Scaling out of losing trades...

Reminds me of when I was in trading arcade back in '99 or '00.

Was daytrading AOL which was then around $60/$70 in lots of 1000 and 2000 shares. Took a big hit on a trade and said loud enough for the guy next to me to hear, "Ok no more Mr Nice Guy". And proceeded to lose another $1000 or so.

Thats wasn't even the turning point. It was some time after that I decided enough is enough. The market is always right. If I am not, accept it and move on to the next trade.

That sounds like me, when I was trying to scalp S&P e-minis three and a half years ago.

Scaling in and adding to a losing position is simply another way to position size yourself at better prices AS LONG AS the main reasons behind the trade remain intact.

Let's say you would like to put up a 2-contract position in a long trade.

Unless you are Mr. Perfect Timing, most of the times your position will go against you in the first intervals after your entry. Sometimes it'll hit your stop loss and rarely will go your way immediately.

Since you never know what's gonna happen next, why should you put on your max position size all at once when you can slowly get in at better prices?

Yes, sometimes the position will go your way immediately and you're going to get a 1-contract winner and make less money. Hey, that's a stress-free winner so you shouldn't be complaining about it.

Some other times you are going to add a second contract at a better price - maybe within the area where you'd have placed the stop loss - and the market will move in your favor on the 1st add.

Yes, if you are utterly wrong and you don't have a well defined plan for adding to your position, then you are going to get hammered quite a few times.

If you trade around important news announcements and you find yourself on the wrong side of the market, you'll probably get killed because volatility is usually high enough to go thru S/R levels like a hot knife thru butter.

It all depends on your edge, your overall market analysis, your technical analysis, your risk management and trade management.

Adding to a losing position for the mere fact of averaging prices down leads to a quick bloody death.

Adding to a losing position with a plan in mind and with a pre-defined risk tolerance can lead to good trades, especially in ranging / choppy markets that are notorious for churning out accounts via stop-running.

In conclusion, if you are a good trader you can either choose to keep losses as small as possible and loading up the boat all at once, letting profits run when you are correct...

...or....

getting in slowly, like market makers and large funds do.

There are pros and cons for either strategy. I prefer to add to my positions at better prices simply because I am not good at reversing my trades and I used to have very bad days in choppy markets, overtrading and exhausting myself both mentally and physically.

If I am to reach my max daily drawdown, I prefer to be wrong and have the market go against me all the way rather than overtrade a market that has no direction and keeps stopping me out without going anywhere.

Probably the best solution is a little bit of both, trying to recognize whether it's a trending market or ranging market.

Volatility analysis also plays a major role in this respect.

IS

i guess it helps to give a soft landing, it will ease our heart.
as for me , i use smallest lot to trade, so there is no scaling out.

about re entry:

if i re enter, i compared the loss of holding previous postion with entry point.
and consider it as replacement. (i trying to maintain the open position size )

I understand what you are saying and can see some preferring scaling tactics and as you say there are pros and cons for either strategy.

As far as market makers and large funds doing this, it is a requirement for them because of the size of their trades. If they bought on the way up it would just make it all the more expensive for each additional trade they made till they filled their needs.

And therefore if they can, they actually do the opposite of what might be expected. Namely buy in small quantites to drive the price up to liquidate much larger quantities, or sell small quantities to drive the price down in order buy larger quantites at much lower prices.

You probably are well aware of this, but there are many others totally unaware of this and don't understand why cable/euro/yen/etc. did a reversal on good news? Because someone wanted it to go one way in order to exit a very big position or maybe they wanted to establish a new big position but at a better price. Don't we all.

sounds like a great plan but most likely you will get whipsawed with a 10 pip stop.
but I think it would work great with a large account that could handle losing 20+ pips,
I doubt a small account could do it with that small of stops set.

http://www.answers.com/main/images/aNorthEast.gif http://www.answers.com/main/images/cLeftTop.gif http://www.answers.com/main/images/cRightTop.gif

http://www.answers.com/main/images/cLeftBottom.gif http://www.answers.com/main/images/cRightBottom.gif

Lol !!


bol·lix also bol·lox (bŏl'ĭks)
Informal.,. To throw into confusion; botch or bungle: managed to bollix up the whole project.

i never scale out a position that's going against me, but I do scale in winners, provided that previous postion is locked in profit AND new position risk do not outdo the previous postion if it's a loss

the way i add is to look for bear/bull or bull/bear candle transitions on the weekly/monthly/daily. This helps determine s/r since i assume you have a change of sentiment, particularly on the larger timeframes

I would rather just get the pain over with myself and take a small of a lose as possible. If it's not doing what I expect there's little point in hope or prayer. So I simply wait for it to finish it's move against what I thought would happen. If it starts to turn back and the signals are still there, then I'll re-enter my initial position. From a mathematical perspective you're much more profitable taking the first stop out, which offers less risk involved.