Hello and welcome to another edition of the bulls vs the bears. Today we are going to start a new series learning how to manage multiple trading positions scaling in and out. And please I’m not talking about checking your weight on a scale. We’re talking about a different kind of scale here.Basically we are going to get creative by managing multiple trading positions. Except that we won’t gung-ho like gamblers. we’ll apply risk management principles that most of you already know about.
Before you tackle the scaling series there are a few things you need to do. You need to know how to set proper stops like the back of your hand. And you must know how to calculate position sizes to a tee. If you haven’t mastered these two trading skills, learn them fast. Or else you will be pulling your hair out trying to figure out what’s going on in this series.
So with much ado we’re going to do what we always do. We’ll define what Scaling is. And then we’ll figure how to scale in and out of trades. But first off:
What is Scaling?
Scaling simply means adding or removing figures from your open trading position. You use scaling to adjust your risk, lock in profits, or maximize your profit potential. Of course there are side effects of scaling which we will be touching on later.
So
How Do I Benefit From Scaling?
It’s more psychological if you ask me. For one thing you don’t need to be super perfect in your entry or exit. It’s important you get this in your head because it’s difficult predicting the price action or the exact turning point of the forex market. You’d have to be Albert Einstein To get the perfect entry point all the time. You keep trying to be like Einstein and you’ll be setting yourself for a huge crash. There can only be one Einstein
The best way to protect your head is to identify an area of potential support/resistance, momentum change, breakout, e.t.c. Just take your position in little chunks around these areas and then lock your profits. Locking your profits must also be accompanied by a properly executed trailing stop. This will definitely take the pressure of your shoulders. And it can also help safeguard your profits in case the forex market does a sharp 360 on you. Of course the more you add to your position the more profits you rack up as the market runs in your direction.
I guess the elephant in the room is:
What Are The Side Effects of Scaling?
First You risk over-risking your money. By that you increase your risk. Don’t forget that you are not just a profit maker. You are also a risk manager. And if you don’t scale properly you risk wiping out your account. News Flash! I’m gonna show you how to add to your open position in our next segment.
Second , when you subtract from your open position you reduce your maximum profit potential. I’m sure you’re like”Why will I want to do that?” Like I said you are a risk manager not a gambler. So it makes sense to leave some money on the table for later.
Now to the main agenda for the day:
How To Scale In Trading Positions
Before I show you how, you need to follow the following rules”
- You need to put in a stop loss or you account will go up in smoke
- Your position entry levels must be planned in advance before you enter your trade
- Your position sizes must also be calculated in advance. And make sure you are comfortable with your risk levels – i.e you must decide on how much money you can afford to part with.
Now onto the matter at hand
Ladies and gentlemen, we have a scaling in situation taking place in a breakout situation. Now as you can see the bears broke out of the consolidation trap after taking a breather. Now how did that happen? The pair dipped lower from 1.3200and then got caught in the consolidation trap between 1.2900 and 1.300. Luckily they managed to breakout for slopes at that level. The pair then dip further at 1.2700 and 1.2800 before retracing to the level of recent consolidation
Now assuming you are not Einstein enough to pick the exact exact entry point, you can consider the following options:
First
You can put in a sell order at the support-turned -resistance level of 1.2900. The problem with this option is that the pair may climb higher, and you could miss out on a juicier price.
Second
In that case take a chill pill while the pair reaches the 1.2900 level. However, if you wait for the market to hit this level then you risk the market turning on you and going the opposite direction- which is further down. And you could miss the return to the downward trend.
Third
Take another chill pill while the currency pair tests the resolve of the resistance area. Once they move back below 1.2900 area, you make your grand entry. This tells you the bears are back on the saddle. Again the downside to this option is that you miss out on entering at a better price.
Fourth
Wanna jump in on a better price? How about jumping in at both 1.2900 and 1.300. Just make sure it’s part of your trading plan. Even more important make your calculations in advance or else your account will fry to pieces.
Now let’s look at another trade setup which combines everything we’ve talked about.
Here is the price action involving the EUR/USD pair. You can make your entry at the 1.2900 level we mentioned earlier. Even if the market climbed higher, leaving your position in the lurch, you could still enter at 1.300 assuming you stay within your risk parameters. If the market took a dip after triggering both trading positions, you would have achieved you risk /reward ratio(Let’s say it’s 1:1).
We also notice a huge chunk of the trading position was entered at 1.300. Now this seems like a favorable price. Why? because even if the market took a dip you will still make a handsome profit. Not bad for a day’s work.
That’s a wrap for “How To Manage Multiple Trading Positions Scaling In and Out ”. Next week we’ll continue our series scaling by touching on Scaling Out of Trading Positions
Til next time take care.
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