This article addresses scaling into a trade; what it is, and the four golden rules for scaling into a trade because smart traders know that to maximize their profits and control risk, they must employ scaling in and out of positions.
With the known and assumed volatility of the cryptocurrency markets, there are excellent opportunities to reap the rewards of scaling into a trade. For instance, let’s say swing traders see the market in a downswing; their strategy might signal an opportunity to enter into a long position for 4 to 5 days. Position traders might be looking more long-term at 4 to 5 months, and day traders are looking for quick opportunities within 4 to 5 hours.
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In the scheme of things, the time frame in which you wish to trade doesn’t matter because all traders must have some amount of flexibility to trade depending on the market trends. Whether you want to go long or pop in a quick trade, the mechanics are the same: risk assessment, market analysis, and setting up the stop-loss – and keeping a finger on the button if you need to make adjustments in case the market pivots.
Now, there are instances when going all in with a fixed lot size is the way to go because there are often all-or-nothing trade scenarios if the zone is very narrow. In these cases, it’s not good practice to hold onto trades for very long.
In the example below, there is a long-term breakout signal from a higher monthly time frame, but the weekly charts signal a low risk buy entry signal on February 25 ’19.
After scaling into the trend on April 29 and June 17, the shooting star candlestick pattern with a longer, higher upper shadow suggests a strong rejection of bullish advancement. In this case, it would be unwise to add to our position after this level.
An all or nothing scenario is shown above, where the Bitcoin (BTC) price flags a double bearish accumulation pattern. The price plummeted down toward the 50-period Moving Average, showing that there may be a slowing of the price decline.
Considering that the signal to short-sell is far from the all-time high and close to the MA-50 support, again, it is unwise to scale into the bearish trend. Additionally, we don’t want to be add any more should the market rise above the high where the stop-loss is established. That would not lend itself well to scaling.
So let’s get back to the point of this. How do we scale in and what are the rules of scaling. Follow as we imagine going long.
Plan Ahead
- Defining the zone
First, let’s define the zone, or window, that indicates your buy or sell range. It is the area where a trader is still keen on buying a specific cryptocurrency, and dependent on the volatility, it could be a narrow window or a fairly wide one. The important thing is to go in with some semblance of knowledge where the “fuzzy zone” of support/resistance, breakthrough levels, or lows that might signal the price to advance. Your zone may depend on the market conditions and your personal time frame to trade in, which is critical to know when to scale in. - Plan your sizing
Now that you’ve defined the zone, it’s time to plan the position sizing, and there are a couple of options: You can either do same standard position sizing down or determine a variation of that. You can either go big in the beginning then add smaller amounts as you go down, or flip it on its head and do small position sizes at the beginning and larger amount towards the end.
There are pros and cons with both and could probably see that yourself if you are going very aggressive at the beginning, you are doing a larger position size. For argument’s sake let’s say the plan was to add $10 USD for every point moved. If you are right in the beginning, then the money invested per point still earns good profit as the market trends upward and you’ve reasonably accumulated a fair amount of token and earnings.
On the flip side of that, if the market is moving against you because the market pivoted, the stop-loss put into place should help salvage your portfolio and there is an opportunity to change your position. Like the example above, if you’ve added $10 USD for every point and see it trending in the wrong direction, you haven’t lost everything in a gamble.
Know your max
The number of people who get into trouble are the ones who don’t consider scaling in or out of a trade. They’ve invested too much and placed a lot of risk on their portfolio. The idea is to pre-plan then pivot when you must. Know your zone. Know your position sizing. Know the amount of scaling you plan to apply.
Set and Forget
This is something a lot of traders struggle with because too many micro-manage their portfolios and trades. They follow the price chart tick by tick instead of waiting for a strong signal to scale in or exit their current position. If there is a solid, well-thought plan in place, give it some breathing room to work and scale accordingly.
Discipline
Be strict with your stop. This is difficult for a lot of people especially when they smell big wins, but here’s the thing: you can ride a wave and have fun but that same wave can pummel you against the shore. The plan is in place for a reason. A win is a win but chasing “the big one” could lure you into losing it all. Measured, disciplined scaling and/or stops are healthy.
Most newbie traders make a huge mistake by adding more to their already precarious position right before the market turns on them. These traders get wiped out because they did not scale properly, their positions are now too large as the margin call kicks in and they’re either left holding the bag or sell out because they can’t stomach it anymore. Weak hands and weak plans lose all the time.
Be strict with your stop-loss, do your best to time your entry, take time to stop scaling in or out in order to reassess the market data, and have an exit strategy. This is the main crux to having a managed strategy to scale into or out of trades. It’s all about how much risk you’re willing to take.
Disclaimer
Content provided by CryptoTraderNews is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. All information is of a general nature. As always, there is risk with any investment. In exchange for using our products and services, you agree not to hold CryptoTraderNews Pro, its affiliates, or any third party service provider liable for any possible claim for damages arising from decisions you make based on information made available to you through our services.
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