Registered User
Joined: 4/22/2007
Posts: 6
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Hello traders,
I am trying to build in a method for scaling into my entries. From a money management perspective it makes a lot of sense. However, i am stumped as to deciding the logic to decide the scale in points. If any traders are successfully (I noticed fpetry mentioned he does in another post) using scaling in, I would really appreciate it if they can provide any pointers or literature to reference. FWIW, I am trying this on a trend following system using hourly charts.
Thanks
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Two mechanical things I've heard of used are,
Guppy's countback line and ATR.
If you go long the countback line uses the highs of the
previous sell-off. You look back 3 bars and only higher
highs count.
If you look at the stock WYNN daily. A pivot low was seen on
3/6/09 (out of three bars the middle has the lowest low)
Counting back the 3/3/09 bar gives a high of 18.29.
The 2/26/09 bar gives a high of 23.68.
The 2/11/09 bar gives a high of 28.53.
The 1/30 bar give a high of 32.7.
(these are points where you would look to add to positions)
The other is ATR.
(the example I saw used a 20 period expmav ATR)
If you went long at 24.1 and ATR was 1.52 you would
look to add to positions at:
24.10 (entry)
25.62 (24.1+1.52)
27.14 (25.62+1.52)
28.66 (27.14+1.52)
(and so on)
In one case you are using previous chart history to add to
positions (of course you must buy a bottom).
In the other you are using volatility.
Thanks
diceman
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Registered User
Joined: 4/22/2007
Posts: 6
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Thanks Diceman. That is very helpful.
Any thoughts on ratio of size of shares to be scaled in with?
I was thinking if I use 2 scale ins and 2 scale outs with 50% of position size at each, then I am effectively opeing and closing two different positions at different points. I am guessing it would make more sens to front load the scale in i.e. more shares at subsequent entries. Maybe 30% at first entry and 70% at second scale in entry. And same for scale out...
Thanks,
Rahul
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Logic would dictate larger buys at the beginning.
(300 shares, then 200, then 100 and so on)
Because you have more profit from the beginning
of a trend than the end.
(but I've never spent a lot of time testing it)
See this:
Thanks
diceman
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Registered User
Joined: 4/22/2007
Posts: 6
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Thanks for the link and your input.
Rahul
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Registered User
Joined: 2/5/2006
Posts: 1,148
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what would be the purpose of scaling in?
why not just buy it if you think its going up?
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Registered User
Joined: 3/21/2006
Posts: 4,308
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Hello all; I am back home and had some free time. I noticed a few new threads. I agree with funnymony to a point. I do not make a habit of scaling into a stock but in a strong trending market If I see a new buy signal then I will add to my position.
These mechanical accumulations mentioned above look great when looking back (to the left of the screen) but for new traders it creates unnecessary risk.
"Logic would dictate larger buys at the beginning.
(300 shares, then 200, then 100 and so on)"
I do agree with Dicemans logic above if one does decides to add to their position.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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"These mechanical accumulations mentioned above look great when looking back (to the left of the screen) but for new traders it creates unnecessary risk."
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How would they be at less risk going all in?
(your only adding money after profit on your positions)
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"If I see a new buy signal then I will add to my position."
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Well your still adding money to an existing trend. All your
quibbling about is what makes a buy signal.
Dennis Gartman has an expression: Do more of what's
working and less of what's not. That's the way I look at it.
Its also the concept of the market being smarter than you
and letting it tell you what's going on.
(rather than the I'm correct because I'm a genius dogma)
If you take 4 or 5 positions and 3 or 4 of them sit there
but one starts heading up. You start directing money towards
the better pick .
After all we can question anything. Why use puts as insurance
don't you feel your trades will work? Why use money
management don't you feel your trades will work?
Remember we always give up something when we control risk.
Thanks
diceman
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Registered User
Joined: 3/21/2006
Posts: 4,308
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"How would they be at less risk going all in?
(your only adding money after profit on your positions)"
Diceman do you scale into every trade? Define all in.. Asset alocation per trade? I mean if you are allowing x amount of $$ for a given trade and "go all in" then you stand to make the max amount of profit as apposed to your scenario. Like you say - "Don't you feel your trade will work"?
Yes; what makes a buy signal is very important. The more of them I get than the better I like it....
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Registered User
Joined: 1/28/2005
Posts: 6,049
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"Define all in.."
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I've spent too much time gambling. (heh, heh)
Lets say someone buys $5000 of an initial position.
Then based on the triggers they buy $3000 more
Then $2000 more.
Funnymony's question would translate to: if you believe the stock is
going up why buy $5000 when you can buy $10000 right out of
the box.
You said: "These mechanical accumulations mentioned above look great when looking back (to the left of the screen) but for new traders it creates unnecessary risk."
I don't see how they can be at more risk putting $5000 in
rather than $10000 ?
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From my point of view these statements are very telling:
"I see a new buy signal then I will add to my position."
" Yes; what makes a buy signal is very important."
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Back when I talked about the GMXR trade you said this:
"I am still trying to figure out why Diceman played GMXR."
This is I think a key point. At certain times we have to decide if
we are going to (or how much) "remove ourselves from the equation"
or put ourselves right smack in the middle of things.
The simple answer to the GMXR trade is diceman wasn't looking for what
Apsll looks for in the trade. Its not really about right or wrong its
about what you've decided to do and how you've set it up.
Most traders have a difficult time relying on things they haven't
decided. They want to "bless" the decision and all decisions.
If you look at it in the broadest sense. You've stated that you
have no trouble having a position and adding to it when you
"see" buys.
Well the other trader has a position and he adds to it based
on other parameters than what he "sees". He's decided what they
are but not where they are.
So it all comes down to how much you want to be in the equation.
The only difference is you want to be in it more.
They have decided they can be in it less.
You see there is a lot of talk about trading and how to trade
but what folks don't seem to realize is there is also a
lot of psychology on display.
Thanks
diceman
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Registered User
Joined: 3/21/2006
Posts: 4,308
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So true Dice... In all the years that I have known you I can remember these words. You want to remove the human factor from the equation. Thus to you a mechanical system is viable. Hey I like to think that over the years that we are friends. I still like your weekly 45 bar moving average to gauge the markets.
You are right also that we look for different things in the trade. You did nail it with GMXR but then again back in early March who knew that the markets were setting up to give us this great gift?
I agree with you about the psychology in trading and that we all must follow our path. I just find it difficult to comprehend a clinical or hands off approach to trading. I am not apposed to the idea of building a larger position in a given trade should the proper circumstances present themselves; I just do not believe that one should practice scaling into their trades as a comon practice. And the grand example that you painted in your July 3rd 10:45am post is not a blue print that a newbie should follow.
We are all here to give our opinions and I have always respected yours and will still continue to do so.
PS: Did Davidjohnhall ever give you my e-mail address. If not than get from him or Toptrader8 (aka Memorableproducts) You know where....
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Registered User
Joined: 4/22/2007
Posts: 6
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QUOTE (funnymony) what would be the purpose of scaling in?
why not just buy it if you think its going up?
funnymony: Yep, I would buy it if I think it was going up and was certain of it. Extension of your question can also be - "why not just go in with 100% equity if you think its going up? The fact of the matter is I DON'T. Yes, I think that probabilities are high, but I don't really know. So, with scaling in I am trying to load up only when market action is indicating that I am on the right track.
QUOTE (diceman)
Logic would dictate larger buys at the beginning.
(300 shares, then 200, then 100 and so on)
That would be true under the assumption that I have a very high number of scale in points such that it ends up that I am still buying shares while the trend is exhausting itself. It will work only if I can find a method to load up quickly enough, with possibly 2-3 scale ins. Scaling in has to be complete when the price movement is showing reasonable signs that the trend is indeed underway (of course it can always turn back...but then we are always talking probabilities)
To give everyone some context of why I am trying to do this: As I see it, markets chop around/base/consolidate more than they they trend. Whatever that ratio is - I have somewhere read Conslidate:Trend::70%:30%. I am currently trading pullbacks in trends. Now the picks I make will show high probability based on the pattern. And in line with sector movement. But then, all stock picks are at the mercy of market sentiment and direction. So my picks will have a high tendency of stopping out during choppy markets (like the last two months). And they will work really well in trending markets. Now it can be argued that why don't I just sit on the sidelines while the market is chopping around? The problem with sitting around is that I don't know when the market will start moving and in which direction once the consolidation is over. So, I end up getting back to the market when it is beginning to start consolidating again. If the trend is longer, then I might get some towards the end.
So, I have to come to a money managemnet solution that keeps me losing small when I am losing and has me all in when things are working. There are a cople of ways that I can think of to tackle this:
1) scaling in: Let the stock tell me if it is indeed going my way (with or without the help of the market). This will keep me light while losing but heavy when winning. I will end up with not a very attractive winning trade/losing trades, but the overall expectancy will go up.
2) Risk lower % of equity during choppy markets: So, if I normally risk 1% of equity per trade, then during choppy times I reduce it to say 0.5%. That should also have same effect on expectency by keeping impact of losses lower and impact of winners higher.
The intent of this post was to explore the 1st option. I would like to thank everyone for their ideas and critiques. Keep 'em coming :)
Please read Worden Notes for 6/23 to see how scaling in has worked for Sir Eight (and a half) Fortunes. That should help clarify the concept. I am quite sold to the idea (which most of you are critiquing) and am looking to find a method to implement it (to which Diceman has provided good leads, Thank you sir)
Thanks,
Rahul
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Registered User
Joined: 2/5/2006
Posts: 1,148
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QUOTE (rahulprakash) QUOTE (funnymony) what would be the purpose of scaling in?
why not just buy it if you think its going up?
funnymony: Yep, I would buy it if I think it was going up and was certain of it. Extension of your question can also be - "why not just go in with 100% equity if you think its going up? The fact of the matter is I DON'T. Yes, I think that probabilities are high, but I don't really know. So, with scaling in I am trying to load up only when market action is indicating that I am on the right track.
then why not just swing trade the market?
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Registered User
Joined: 4/22/2007
Posts: 6
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QUOTE (funnymony)
then why not just swing trade the market?
Not sure what you mean here. Can you please elaborate.
I am trying to capture the swings. Many times it does seem like next swing has started but follow through does not happen because the market isn't trending. And I get stopped out. I am trying to find a way to lose less when this happens and win more when the follow through actually does happen.
Rahul
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Registered User
Joined: 2/5/2006
Posts: 1,148
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QUOTE (rahulprakash) QUOTE (funnymony)
then why not just swing trade the market?
Not sure what you mean here. Can you please elaborate.
I am trying to capture the swings. Many times it does seem like next swing has started but follow through does not happen because the market isn't trending. And I get stopped out. I am trying to find a way to lose less when this happens and win more when the follow through actually does happen.
Rahul
if the longer term trend is sideways, then trade, buy and sell, the shorter term price swings.
if i were looking to invest longer term, say 10 years+, i'd probably dollar cost average, 25% gold, 25% maket etfs, 25% bonds, and 25% cash.
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Registered User
Joined: 3/21/2006
Posts: 4,308
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Rahul, one good method for swing trading would be to use a four day moving average on price and then plot a four day moving average of the four day moving average. You could then trade the cross-overs... You are correct that this simple trading system works best in a trending market. You will notice in my example below that in May/June when the markets started to move sideways that the system was far less effective.
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Registered User
Joined: 2/5/2006
Posts: 1,148
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seems like this is basicaly a 50 period ma crossover on a 30 minute bar chart.. i would also suggest buying, on a crossover, when the trend is up(i.e. the 200 period ma is sloping up), and shorting when the trend is down, for a very "basic" system.
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Registered User
Joined: 4/22/2007
Posts: 6
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QUOTE (funnymony)
if the longer term trend is sideways, then trade, buy and sell, the shorter term price swings.
Yes that makes perfect sense. With fractal nature of charts it would work to keep going down the timeframes if the higher time frames are choppy. I am currently trading 60min charts. Going further down will take me into day trading. With a full time job, I will not be able to pull that off. I should look into the possibility though...
Rahul
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Registered User
Joined: 1/28/2005
Posts: 6,049
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I have to admit I don't understand what folks are talking about.
Funnys questions sound like if I bet $10 in a casino and won
why not bet $1000 ? (well yeah if you give me a time machine)
Now we are saying if the market is consolidating then play
for consolidations. If it is trending then play for trends.
Some how we went from 60 min charts to long-term dollar
cost averaging. (which by the way is scaling in)
I guess I could end by stating we should only go long
stocks we are absolutely certain will go up and short those
we are certain will go down.
(regardless of current market conditions or trends)
Thanks
diceman
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Registered User
Joined: 2/5/2006
Posts: 1,148
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QUOTE (rahulprakash) QUOTE (funnymony)
if the longer term trend is sideways, then trade, buy and sell, the shorter term price swings.
Yes that makes perfect sense. With fractal nature of charts it would work to keep going down the timeframes if the higher time frames are choppy. I am currently trading 60min charts. Going further down will take me into day trading. With a full time job, I will not be able to pull that off. I should look into the possibility though...
Rahul
swing trades can occur on any time frame. anything above a 15 min bar chart chart can be a multi-day trade. here's a setup the whole world is watching, on the daily bar chart. (even diceman saw this). its a head and shoulders pattern inside a triangle. so trade which ever direction the formation breaks. you can see the macd sitting on the 0 line, ready to give a signal whichever way the formation breaks. in the meantime you can trade the upper and lower boundaries of the pattern using data from the lower timeframes.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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"That would be true under the assumption that I have a very high number of scale in points such that it ends up that I am still buying shares while the trend is exhausting itself. It will work only if I can find a method to load up quickly enough, with possibly 2-3 scale ins. Scaling in has to be complete when the price movement is showing reasonable signs that the trend is indeed underway (of course it can always turn back...but then we are always talking probabilities)"
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My 300,200,100 share purchase was shown just to illustrate larger first and
not to be taken as actual buying advice.
"So, I have to come to a money management solution that keeps me losing small when I am losing and has me all in when things are working."
When you trade 60 min charts do you hold positions overnight?
The problem may be with your stock selection technique.
After all if I'm buying stocks that are flat. I could change money management
so that I don't get burned on the flat stocks or I could focus on how to
better find stocks that are in trends.
Thanks
diceman
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