How to Trade ETF Funds Successfully: Scaling-in Strategies for Short Term Traders
One of the more interesting questions we get about high probability ETF trading has to do with the strategy of scaling-in.
As I have written elsewhere, scaling-in to trades is a strategy that high probability traders use in order to improve the accuracy of high probability trading signals and to potentially boost returns significantly. Scaling-in is such an important part of high probability trading that Larry Connors and Cesar Alvarez, authors of the book High Probability ETF Trading have built one trading strategy that is designed to take maximum advantage of the power of scaling-in, a strategy called TPS for Time Price Scale-In.
Time Price Scale-In is less a single strategy and more an entire constellation of short term, high probability trading strategies all based on various scale-in tactics. In fact, if you put ten high probability ETF traders who traded TPS in a room, there’s a good chance that you would learn about ten different ways to trade exchange-traded funds using TPS.
What is TPS? At its most basic, Time Price Scale-In is about buying more of a position as it moves lower (or, conversely for a short trade, selling short more of a position as it moves higher). Our research into short term price behavior in exchange-traded funds – research that does back to inception for a large number of widely-traded, highly liquid ETFs – shows that by adding to a initial position on additional weakness, high probability traders can accomplish two things.
Improved accuracy. Scaling-in – or averaging – into mean reversion, high probability trades provides traders with a greater chance that their trades will prove correct.
Potentially greater profit. By adding to positions as they become more and more oversold, traders stand to potentially gain more when those markets recover and the trade is exited on strength.
As I write in an upcoming article for Technical Analysis of Stocks & Commodities magazine, if you compare the performance of our high probability trading strategies with a scale-in and without, you will notice that the “more aggressive” versions that include the scale-in have a significantly higher percentage of winners compared to the regular, non-aggressive versions that do not have a scale-in strategy included.
Of the 5 ETF trading strategies, for example, in High Probability ETF Trading that include both a non-scale-in and a scale-in version, the average difference in percentage winners between regular and scale-in versions of the same strategy is more than 5%.
If you want to learn more about the power of scaling-in and how scaling-in can help improve your short-term, ETF trading, click here to download your free copy of How to Trade ETF Funds Successfully: An Introduction to TPS.
David Penn is Editor in Chief at TradingMarkets.com.