I responded to a PM in the forums with some comments about scaling into and out of trades. I’m putting that here in a blog article in order to get you to think about how to use your capital to maximize your profits, but in addition to that to maybe give you “permission” to do so if you are stuck in a certain way of thinking.
This is what I wrote (in italics) in my PM and then below it I’ll try to expound a bit further:
If you are able to risk more than 1 mini lot I would do so, the reason being is it will allow you to make better progress if you learn how to take profit and manage a trade while also catching the runners. If you can trade at least 2 minis then do so. Take profit along the way and then work at letting your remaining lot run. This will help you discipline yourself to stay in the market in order to let your profits run. A new trader problem is taking profits off the board too soon and letting losers run against you. Flip that equation around. You can scale into and out of trades in order to manage risk. This is just a simple example: if you have two lots and price moves against you 30 pips, then take one off and hang onto the other, if it moves against you further then you’ll have to cut it loose, but if it falls back in line and moves your way you can always add back on as the trade develops. There is a skill in scaling in and out of trades to manage risk, work at these things in order to minimize your losses and maximize your gains. Sometimes you may want to take just 1 lot to get a feel for the position, then do so, sometimes you don’t see the trade until money is on the line, until you place your bet, as things develop scale in on the momentum, when it runs 30-50 take that one off and leave the original. These are just some examples of various ways you can work with your capital in order to make the market work for you, but you have to do this inside your understanding of technical analysis and the fundamentals. For example, today I took an e/u short. I took my standard position and the trade moved in my direction, dropped hard below support and was showing signs of continuation. As I was listening to the news wire, news came through that was going to push the price lower, as it reacted with the momentum in place, I pressed my position and leveraged up, let it run 30 pips and then I took that position off while leaving the original on. The original went another 30 and I closed at a logical profit taking point. Price continued hard, closed below support again, pulled back to now resistance and I took another standard position short with the selling and took that for another 50. These are just examples of learning to manage the trade, taking profit at the right times, but also giving yourself opportunity to let your winning positions profit for you longer term. On the other side of things I was in a losing trade with USD/JPY that I was able to scale out of and minimize my loss so that when I did score my winning trade the gap between my winner and my loser was larger thus growing my account more.
First of all, if you are only able to trade one lot then this is not going to help you right now. But if you are trading one mini and your broker offers micro, then drop down to micros so you can trade multiple lots. If you are trading one standard then drop to minis so you can trade multiple lots. In my opinion you will be the better for it in the long run. The point is to leverage down to low levels so that you can minimize those losses while taking advantage of profit opportunities. This will also reduce your stress as the market develops because most of the time our timing is off.
Assuming you have multiple lots to trade it is always best to start at your lowest to moderate level of leverage especially if you are a new trader. Reason through and take your position and when you do there is nothing wrong with taking an exploratory position (not based on a flip of a coin), but exploratory in the sense of low leverage. The reason being is that one of the most difficult things to master is timing and even when you get better at timing the majority of the time the market moves against you a bit or ranges on you unexpectedly for the next 1-2 hours. Taking into account this reality allows you to alot for timing issues and thus if your timing is off which most of the time it is you are managing a trade at the lowest possible leverage. You’ll find that little position changes the psychology of your observation and thus can aid you in making better choices as the trade progresses. If the price moves against you, let’s say if you were in a short and the price moved higher to a point of resistance above, you have the option of taking the smaller loss or scaling in (leveraging up), without going outside money management percentages. This will also give you a better price. Too many people don’t understand that if you are going to scale up a losing position you must already be way below your money management threshold! Understand the risks of leveraging up a loser. Do not over-leverage. These strategies are to maximize your capital not exploit it and destroy it. It is always better to “press your trade” and leverage up your gains. If the price moves in your favor, or begins to set up in your favor then you can leverage up to a standard position of risk, depending on your available capital, in order to maximize your profit. If you are not sure if it is a good time to leverage up then don’t, just leave it, profit is still profit and it won’t be long before the market gives you an opportunity. If that opportunity doesn’t come to leverage up or you just can’t seem to pull the trigger, again, don’t worry about it, you still have landed a profitable trade. As you exit your trade you can scale out by taking part of the position off at a profit taking point while leaving the other position on for further movement, maybe over the course of several days. If this does occur, and you score a runner, you can leverage in and out of the original trade for more profit on smaller time frame moves using the original position as hedge for any loss. This is a great place to be in, in that you are able to wait with incredible patience for the best possible entries for any additional profit opportunities because you are trading on the back of an established winning position.
In the reverse, you can scale out of trades as price moves against you. While it is always better to leverage up than leverage down, it is possible and better to manage risk by leveraging down than completely removing yourself from the market; assuming of course that you are not being reckless and holding a trade beyond it’s technical indications such as S/R points of interest, etc. Remember, the point is to reduce the loss, but give yourself an opportunity to win. By scaling out you are lowing your risk, but keeping yourself in the trade and giving breathing room upon the event that it moves in your direction at which time you can manage it accordingly or leverage back in at appropriate points of interest based on techincal analysis or market momentum.
These are some ways you can use your capital to maximize profit on market moves while keeping your losses as low as possible.
One last thing, if you would like to comment below please do so, but do not make a comment about how this is irresponsible money management. Everything I said above is in the confines of staying inside proper percentages of risk, and if you follow some simple guidelines you’ll find yourself better managing your trades and keeping (and making) more of your money. If you are over-leveraging with multiple lots and killing your account, don’t come crying to me, (or Nick) as you have been warned (with a smile).
