Yellow lines are long entries (blue would be short entries).
Green lines are profitable exits (red would be losers though ideally one never has any with this approach).
The scaling - in went like
#1 = Long 1
#2 = Long 1 (Net Long 2 contracts)
#3 = Long 2 (Net long 4 contracts)
#4 = Long 4 (Net long 8 conts).
That is the recommended maximum. Why?
This approach is structured for day-trading (of course can be changed for weekly trading).
The 2 point target is, on this 1 minute timescale with recent volatility, a modest amount, but more then 2-4 ticks.
The simple logic is: using whatever criteria you like, you enter a position with the expectation of making 2 points (in the above SPY that means .2) = $100 in the e-mini. If you get that profit target you are done for the day. $100.00 = 1% of a $10,000 account which is a very good daily profit target and let us assume this is a $10,000 account though probably better to use a $25,000 for this level of risk.
Now, if your initial target is not hit (i.e. you are wrong in the short-term), rather than bailing out with a 10 tick $125.00 stop, you add in.
In the above example I entered on a whole number and then scaled in every .2 pts (= 2 full emini points) as shown above and on the chart.
But there is more than just scaling-in logic.
The profit target amount is about half a typical swing in this market (which you research ahead of time before picking your scale point amounts).
So the theory is that even if you are very wrong, if you keep adding-in, then at some point you will get a corrective reversal.
This is why you add in the amount traded as it goes against you.
From the above example, the text from the last, #4, entry:
Enter Long 4 = Net Long 8 contracts
Open Position: -6 -4 -4 0 = -.14
Break Even Value = .7/8 contracts = let's call it .1 = 205.5
(Hit within 1 min of entry)
Profit Target = 205.7 where
#1 = 206.00 - 205.7 = -.3
#2 = 205.8 - 205.7 = -.1
#3 = -205.6 + 205.7 = +.1* 2 contracts = +.2
#4 = -205.4 + 205.7 = +.3 * 4 contracts = +.12
Total = +.10 (or 10 S&P/Emini Points).
(Max miniswing went to 205.94; of course could have scaled out like scaling in
but this is kept as simple as possible for clear display)
At the point of entry in a trade which was completely wrong (the most profitable with this method, but also most risky and complicated to execute) was down 14 points (-.14 on the chart). So that is down $750 + commissions. But more importantly, the reason you are buying so many is that the swing has gone against you since point of entry many bars ago without your being able to pull out your 2 point profit target. So with each additional purchase lower down, you are in a higher percentage likelihood of coming out ahead even if you get a less than .382 correction which happens nearly always in these small day-trading mini-swing scale markets. Even on big days when you are wrong.
So at the point you are buying 4 more contracts in the above example (and now being net long 8 contracts), and being -14 points down, with 8 contracts a one point move gives you +8, meaning you are now only down 6, and a second point move gives you another +8 making you +2 which is your original target. This is why you add in more contracts as it goes against you. But given that the market has gone down 8 points since you entered - and in the above example it had already gone down a ways before the first entry (which is often the case with this sort of approach since trading pullbacks is less stressful than breakouts and also better for scaling-in approaches), so let us say 12 points, which is ALOT in this timeframe, the probability of at least a 4 point pullback (33%) is high, so if you add just one more point to the breakeven level, i.e. 3 points above entry, you will come out 8 points ahead.
Naturally there are all sorts of issues, chief amongst which is:
Risk: what if it goes totally pear-shaped against you and you find that you would need to add-in like this: 1, 1, 2, 4, 8, 16, 32, 64?
Moves like this happen every few months assuming you have your levels calculated about right for your timeframe (trading 2 point increments on a daily chart would be impossible without having at least $1,000,000 - but could be done by automated strategies which are easy to program in Ninja, for example).
Well, my conclusion on this is to stick with 8 contracts and then hang on in an adverse move (you have a $10-25,000 account). Each point against you is an addition 8 emini points = $400. So 10 points more against you is $4,000. If you are no adding in, then essentially you are expecting the market - which remember has not had a 2 point correction since you first entered - to come back up to this level where there was never any correction. It nearly always will.
If it doesn't, then you wait it out as follows:
The first big leg down corrects up but does not give you a break-even exit and then goes back down. At some point it will start to bottom out (double bottom etc.). Since this is a day-trading approach we will not hold overnight, but nearly always during a day there is a correction of the morning's range at least, and sometimes around 3.30 EST a correction of the day's range esp. if there has been a strong trend down (again this is example is going long and market going against you, so same logic in reverse if shorting and market goes up all day). So if you get a nice bottoming pattern then you can add in another 8 which is your absolute maximum and with any luck the market should come back up to get you out break-even or a small profit.
Let calculate with above example:
Actually, as I typed this the market had paused after the profit-taking rally, and then sold off to 2048 which is 8 pts below the 2054 entry in the example. Let's say it goes down another 2 points to 2044, which is 10 pts lower than entry.
At this point you are down 10 points * 8 contracts = 80 points plus the initial -14 = -94 points = -$4,700.
If you get bottoming action and can get in around 2046, which is 16 pts better = -78, let's call it -80 inc. commissions, and you buy 8 more contracts, then to break even with 16 contracts at that point you would need market to rise 80 pts / 16 = 4 points = 2050, which is still 4 points below your last entry or about .38 retracement.
Comment: of course this is risky. Indeed it looks like today is a big moving day compared to previous week so a good example of things going wrong (though initial PT with 8 contracts met within 2 minutes of entry!).
So I will comment at end of day and review the open position risk.
I will also assume did not exit and am holding the 8 contracts and will re-enter 'live' in the sense that will draw the entry buy line before the entry bar to simulate actual trading conditions.
Then we'll see how well or poorly the account fairs on a dangerous day like this, which is less than 1 in 10.
(picture of current situation with position exited after adding in 8 contracts as explained in previous comment and daily PT of $100 reached (after risking many thousands!).
It is now lunchtime so probably market will make another downmove today but this example of a VERY bad trade working out is not bad as such.
Notes about the example:
1. Personally I wouldn't have taken this trade because like to give the market an hour or so to tip it's hand but in any case having taken it:
2. It worked out picture-perfect assuming entry on the low tick of the early swing down; if that entry not flled, then could have got out BE anyway.
3. Assuming that it hadn't rallied but just kept going down, waited until dust had settled and market made a real-time identifiable bottom (I used basic approach of waiting for both a HH and HL = higher high and higher low) using personally developed swing pattern recognition which has strict, programmable rules and filters out most weak swings. Anyway, as soon as a HH was made after both HH and HL having been made (horizontal yellow line indicated new entry, along with text commentary on chart to left with some of the numbers), then the BE+ PT was drawn on chart and not long thereafter the position exited with a tiny gain.
4. If you look at Daily and esp. 5 minute chart (my preferred day-trading chart), you can see that today's entry was almost like a blind gamble and indeed would probably have found simple short entry at some point and made quick 2 pt PT.
5. THere is the ADL indicator on the chart at bottom. I have started experimenting with that as a non-correlated indicator to determine longer-term trend the purpose of which is to determine if/when to reverse direction. Right now the scaling-in / adding-nr-contracts method assumes never changing direction. It makes things simpler and works 95/100 times. However when it doesn't work, it can wipe out 3 months of small gains, so that's not nice. The idea is: when the ADL (advance-decline) line switches, then if you get a pattern in that direction, you reverse your current position, and then shoot for break-even net of any loss you are taking on exiting and enter with 2 or more contracts in new direction (depending on size of open loss at that point).
Example today: at 9.54 on this chart the market retraced (and indeed a break-even exit could have been made there - and would have been of course, but for our example of things going wrong today I pretended that this had not happened). AND the ADL line changed to bearish from bullish. At that point would reverse to short. GIven that there was no loss in this example, would have shorted 1 contract and then scaled in further if market continued up against new short position. But let's assume loss on reversal was 4 points total. GIven the usual PT is 2 pts, then enter short 2 contracs with PT of 2 points * 2 contracts = 4 points = BE (breakeven). Add a point to make daily PT and cover commissions = 5 points PT. Today that would have happened by 10:26 (BE happened at 10:16), or basically 30 mins after switching direction. The ADL line does not change very often each day so I find it an excellent trend indicator. It also shows things that the price action alone does not show (assuming it is properly calculated which I haven't checked).
Anyway, the point of this is not to show off or prove that something works etc. but to provide a basic example of the only way I think one can trade without using stops. There may be variations, but most of the core issues and principles have been addressed - positive and negative - in this magnified/shortened 1 minute example which played out in about 3 hours. Of course with longer timeframe chart it would take longer, however if this is a day-trading approach, you need something that can handle a large adverse move and have a chance of retracing enough to get to BE before close of market. Frankly, the best way to trade this market is to have $100,000 for this approach - some of which could be in longer-term positions, T-bonds etc. - so that if you do have to add in a bit more and hold overnight, you can handle it margin-wise. If you do keep adding in, it is virtually impossible for the market not to retrace.
6. Note how when adding in this way, the BE point lower down was significantly below the previous entry point. This was true with the final exit even though the final 8 contract buy was not in the typical 2 pt sequence.
7. If you had bought in 2 pts below initial #4 position, .e. at 205.2, then you would have quickly made money on the next swing up.
I believe that studying this sort of approach and moreover mastering not only how to calculate the BE points and open position profits etc., but also the realistic risk levels - which are considerable - is worth the effort. Because along with much higher risk come much higher probability. Disregarding the math elements this strategy is based on a simple premise: the longer a market goes in the same direction without a correction, the higher the probability of at least a 30% correction becomes. Further, if you are already invested then you don't have to try to pick tops and bottoms so basically all you need is to 'man up'
to your position, fully invest in your position in that particular swing so that when it does turn back in your favour, all you need is a very modest correction to get out of what otherwise was a trade where you would have taken a loss. This also means that generally your profit targets are modest (today's example 2 pts only), which also means higher probability of success. 9/10 times your first target will be hit if you use simple, basically reliable methods. But most good methods still lose about 30-40% of the time and if your stops are larger than PT's, which is often the case in shorter-term approaches, it is very hard to come out ahead net of commissions and slippage. This is a hard truth which most day-traders never overcome despite considerable effort. You need methods that are more like 80-90% successful, or you need to have profit targets about 3 times larger than stops, i.e. swing trade. In which case you need generally to trade with the trend, either on breakouts or pullbacks, you have to have impeccable discipline (true with all daytrading) and you must be patient to sit in front of screen all day long.
8. Advantage of this method is that you don't really care if you are right or wrong. Indeed, most of the time when you are wrong you end up making more money since once you have 4 or 8 contracts, just going 2-3 ticks past BE will do you well (with 8 contracts each tick is worth 2 points of a single contract). By not caring so much about being right or wrong you focus less on predicting the market or getting overly invested in one direction or another, and pay more attention on what really matters: money management. Indeed you can make money this way by tossing a coin to pick whether to go long or short (which is pretty much what I did with this example. I opened up the chart a minute or so after the open, so a big down bar and decided to go long and put the entry price just above yesterday's close in hopes of a test and then rebound. Didn't happen. So instead of making $100 / 2 points, I had to risk $750 and then made about $500.00 and it took only about 8 minutes for the whole thing (9.31 to 9.39). This was an unusually volatile opening, but nothing extreme, but very well illustrates the advantage to using an approach that does not use STOPS!!