Scaling In Your Position
This technique used by many professional traders, seeks to “play” the market by testing price action to get a “feel” of the market direction. After a string of losses, a trader may want to reduce risk and stay in the market at the same time. Traders often times feel compelled to trade when they should actually be on the side lines. By scaling your position, you can significantly reduce your risk in down markets, or flat markets that are not trending. The big money is in jumping on the large stock trends. To catch the big trends, you should always be in the market.
Taking a smaller increment position on a stock, and slowly adding to your full initial planned position.
Scaling into the position when trading stocks or other financial instruments is an approach that allows the trader to take a trade gradually, rather than buying a full position at once. There may be many reasons for scaling into position, but the idea here is to minimize risk and maximize profits. You must also keep in mind that when using this strategy a sizable account is mandatory, as trade commissions can get quite expensive even at $10.00 a trade. A small $1000 account can easily get reduced to nothing just paying out commissions.While scaling into position we always must consider our “risk” or how much we can lose given the trade goes against us and our stop gets hit. Often traders are increasing risk by taking a too large of a position.
When Would you Scale your Position?
Lower Your Risk – Sometimes the stock breaks out above planned buy point. When breakouts happen they tend to be very violent and volatile. The stock may have moved upward significantly from it’s breakout price. In this situation, you will find that the risk factor may be too high at the moment. Especially during a bull market you will find that breakouts often beyond their buy points. Some traders might think, this is a bad thing, but breakouts where you must scale your position often lead the the biggest trends in the next bull phase.
You want to test the market – After market crashes, breakouts tend to fail. Every trader knows that the beginning of a bull market is where the big money is made. Therefore, even in a bear market or after a major crash, you still want to be trading. Getting on a trend means that you must analyze every breakout for the possibility of a big trend.
How To Scale Into Position
Split your initial trade position into one third, and slowly add to a full position. For example, your planned full position of $3000 is split in to three trades of $1000. Your first $1000 trade will be made upon a stock breaking out. The second $1000 trade will be made on the pull back to a technical support level. The third $1000 will be made when the price of the stock trades above your first buy point.