All In or Scale In… That is the question!

The following Guest Post submission is from Dan Giovannetti, a trader in the TopStep Trader program. For more on their innovative program to cultivate and fund aspiring new traders, check them out at www.topsteptrader.com.

 

All In or Scale In… That is the question!
By Dan Giovannetti

There is a major difference of opinion when it comes to the topic of Scaling In entries when trading. I can say that I’m 100% in the camp that’s in favor of it. Let’s cover the pros and cons of scaling in to see if it can work for you.

First off, what is “Scaling In?” Well simply put, scaling in is an order entry technique where you put on trade orders at various price levels to cover a price range. For the purposes of this discussion, I will talk about the ES S&P E‐mini futures contract even though I believe you can use apply this concept to just about any traded security. So if I was thinking of buying ES and believed a good spot to enter was at 1205.00 while trading 5 contracts, then I would put in 5 Buy Limit orders. The price of those orders would be as follows: (1 @ 1205.00, 1 @ 1204.50, 1 @ 1204.00, 1 @ 1203.50 and 1 @ 1203.00). You could separate the distance of the orders by whatever fits your comfort level or trading system. For example, you could put the same orders in at 1205.00, 1204.00, 1203.00, 1202.00 and 1201.00. Again, it really depends on what your risk tolerance is and what your profit goal is per trade.

“Scaling in” is not discussed nearly as much as “scaling out.”  This is because most traders have not considered it or have been told not to.  Most opponents of the scale in approach argue that you are throwing good money after a bad trade. Although I understand their argument, I think most are missing the point. Using the above example, if I planned to put on a long position on the ES with 5 contracts, but went “all in” at 1205.00, then later when the trade pulled back to 1202.00, went ahead and put on 5‐10 more to try to improve my position, I did it out of desperation and not by plan. This example would support the theory subscribed to by those that oppose this approach. In this example, I’ve exceeded my intended position size and more importantly, I added to a bad trade. This example is not the way to scale in.

Going back to my original example, when I decide to scale in at different prices, I receive the following benefits:

  • I lessen my risk from the very first position.
  • I lower my cost basis as my orders get filled.
  • If my trade fails the original parameters outlined, I can usually get out of the position NET EVEN.
  • I improve my win ratio.

Now because of this approach, I will not always get my full 5 contracts filled. But that’s fine with me. In that case, I experience a “heat free” trade and I’m sure we can all get used to those. But in the case where all my positions get filled, my breakeven point (BE) has been lowered substantially. And because of this, I can usually minimize my loss or eliminate it altogether by closing out my position at BE when the trade has failed my original parameters.

You will need to set your profit and stop loss targets according to your comfort level and risk tolerance. For me, I like to take 3 points profit on the ES. With that in mind, I will typically adjust the entire limit order to 3 points from the furthest entry or drawdown. I have found that the ES moves in waves; typically between 3‐5 points in any direction. So, by scaling in my entries, I tend to get the majority if not all of any given move. You will need to figure out what works best for your trading system and style.

There are three styles of scaling in your position: Equally, front ended or back ended.

Scaling in equally is the simplest form of scaling in. By using this method, you simply put on equal positions on at various positions. The above example uses equal scale in orders.

Front end scaling is the riskiest style of scaling in.  By using this method you put on more contracts at the front end of the trade. For example, instead of scaling in at 1205.00 as we did in the above example in 5 equal price points and 5 equal contract amounts, now I would put in the following orders: 3 @ 1205.00, 1 @ 1203.00 and 1 @ 1201.00. By doing this, my BE point would be much worse than by scaling in equally and would have a tougher time getting to BE if my trade failed.  Because of this, I do not use this technique.

Back end scaling offers the lowest risk of the 3 styles.  By using this method you put on more contracts at the back end of the trade.  Using the same example, this time, I would put on the following orders: 1 @ 1205.00, 1 @ 1203.00 and 3 at 1201.00. By doing this, my BE point is at the best place and the easiest to hit in the event that my trade failed the original parameters I set prior to entry.

I tend to stick to the easiest method (equal scale in). Before you decide to use any scale in technique, I strongly urge you to back test your system manually to get an idea of what kind of drawdown you may experience on a regular basis. You may even want to test this approach on a sim/practice account before putting your hard earned money on the line. But in any case, I suggest you remain consistent once you decide to use this approach. Consistency is the key to successful trading, no matter what system you use. I have found that scaling in my trades have increased my consistency and thus has made me a better trader.

Good luck.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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