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Part II. Scaling In

Scaling In - Forex School
…To a losing position

Commander in Pips: In the previous lesson we’ve stopped before the discussion of the scaling in procedure. There could be different scaling in – one is to a loss position while another - to a profitable one. Which one you want to start with?

Overall trade context should hold when you make scaling - Forex School
Pipruit: Well, let’s start with the bad scenario – a loss position (this is much more usable for me currently…).
Commander in Pips: As you wish your Highness. In the beginning you always have to keep in mind the properties of any scaling – either it will be “in” or “out”:

1. Overall trade context should hold when you make scaling;

2. Your money management rules have to be achieved.


For newbie traders probably it makes sense to stay away from scaling in, at least during first year of trading. The major question that could arise with scaling into a losing position is why to add to a losing position? If this is a losing position and we by adding more will make it even more losing than it was initially, right?

Not quite. This will happen, if our point 1 was broken already. If the market has passed our invalidation point and our position is held somehow (interesting how). In other words, when our position is miserably wrong. If you add another miserably losing position – then you will get double trouble. Never ever scale into a position that you wrongly hold after passing through invalidation point. This could happen only as the result of mistake – you’ve broken your trading plan and did not close you position at the invalidation point.

As you understand we have to add to original position only if our context still holds, but we have different possibilities to enter. Let’s take a look at it with this particular example:

Chart #1 | EUR/USD 60-min 
Your money management rules have to be achieved. - Forex School
Pipruit: Wow! So much different stuff here…
Commander in Pips: Yes, it’s a bit overload with details, but we will move through it step by step. Particularly, I will give you clue questions and hints and you will have to move through it…

Pipruit: Right. I’m ready.
Commander in Pips: Let’s assume that you have solid bearish daily trend (chart is not shown here) and you search for a possibility to enter short with the daily trend. Once you’ve seen a combination of Wash and Rinse pattern of previous 1.3375 low, that was combined with MACD bullish divergence and a bullish engulfing pattern. Then the hourly trend has turned bullish and retracement just has started – you see only the engulfing pattern. Tell me, what pattern could be trade here, where its invalidation point and how you will enter here.

Pipruit: Well, I see your help on the chart directly where you write Gartley ‘222’, but I could know by myself. Since this is a “222” sell, its invalidation point is the high of the initial X-A swing, i.e. 1.3496. Also I suspect that the 0.382 retracement is too close, based on the engulfing pattern. The minimum target is the length of the bars, hence it will be higher than 0.382 resistance. Probably I will write in my trading plan to enter slightly lower 1.3438 0.618 level, particularly around 1.3420-1.3425.​

Commander in Pips: Why?

Pipruit: Because I see Agreement of 0.618 AB-CD extension 1.3427 target and 1.3438 0.618 Fib resistance level. I will place a stop above 1.3496, let it be 1.3515 level.
Commander in Pips: Very well. And why do you decide to enter right from 1.3425, maybe the market will move higher? Besides, see the nice up bar right before hitting your ENTRY #1 order?

Pipruit: Hm, difficult to say. Probably I just do not want to skip the entry and take part in daily trend. Since I do not know if the market will move higher or not – I have to enter here and place a stop so, that could let me out if my entry pattern (“222”) will fail. So, trading plan gives us only 1 combination – entry 1.3425, stop 1.3515.
Commander in Pips: And what will happen if the market will proceed to AB=CD 1.3462 completion pattern? Will overall our entry context fail?

Pipruit: No. Our invalidation point is 1.3496. Hence, any level before it will remain as a “222” in progress.

Commander in Pips: Right. Here we accomplish first condition for scaling in:

Overall context holds when you make scaling

I offer you to apply scaling in. But before that we need to adjust your position size, according to your money management rule. Let’s say you have 10,000 USD account, and your risk per trade is 1%. It’s better to enter 1/3 of your position at 1.3425 and 2/3 at 1.3452 – remember we have to place entry orders slightly before levels, why stops – beyond the levels. So, calculate what lot size you have to open at 1.3425 and what lot at 1.3452. Stop will be the same for both positions – 1.3515, since invalidation point can’t change.

Pipruit: Let’s see. My total risk in this trade could be just $100. Hence first position risk as 1/3 should be $35, while second position approximately is $65.

So first lot is 35/(1.3515-1.3425)/100 000 ~ 0.04 standard lot

Second is 65/(1.3515-1.3452)/100 000 ~ 0.1 standard lot.
Commander in Pips: Good, so we’ve appointed the second condition:

Your money management rules have to be achieved

Commander in Pips: Now look what has happened – the market has shown respect to your ENTRY #1 level – well done, Agreement was solid resistance, but later it has proceeded higher. The market has shown a much flatter CD leg, compared to AB, so you have solid chances for success. Later you also have seen that 1.3463 is 0.786 Fib resistance, so there also was some kind of Agreement.

Pipruit: I see. And what has happened next?​

Commander in Pips:
 Heh, I’ll show you… By the way, actually you can apply your stop even at 1.3497, since any slightly move above the high will erase this pattern.

Chart #2 | EUR/USD 60-min - continuation
the market has shown respect to your ENTRY #1 level - Forex School
Pipruit: Looks nice. I wish all my trades were in such way!
Commander in Pips: Right. Take into account that your real entry level was (1.3452*0.1+1.3425*0.04)/0.14 = 1.3444 – 16 pips lower than absolute retracement top (1.3460). So “scaling in” framework lets you not catch the market and gamble where and how to enter. Also it can allow you to feel confident that you will not miss the entry that you’ve waited for week or even more. The worst scenario is that you will enter just with 0.04 lot. Still this is much better than skipping a 200 pip move totally, right?

Pipruit: Absolutely.
Commander in Pips: Now, and if market will move above 1.3496, where we can scale in?

Pipruit: We can’t
Commander in Pips: Why?

Pipruit: Because in this case market has broken our entry context that is Gartley “222” Sell pattern. Since the market has passed through our invalidation point – we can’t scale in to a miserably losing position. Even more, it will be strange if we will still hold our original 0.04 lot from 1.3425.
Commander in Pips: Very well. I see you’ve got the point.

…To a winning position

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
Risk management rule – no more than 1 % in every trade. - Forex School
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?

Pipruit:
 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?

Pipruit:
 1%*5000 = $50; 50/((1.3405-1.3465)*100,000)= 0.1 standard lot. 
Commander in Pips: Very good. What is your potential target?

Pipruit:
 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?

Pipruit:
 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?

Pipruit:
 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?

Pipruit:
 $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.

Pipruit:
 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?

Pipruit:
 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.

Chart #3 | EUR/USD 30-min
Our invalidation point here will be the high at 1.3369 - Forex School
Pipruit: Our Entry #3 will be based at the same algorithm as Entry #2. Enter at 1.3286, stop should be placed above 1.3334 high, say at 1.3345. Lot approximately the same. Right?​

Commander in Pips:
 Not quite. There are two possibilities exist, you may apply both of them depending on your experience and expectations. The major difference Entry #3 with Entry #2 will be that Entry #1 will be locked in profit, that you may use this to increasing lot at Entry #3 point, since your risk should be the same – $50 - or you may not. If the market will proceed lower your profit will increase significantly. The drawback of this approach is if the market will reverse here – your probability to end your trade with loss will be greater. Let’s explain it by calculations. First, we have to prepare the same calculation as with Entry #2 point.

Pipruit: Ok. We move stop loss order as on 1st position as on 2nd on 1.3328 – breakeven on 2nd entry point.

Third entry should be made from 1.3286, stop at 1.3345:

$50/(1.3345-1.3286) = 0.08 lot. Hence, potential loss is $50, while profit is: 270+133+(1.3286-1.3195)*0.08 ~ 476. Oh, wait a minute. We do not have any risk here! Our locked profit on Entry#1 is (1.3365-1.3286) = $79! I think I’ve got about what you’re speaking. So, our 3 lots position is riskless here. Even more, we have another $29 to spend on adding more on Entry #3. We can add $29/(1.3345-1.3286) ~0.05 lot. So we can enter as much as 0.13 lot and still have riskless trade. Amazing!

Commander in Pips: Right. You’ve done well. Now calculate how you can enter with Entry #3 still to remain risk the same – $50.

Pipruit: This is simple. Since we’ve calculated that 0.08 lot gives us risk of $50 and our riskless position is 0.13, hence we can enter with 0.21 lot here.

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

Now is Entry #4 at 1.3260 by the same conservative approach - Forex School
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.

Comments

WaveRider
7 years ago,
Registered user
Sive, you've blown my mind.

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