A. I like to call the strategy 'Buy low, buy higher and sell highest'.
But on the internet you’ll see that the more popular term they call this strategy is where you 'scale in or scale out'.
I believe it is a strategy that can work very well and in your favour as long as you have strict entry and money management rules in place.
This technique is mostly used when a trader holds onto a medium-term trade (few weeks) and may like to 'scale' or buy more of their position in order to bank more profits when they sell their double exposed position.
The easiest way I can explain scaling in, is with an example.
Example: Scaling In
On day 1, Jim decides to buy 100 CFDs of a company at $50.00 per share and he sets his take profit price at $80.00 per share.
After two weeks, the share price climbs to $60 per share. Jim feels confident with his position and decides to 'scale in' or buy another 100 CFDs at the higher price of $60.00.
As Jim scaled in with equal sizes of the position, his entry price would have moved up from his original price.
This is also called a ‘new scaled average entry price’.
To calculate the ‘new scaled average entry price’, you'll use this easy calculation.
New scaled average entry price = (Original buying price + Scaled in price) ÷ 2
= ($50 + $6) ÷ 2
This takes Jim's new scaled average entry price to $55.
If the trade hits the take profit level, Jim will bank over double the amounts of profits with his scaled in position than if he stuck to his original 100 CFDs position.
Before you implement this, I have three tips which may help optimise the scaling in strategy.
Tip 1. Make sure you buy equal sizes of CFDs at a time to help make it easier to calculate and to keep consistent.
Tip 2. Make sure you never deposit more than 5% of your portfolio per trade position as scaling in could be dangerous should the trade turn against you.
Tip 3. Have a consistent rule to know when you'll scale in with each trade you take.
This will help you track a mechanical, no questions asked trading strategy.
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What a loyal Trading Tips reader has to say:
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Q. "I have a technical question and have no idea where to ask and not sure if I'll get an answer, but here goes. Timon, I know you've tested thousands of trading strategies in your life. Could you please tell me your default settings for your five favourite indicators you use with technical analysis when you trade?."
A. Sure, as this is indeed is a technical question. I'm going to have to inform my new Trading Tips readers to please click on each indicator which will take you to an article where you can read more about them… Once you’ve done this, then you can go to your charting platform and set each indicator’s parameter to see how it works trading them.
Here are my default and favourite trading settings I've found that have worked for me since 2003.
- (Fast line: 12; Slow line 26; Signal line 9)
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Analyst, Red Hot Storm Trader