On August 29th, I published an article about two important mistakes that novice traders make: Averaging Down and Scaling Up; Which One Works?
There is no doubt that “Averaging Down” is a terrible mistake. Sometimes you succeed to double your account through averaging down (you take a position, the price goes against you… you take another position… and this happens for few times, but suddenly the price turns around and you close all your positions with a good profit), but when it turns to a habit, it will wipe out the whole account, and you will not only lose the principal, but also the profit you have already made.
In the same article, I explained that “Scaling Up” is not a good idea also, and I am against it. It is not a good idea, because it is possible that the price turns around when you add to your winning positions, and you have to close many of them with loss. Even if that is not the problem, I am still against Scaling Up, because I believe we have to keep our trading as simple as possible, and not to make it complicated with adding some more rules to our strategy about scaling up when a position is in profit.
If you don’t know what “Averaging Down” and “Scaling Up” are, please read that article, and then read the rest of this article.
A while ago, one of my friends and trading buddies who had read that article also, contacted me and explained about his “Scaling Up” strategy that has enabled him to double or triple his account sometimes. He follows almost the same trading strategy that we do, but he has some innovative methods in managing his positions and maximizing his profit. I asked for his permission to share his Scaling Up strategy with LuckScout followers, and he sincerely accepted. Thanks to him!
How Does He Add to His Winning Positions?
As you may know, when there is a strong trade setup, I take two positions with the same stop loss. Usually the first position has a 5xSL target, and the second one has no target. When the first position hits the target, I move the second position’s stop loss to breakeven, and wait for the price to run. I usually close my second position manually when a strong reversal signal forms. In some rare cases, I move the second position’s stop loss further to lock some profit. This is all I do for my positions. I don’t spend any more time on them, and I am happy with my style. However, my friend does much more than this, and he is so happy with the result. Let’s see what my friend does.
He enters the market when a strong trade setup forms. This is what I do too. However, he takes only one 2-5% risk position, with a proper and reasonable stop loss, but no target. He allows the price to run accordingly. When a continuation trade setup forms, he moves the initial position’s stop loss to breakeven, and takes another 2-5% risk position. When you move the stop loss to breakeven, there is no risk anymore, and the 2-5% risk that you had taken, turns to zero. It means your capital is safe even if the price turns around and goes against you. Therefore, you can take another position with peace of mind, as if you have no open position at all (of course keep in mind that sometimes your stop loss won’t be triggered when the market is too volatile. This is the risk you have to consider).
Besides, as your position is in profit, and so your equity is increased, and you have more room for the second position. However, the 2-5% risk he takes for the second position is based on the account initial balance, not equity (read this article to learn about balance, equity, margin, free margin, and…).
The second position my friends takes, will have a reasonable and proper stop loss too, but no target. Again, he waits for the price to run accordingly, and if another continuation setup forms, he repeats the same process.
Therefore, he only holds a 2-5% risk from the initial balance, while the previously taken positions are safe and only the last position has a 2-5% stop loss.
Sometimes when the market trends strongly, and several continuation setups form, he will have the chance to take several positions while all the previous positions are in profit and their stop loss orders are moved to breakeven.
Let me show you an example.
On 2014.05.08 he took a short position when the 2014.05.08 candlestick closed on EUR/USD daily chart (candlestick #1 on the below chart). This is what I did too. He moved his first position’s stop loss to breakeven when 2014.06.05 candlestick formed, and took the second position when a continuation setup formed by candlestick #2. Later on, when another continuation setup formed (candlestick #3), he moved his second position’s stop loss to breakeven and took another position.
All of his three positions are still open. Let’s calculate how much profit he has made so far with a $10,000 account as an example.
Risking 2% of the balance and having a 50 pips stop loss, he had to take a 0.4 lots position each time. A 0.4 lots EUR/USD position has a $4.00 pip value. His first position is in 930 pips profit ($3,720), and his second and third positions are in 700 ($2,800) and 500 ($2,000) pips profit respectively, which is $8,520 in total. It means he would have almost doubled his $10,000 account taking a 2% risk only.
What if he had taken a 5% risk? Then he had to take a one lot position ($10 pip value) each time, and so his first position was in $9,300 and his second position in $7,000 and his third position in $5,000 profit now, which is $21,300 profit in total. So his account would be tripled already.
It looks great, but you have to take some very important points into consideration:
1. We are not supposed to be that lucky always, because usually markets trend 30%, and range 70% of the time. So we will not have such a strong trend always. For example, he applied the same strategy to our GBP/CAD short trade setup (if you don’t know what I mean by “our GBP/CAD short trade setup”, I have to explain that on last August, a short trade setup formed on GBP/CAD daily chart by 2014.08.06 candlestick (#1 on the below chart). We reported the short trade setup on LuckScout, it worked very well, and now we use it to “gauge” the other short trade setups we locate).
My friend took a GBP/CAD short position almost when I did. I took two short positions as usual, but my stop loss was hit by 2014.08.08 candlestick (#3 on the below chart), and I entered again while this candlestick was still forming. My first position hit the x5 target, and I closed the second position with a ~740 pips profit when the 2014.09.08 candlestick (#8) closed.
My friend could take only one position that was closed by him almost at the same time that I closed my second position. So with this trade setup, I made more profit than him. Unfortunately, there are so many cases like this that my friend doesn’t succeed to “Scale Up”. In spite of this, even if we can do it rarely, it will have a good return.
2. In order to become able to trade and maximize the profit like my friend, we have to know how to take the “strong trade setups”, have an optimum entry, a reasonably tight stop loss, and also the ability of taking the continuation trade setups, otherwise it is impossible to Scale Up properly and maximize the profit. So if you like to copy him, first you have to learn how to pick the strong setups, and then Scale Up when continuation setups form. What he does is the maximum level a trader can go. You have to work toward that destination, and I am sure you can make it: Make Your First $100,000 Trading Forex