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Chapter 36, Part II. Scaling In. Page 6

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

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    Commander in Pips: Yes. The question is should we do that or not. This is not break your risk management rule and hold risk/profit ratio, but probability of exiting at the end with profit will become smaller. Still this is not forbidden, but demands more experience. We can treat it as a conservative approach – enter with 0.08 lot, aggressive approach to enter with 0.21 lot. Since we need to increase probability of profitable trade we will lock total position with 29$ profit and add just 0.08 lot.

    Pipruit: I agree.​
    Chart #3 | EUR/USD 30-min
    [​IMG]


    Commander in Pips: Now is Entry #4 at 1.3260 by the same conservative approach. If you want you can make the same sophisticated calculations by yourself for aggressive approach.




    Pipruit: Ok, conservative will be: Moving stop at breakeven of Entry #3 at 1.3286. So Entry#1 and Entry#2 now locked in profit. Entry #4 conservative lot is $50/((1.3295-1.3260)*100,000) = 0.11 lot.

    Aggressive way: ((Entry#1 1.3365- Stop 1.3286)+(Entry #2 1.3328-Stop 1.3286)+$50)/((1.3295-1.3260)*100,000) = 0.38 lot

    or, for riskless position = ((Entry#1 1.3365- Stop 1.3286)+(Entry #2 1.3328-Stop 1.3286))/((1.3295-1.3260)*100,000) ~ 0.27 lot.

    Commander in Pips: Right. So, that’s all – market has hit the target of Butterfly by the end of trending day at 1.3195. What is profit?

    Pipruit: Let’s see:

    1.Conservative approach:

    0.1*(1.3365-1.3195)+0.1*(1.3328-1.3195)+0.08*(1.3286-1.3195)+0.11*(1.3260-1.3195) = $447.30

    2. Average approach (holding riskless trade from entry #3):

    0.1*(1.3365-1.3195)+0.1*(1.3328-1.3195)+0.13*(1.3286-1.3195)+0.27*(1.3260-1.3195) = $596.80

    3. Aggressive approach (risk holds constant at $50):

    0.1*(1.3365-1.3195)+0.1*(1.3328-1.3195)+0.21*(1.3286-1.3195)+0.38*(1.3260-1.3195) = $741.10

    Commander in Pips: Yep. That’s it. And what about profit without scaling in?

    Pipruit: Oh, yes: 0.1*(1.3365-1.3195) = $170.
    Commander in Pips: So, the choice is up to you – apply scaling or not. Before this chapter you did not want to do it…

    Pipruit: Well, now I see that this is quite useful tool. Although I still need some time to adopt it into my trading system. But I understand the major idea of scaling. While you scale in or out – money management has to be accomplished; probability of profit has to become higher; context for trading has to hold.

    Commander in Pips: Right. Also when you are scaling in – don’t forget to control the margin.



    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer them soon.



    Note: FPA ranks are earned in the battles against scam, not in the classroom.
     
    #1 Sive Morten, Dec 28, 2013
    Lasted edited by : Oct 14, 2016
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