In the last trading lesson we discussed the fact that many successful professional traders and hedge fund managers scale-in to positions.
Today in the second part of this four part series we’ll look at the various scaling methods.
Scaling-in with Two Pieces
Scaling in with two pieces means you’ll buy half your position the first day and then look to buy the second position at a lower price in a future day. This can also be done with percentages, meaning you may want to buy 1/3 your position the first day and then 2/3 the remaining position at a lower price therefore having an average price which is weighted lower. This is a simple process and is the most basic scaling-in strategy.
Scaling-in With Three Pieces
Using this approach you’d buy the same way you did above but you’d do this over a three-day period (this is my favorite). On day one you would buy x%. If prices go lower in a future date you’d buy another x%. And then if they went even lower in a future date, you’d buy the final piece getting to a full position. This can be done with equal positions each day or done on a 20%, 30%, and then 50% scale-in. This approach when applied especially to ETFs has produced high percent correct trades, especially when buying above the 200-day ma.
Scaling-in the 4 or More Pieces
This is a more conservative approach. Scaling-in over 4 or 5 days for example also tends to be a very high percentage strategy, again especially with ETFs. The downside is that it tends to leave high cash positions as oftentimes the ETF will reverse higher and you’re locking in your gains, but with less money invested at the time. It’s a more conservative approach and is often used to lessen the volatility of a portfolio.
This is from Larry Connors’ Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.