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Chapter 36, Part I. Scaling of Position. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Scaling out

    Commander in Pips: Ok, the first way is a pleasant one – scaling out. I call it “pleasant” since it includes profit taking. About the “scaling in” procedure we will talk a bit later. Actually we’ve spoken about this way in details in harmonic patterns trading section. Also this approach clearly described in L. Jouflas and L. Pesavento book – “Trade what you see”. So, if you will need more clarification – be my guest. Although they apply such a way of scaling to harmonic pattern – it could be applied to any approach. Harmonic pattern is just on that trigger your in. If you apply another way to enter – this is no problem, you may apply the same “scaling out” procedure. So, let’s see how it works.

    The statistical foundation for scaling out is to increase the probability of getting profit and stay with the profit/no loss situation with as much probability as possible. Initially at the stage of your trading plan creation you have to assume partial scaling out of your position. There are two goals that assume scaling out:

    1. Move your trade to breakeven reasonably as soon as possible;

    2. As first goal been achieved – get profit.

    So, in a way of example that we will show, you gradually move the odds into your favor. Our task in any trade is to not get as much profit as we can anyway (although it looks attractive), but to get as much probability to get profit or stay at breakeven as we can. On first view it might be seen as curious, but trading is a huge number of trades. If you follow the maximum profit in any trade and do not move probability in your favor – you probably will catch some of those big trades, but will lose in many others.

    When your probability to success becomes much greater in every trade but profit itself becomes a bit smaller – then you will get a better overall result. I will not even talk about the psychological component. The simple example could be as follows: What is better to get $1500 profit and then take a loss $250 in 5 trades in a row later or to get $150$ profit in 4 trades in a row and 1 loss at $100? Is the result the same? I think the choice is obvious. Ok, that’s enough blah-blah-blah – let’s pass directly to an example. That is our butterfly “sell” that we’ve used already but for a bit different purposes.
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