Ok, here goes... Scaling down 101 !
There are 3 technical prerequisites that must be in place before implementing this strategy. You must be 95% confident of your trend, and you must be 100% sure of your trigger price. Now for the third and arguably the most important component is risk. You MUST have a solid method of measuring risk!!! You just cannot stick a stop loss order in at some dollar amount that you are prepared to lose. If you do that, you are gambling, you are saying *I hope this market moves to my profit target before it hits my stop* - thats a bet in my book!
Cool... time for the trade. Suppose we are looking at the ES chart. We notice that the trend is up (that makes us buyers only), and we see a bullish FBWT with a buy trigger price at 1465.50. The first 2 prerequisites are met, now i need to check my risk before I do anything. Lets suppose we are using a trendline to determine market direction. The distance from the FBWT down to the trendline is what we*re after... lets say it is at 1462.75 and distance of 2.25 points... that*s our risk, and thats where the stop must go - a tick or 2 BELOW the trendline value. The stop goes in at 1462.25. The risk on this trade is 3.25 points. Now, we want to trade 3 contracts. Can you see where this is going yet? Lets say that our calibration shows we have a better than 80% probability of making 8 ticks on this trade. Our target thus goes in at 1467.50 (8 ticks above our trigger). We have our target, and we have our risk... now finally the nifty part. If you buy 3 contracts at the trigger and you are stopped out, you book a loss of $487.50, if it goes to target, you book a $300.00 gain. Nice and simple. Now imagine instead of putting it all on the nose at one time, you buy only 1 at the trigger - if it immediately runs to your target, too bad so sad, you only make a hundred bucks. If however it begins to move against you (which you want it to do), you buy another contract at say 1464.50, 1 point below the 1st purchase. REMEMBER THE RISK/STOP IS PREDETERMINED ON THE ENTIRE POSITION AS A WHOLE. If it runs to target from here, you make 100 bucks on the first one, and 150 on the second!!! You increased your profitability by 1 point, but more importantly, you decreased your risk by 1 point by buying that second contract 1 point closer to your stop! Ok, lets assume it drops again, and we pick up our third and final contract at 1463.50. Lets do a little math... If we*d have gone all in at the trigger, the risk would have been 9.75 points, but by scaling in, we reduced the risk to 7.75, a full 2 points, or 100 bucks!!! Thats a very good thing. Lets go the other way, - value of first contract at target, $100, value of 2nd contract at target, $150, value of third contract at target, $200. total = $450.00, an additional 150 smackers over going all in at the trigger, and a 100 dollar reduction in risk. I must however insist that before trying such an advanced trading strategy, you absolutely have to have a method to find a target, and find a stop... there can be no second guessing, no *thinking* about it... it is either there or it isn*t - no exceptions!
Trading is all about discipline, and it is at this level of the game that you need to exercise it more than ever!
Rob