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Chapter 36, Part II. Scaling In. Page 4

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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    Commander in Pips: The major principle to any scaling framework is to improve probability/risk parameters – either remain risk the same and increase probability to success or remain probability the same and reduce risk. The same should be done with scaling into a winning position. Just keep in mind this thing and another one – necessity of execution money management rule. That’s all – you will never fall into the pit of margin call. Still here we have to make some add-ons:

    1. Control your used and free margin. Since if even your overall position is profitable, you intend to increase it – this demands more margin;

    2. This procedure should be mostly applied when market shows trending behavior – either intraday or on longer time frame. Our example will be on 30-min chart.

    3. In fact, if point 2 will not hold – you will not able to get the necessary conditions of overall risk/probability improvement. If the market will retrace too deep or show a ranging environment you will not be able to apply scaling in procedure as it has to be applied.

    Here is our chart as an example. It’s a bit overloaded with details – but do not be afraid, it’s much simpler than it seems in the beginning. Your input parameters are:

    1. Account assets – 5000 USD.

    2. Risk management rule – no more than 1 % in every trade.

    Chart #3 | EUR/USD 30-min

    In fact, this analysis is a bit adopted for our needs from daily researches. You have solid bearish context on the daily time frame. Your trading process starts from the gap down on Monday’s open – right below the weekly pivot point (not shown here). As we’ve discussed earlier – this could be the sign of starting trading day. 30-min Trend by MACD has turned bearish. What you will do next?

    I will wait a bit and see – will the be filled or not. As we see, that it has not happened totally, this is a good sign for a trending day. A bit later during retracement we see that the trend has held bearish. Probably I will try to enter right from the 0.382 resistance area of the recent swing down 1.3365, since this could be a “222” Sell pattern. Also, right at this point, the market has tried to shift the trend to bullish but failed. This is a so called “stop grabber” pattern or trend shifting failure. This adds more confidence with this position. Initial stop I will place at 1.3405 – a bit higher that this swing’s start point.

    Commander in Pips: Very well. What will be your position value?

    1%*5000 = $50; 50/((1.3405-1.3465)*100,000)= 0.1 standard lot.

    Commander in Pips: Very good. What is your potential target?

    Since the market accelerates right down after my initial entry – it could turn to Butterfly “buy” pattern. So, it’s target 1.618 extension at 1.3195.

    Commander in Pips: Ok, what’s next?

    Our confidence that this might be a trending day is growing – the market has not filled the gap, shown just 0.382 retracement, trend holds bearish very well and finally this could be butterfly. So, now is your turn – how we can apply scaling in? Our next possibility is a 0.382 retracement Entry #2 point at 1.3328.

    Commander in Pips: Right. Let’s see, our current potential profit is (1.3465-1.3195)*0.1 lot = $270. Our risk is $50. According to our conditions we need either keep risk and increase profit or reduce risk and hold profit. By applying scaling in more probable that we could reach only the first thing. Here we have to apply some tools like we’ve used in scaling out. Particularly – moving stop to breakeven. By this action we reduce risk to $0. So, our potential for add on – $50 again. Since we assume that this is trending session, where do you place your stop at second position, if you enter from 1.3328 and what lot it will be?

    Let’s see. If the market will return above 1.3365 then 30-min trend will turn bullish, butterfly will be under question and this will not be trending session, since market will erase whole recent swing down. Besides, if I add another position now and remain previous stop on Enter #1 - this will increase overall risk. Hence, I probably move stop to breakeven on first position and place stop on Entry #2 above the recent swing high – at 1.3375, slightly higher my first entry.

    Commander in Pips: Ok, what lot size will you enter?

    $50/((1.3375-1.3328)*100,000)=0.1 lot.

    Commander in Pips: Very well – let’s check it. Risk remains the same – $50, while potential profit is $270+0.1*(1.3328-1.3195) = $403. Good! Let’s proceed.

    Commander, let me ask one thing. Could we, say, not move at breakeven at first position and place it at 1.3375 with the second entry and simultaneously slightly reduce the second lot so, that overall risk remains the same $50?

    Commander in Pips: What for?

    Because our second entry is also based on “222” pattern – although we do not know will it be AB=CD retracement or not. If we place the stop a bit below the 1.3369 high - it’s not absolutely correctly, since if even the market will reach it - the “222” pattern will not be canceled. Theoretically the market can proceed lower even from that area. Our invalidation point here will be the high at 1.3369 – hence stop should be placed slightly higher, let’s say at 1.3375

    Commander in Pips: Excellent observation. I suppose you’re right. Still, let’s proceed with a bit simplified example. But your conclusion is correct.
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