Battle Plan Trade of the Week: Selling Short and Scaling In

There are many trading strategies and techniques that we follow in Larry Connors Daily Battle Planthat are new to some traders – even traders who have been in the trading game for years.

One of the ways we trade differently is by buying markets after they have become oversold and exiting after those markets have recovered and moved higher. This is our long trading strategy for stocks and ETFs and has been historically tested to be an excellent way for short term traders to make high probability trades in the marketplace.

Another way we trade differently is by scaling into positions. Our approach to scaling into positions is consistent with our strategy for taking positions in the first place. In other words, when we are looking to buy a market, we look to buy more as the market moves lower. And when we are looking to sell a market short, we will add to our position as the market moves higher and becomes increasingly overbought.

Dow DIAMONDS – DIA – Adding to a short trade as an overbought market moves higher can be a key part of a winning ETF trading strategy.

DIA Chart

This can be psychologically very difficult for many traders. But it also can be a key part in helping short term traders take maximum advantage of high probability trading opportunities in overbought and oversold markets.

How does this work in a real trade? Review any of our Battle Plan Trade of the Week articles over the past several months and you will see examples of how we have added to positions in order to build what we call a “full position” in a trade.

For example, let’s say we have an overbought ETF that closes at 50 that we feel is a good short selling candidate.

We would sell short a partial position on the close at 50, and look to sell short another partial position if the ETF closed higher. Should the ETF close at 51 the next day, then we would sell short a second partial position. Our strategy has been to break positions down into three units, but traders have the flexibility to break trades down into as few as two or as many as four or five different partial positions.

Scaling into trades in this way accomplishes a couple of things when combined with high probability trading strategies. Most importantly, by averaging lower into long trades and averaging higher into short trade, traders will likely get a better average price per trade than if they jumped into the trade with a full position on the first signal.

This approach may not be as powerful with trading strategies that produce only 50/50 win rates (or worse). But for high probability traders using trading strategies like those in the Battle Plan, scaling in strategies such as this can play a major role in boosting gains over time.

Did you miss our most recent Battle Plan of the Week article, “Turning Japanese with EWJ”?

Every day in our Battle Plan we’ll provide you with incisive, before-the-bell commentary and analysis on the day’s markets to help put your trading in context. We’ll give you suggested entries and exits for short term trading opportunities in stocks, ETFs and options that may be only hours away. And we’ll give you what many other people can’t: model-driven percentages so that you know the historical win rate going back to 1995 for every single trade idea—