How to Scale Into your Trading Positions
Traders can find the optimal levels to scale into their positions by using the ConnorsRSI indicator, yielding them lower average purchase prices and higher overall gains on their trades.
ETF Scale-In Trading includes more than 20 variations of this high probability strategy that have shown winning trade rates of over 92.8% throughout our historical back-testing. We’d like to share the introduction to this guidebook as it provides a detailed history of Scale-In Trading, along with a background on how this specific strategy came to fruition.
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Below is the first chapter of ETF Scale-In Trading:
In 2008 we introduced a “Scale-In” strategy that we called TPS. TPS stands for:
- T – Time
- P – Price
- S – Scale-In
When you combine these three key elements of trading (Time, Price and Scale-In) you often see significant improvement in your trading results. TPS remains one of the most popular strategies we have taught, and beginning in this Guidebook it will be referred to as Scale-In Trading.
Scale-In Trading has its roots in the investing world from decades ago. Effective money managers have successfully used it for many generations.
The first time I learned about Scale-In Trading was in 1985. It came from one of the largest and most successful brokers at Merrill Lynch. His clientele included the business “Who’s Who” of Los Angeles including one gentleman who went on to become a senior presidential cabinet member, another who became the Mayor of Los Angeles, and a handful of others who were successful enough to become members of the Forbes 400. This gentleman understood investing and he especially understood how to scale into stocks. Some of the most successful people in Los Angeles relied upon his advice for decades because of this knowledge.
As he and I got to know each other better, he was kind enough to begin mentoring me on which stocks to buy and more importantly how to buy them.
I can still remember the first stock he recommended to me. It was Louisiana Pacific (symbol LPX). At the time it was a compelling long-term value play and by the time he was done explaining to me why it should be purchased, I was convinced. He suggested that I purchase the stock for as many of my clients as appropriate and to do it immediately. And then he finished the conversation by saying something that has stuck with me since (and this is the backbone of this Strategy Guidebook). He said “after you buy the stock for everyone, go home tonight and hope it goes down tomorrow”. At that point I was perplexed. I asked him why in the world would I want the stock price to go down? And then he said the magical words: “so you can buy more tomorrow at an even lower price”.
If memory serves me correctly, LPX didn’t go down much, and eventually it rose by a healthy percentage. We bought near its lows – something which is often more luck than skill. His insight on the stock was very correct. More importantly, he planted a seed which further grew 18 years later.
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Corporate Attorney Turned Hedge Fund Manager
In 2003 one of our customers at TradingMarkets decided to leave a successful career as a corporate attorney at a high profile law firm to become a hedge fund manager. He took his expertise of the industry he specialized in and made a major career shift to run people’s money for 2 and 20.
A much larger fund that housed both emerging and veteran managers immediately offered to lease him space and take care of all his accommodations. It’s a common practice in the industry and often a win‑win situation. The manager gets space and accommodations as well as the opportunity to develop relationships with other managers. In exchange, the large fund providing the facilities gets fresh, new ideas from mangers of different expertise. When it’s successful, everyone wins.
As he kept me updated on his venture, he was kind enough to share some of the things he was learning. For him, what really stood out was getting the chance to see first-hand how many of the more successful hedge fund managers ran money.
As he became more immersed in the business, one day he called me. We were discussing the market, which had bottomed that spring and entered a new bull market. He then said to me the exact same thing I had heard 18 years earlier. He told me that many of the successful managers there did different things but most had one thing in common. Once they researched an idea and had the conviction to begin purchasing the security, they didn’t simply go “all-in”. They bought pieces (a percentage). And then they went home and hoped for the stock to go lower so they could buy even more at cheaper prices.
If prices went straight up, they had a position and the position was profitable.
If prices went down (which was common during 2002), they got the opportunity to add to their position at even better prices. And they would continue to buy as prices went lower until they owned a full position. Once a stock price moved up to the value they felt it was worth, they locked in their gains (something many of them were able to do quite nicely in 2003 and the next few years). Like everything else, this strategy didn’t always make money. But when they were right, they were oftentimes very right, and one or two large moves from positions bought at extremely low levels made their year (and made their clients very happy). Instead of going “all in” as most people do, they scaled into positions at more favorable prices with the goal of locking in gains as the stock rallied higher.
The above concept allowed us to develop our original Scale-in Trading strategy (TPS) in 2008. And I’m happy to say that as of today (March 2013), the strategy has not only continued to do well, but we’ve been able to expand upon it significantly.
Before we move on, let’s make sure we understand the difference between scaling in and doubling down. Scaling in can be done many ways and the main aspect is to allow you to commit some (not all!) of your allocated capital to the position. If prices go up, you’re ahead. If they go down, you’ll add more to your position at better prices as you move toward your goal of buying a full position.
Doubling down (or as some people call it, doubling up) is a very aggressive game and very different than scaling in. When doubling down, one initially takes a full position. Then if prices go lower they double their position, often on margin.
Each approach is based on the belief that prices are going higher. The difference is the money management aspect of executing the trade. Scaling in is a more gradual and more conservative approach to trading one’s money. It’s also more forgiving. It allows the trader to say yes, this security is oversold and I want to buy it. And if it becomes even more oversold, I can buy it lower and lower and lower depending on the scale-in version I apply (this will be described as we move ahead). And as you will see from the test results, especially on a percentage correct basis, it’s often a better way to trade, especially with ETFs.
As traders our goal is not to hold positions for months and years like the managers mentioned above. We want to efficiently time an entry and exit it as soon as possible. In this Guidebook on Scale-In Trading, we will teach you exactly how to do this. And with a full focus on ETFs, which are baskets of stocks and are usually safer than individual stocks, you will learn to scale into positions using multiple methods which have historically had a high probability of being profitable.
In this Guidebook, we are going to provide you with the exact rules to buy and sell liquid ETFs along with the full test results to support this style of trading. You’ll see consistent results on the major liquid ETFs with many scale-in variations that exceed 90% correct going back well over a decade.