Scaling in and out of trades is an important concept that many traders need to add to their arsenal. Determining where the market is going is hard enough; also determining the timing of the market is near impossible. So why do most traders enter a trade with all their guns blazing with nothing left in reserve if they are wrong?
Today I want to look at some tactics of scaling into trades – especially when we are dealing with range trading.
When it comes to range trading, you should break the range into four equal parts (quartiles). Once price enters the top or bottom quartile, you should trade accordingly:
1. Enter when the price first enters the quartile. You enter this trade expecting the market to turn around as it approaches the support and resistance of the range.
2. Enter again when the price approaches approximately halfway between your first entry and the outside of the range.
3. Enter again when the market hits or breaks the outside of the range.
Now, why would you break up your 1 trade into 3 smaller trades? Because it releases your from the responsibility of timing the market.
If you were to enter 1 trade only, where would you enter?
Right when the price enters the first quartile? What if the market blows right through the range? You have no leeway anymore.
A good option might be to enter your 1 trade in the middle of the quartile. But what if price never reaches that level? What if the market turns around 5 pips short of your entry and heads all the back to the other side of the range? You just missed money.
And if you wait to enter your 1 trade when the market actually hits the support and resistance, you will miss the majority of trading within that range.
So scaling into a trade eliminates the need for you to time the market. As long as the market turns around and stays within the range, you are going to make some money.
