Scaling Into Trades - A Practical Approach

Hi Dave,

I need some help with scaling into trades.

In some of your previous analysis posts, you had phrasing such as:

NZD/USD – scaling into longs between .7487-.7410
AUD/USD – scaling into longs between .7974-.7804
NZD/JPY – scaling into longs between 82.10-81.00

Would I divide my normal position size into 1/3 and wait for the price to hit certain ranges? I’m really lacking skill in this area.

Any help you could give me would be greatly appreciated.

Thanks,

Rick L. – Glenside, PA

Rick,

Thanks for the question. I’m answering it here because I think many people struggle with this aspect of trading.

First, there is no right or wrong approach; it is what works best for you. What you described above fits with how I typically frame a trade set-up, with a few variations. Allow me to explain.

When you are looking to buy a pull-back in an uptrend or sell a rally in a downtrend, we cannot know for certain whether prices are simply correcting or starting a new trend. Sometimes we will nail the turning point; other times the market will roll right over us and take our stops out.

That said, I think it is best to first determine how you will break your trade up. Will you take your max position size (based on the stop-loss and max % risk) and break into 2, 3 or 4 entries?

I think 2 or 3 is a good number ….4 seems like overkill in my opinion.

However, I would rarely enter a full position into the support or resistance zone I am looking at. Remember, as noted above, the market may not give a rip about my so-called resistance or support zone.

Therefore, by putting on a piece at what we believe to be favorable price levels, we put ourselves in position to get a really nice entry if the market then reverses shortly thereafter. If the market continues to move lower or higher we have a modest position on if we get stopped out. Seems like a reasonable trade-off.

I would use the last half or third to add to the position once the market starts to move in the direction you anticipated.

I hope that helps.

Dave

 

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