Scaling Into Trades: Pros and Cons

*Editor's note: Examples in this lesson use futures contracts, but the concepts work the same for stocks shares.  Most modern brokers have advanced order entry settings to allow you to  set your buy & sell orders to scale into a trade.

Exclusive lesson by Tony, TraderSmarts

There are times that I scale into trades. There is a three-fold benefit to scaling in to a position and really only 1 pitfall.

Pros:

  1. Potentially allow you to trade more size with the same risk.
  2. Allows you to use a wider stop with the same risk.
  3. Allows you to trade an AREA that you like without putting all your eggs on 1 price.

Cons:

Causes you to have smaller size on at times than your maximum position size. The pitfall is because you are scaling in you have to size accordingly. This is not always a bad thing - but it is the one drawback to scaling in.

Explanations

Benefit 1: Potential to Trade with Bigger Size (# of Contracts or Shares) but Same Risk

I can take (potentially) more size with the same stop point because I will have a better cost basis than if I entered the entire position at the first price.

Example: 6E trade we took previously in our TraderSmarts subscriptions service(Monthly), (Quarterly), (Annual), (Swingtraders).

Trade was long 1.4392, 1.4383, and 1.4375 stop at 1.4367.

If we were filled on all of the entries we would have a cost basis (average price) of 1.4384.

1.4384 - 1.4367 = 17 ticks

Say your max risk per trade is 5K.

17 (stop) X 12.5 (per tick value) = $212.5

5K / $212.5 = 23.52 so your max position size would be 23/24 contracts if you scaled in. So you could take 8 at 1.4392, 8 at 1.4384, and 8 at 1.4375.

If you wanted to enter all at 1.4392 you would calculate your size like this:

  1. 1.4392 - 1.4367 = 25 tick stop.
  2. 25 (stop) X 12.5 (tick value) = $312.5
  3. 5K = $312.5 = 16 so your max position size would be 16 contracts or 8 less than if you scaled in.

Benefits 2 and 3

The second reason why I sometimes scale into positions is if I have a range that I really like. This works two-fold.

Consider the Gold Futures contract (GC) trades I like to take where I scale in at 3 pts usually with about a 30 tick stop on the cost basis (average price).

For example, say I want to be short GC at 1471.1. But I also like short at 1472.8 and 1474.6. If I take a short at the first level of 1471.1 with a 30 pt stop I would need to put my stop at 1474.1. What could possibly go wrong with this strategy? This would give price an opportunity to move up to my 1474.6 number, stop me out for - 30, and then move back down but successfully taking me out of the trade for a loss.

Instead if I scaled in at all 3 entries I would have a cost basis of 1472.8 and could use a 1475.8 stop. That is a 47 tick stop on the first entry.

Scaling in also gives me an opportunity to finesse the position by trading around my fills depending on what happens. For example getting filled on entry 1, taking a scale or 2, then going risk free on entry 1 and working 2nd, or taking scratch on first entry and leaving other on risk free, etc. It just provides so many more options than having 1 entry and 1 stop.

Also it gives me the opportunity to actually get a fill. If I waited for the 2nd or 3rd entry instead of taking all 3 it

  1. may not get filled
  2. could hit first entry...give me a couple scales (that I am not in by waiting for the 2nd or 3rd entry) then blow through 2nd entry to stop.

Pitfall 1

Because you are scaling in instead of going all in you may only get 1 or 2 fills which will leave your position size on the trade smaller than what you would like.

Hope this makes sense and explains why at times I scale into positions

TraderSmarts
www.tradersmarts.net
www.tradersmarts.blogspot.com
www.twitter.com/TraderSmarts

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