrophic. For example if you forget to cancel a stop you may think you are flat but instead the stop will make you short. Another rule I think is important to never break, is to stop trading if you miss-execute.
I see risk much differently than many have been taught. I am very conservative in my first trades, I gather bullets. I also am very conservative in the first part of my trade. This puts me at risk of having a big fish on the first trade and getting out early. This helps me to manage my psychological capital. For this strategy to work you must occasionally hit a homerun. This strategy can lead to early days, if I have two full boat stop outs than I am done for the day. I am only trying to make $1500-$3000 trading that size, being down $1200 with this strategy means I am off. Tape reading is essential for my success as well. If I do not get filled on all my prices, they are usually good prices and I will let them run longer.
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