Anatomy of a scaling trade

Anatomy of a scaling trade

Many twitter followers were interested in the details of my approach to scaling out of trades. To be clear, I generally take my trades in specific areas with either a 1/4 unit, 1/2 unit or whole unit. I do not generally scale-in unless I see confluence within a fairly tight zone (2 pt spread or so).

Hence, when i say “1055.50 scaled $ES_F” on twitter, this means that I am scaling OUT of that trade. Scaling out means that I am taking a portion of my position off in order to bank profits or to reduce risk. In order to understand what that tweet means, the reader must be following the trade to know what is going on.

If you wish to look at all of the trading terms I use, please check the Glossary of terms.

Let’s go over the trade taken on Wednesday, October 28th, 2009.

First…a word of caution: THIS IS AN ADVANCED METHOD OF MANAGING TRADES. Adding randomly and without a plan IS THE SINGLE MOST LETHAL THING YOU CAN DO TO DESTROY YOUR ACCOUNT. This trade is planned and is executed according to that plan depending on how the market reacts in my areas of interest. If you do this, you are doing so at your own risk.

The setup:

Go long against high volume cluster and heavy range trade of 10/6 and 10/7 with support anticipated at 1050 as shown here:

The Trade:

The $ES_F opens at 1057.00. Rotates to fill prior day’s gap at 1060.25. It then rotates down through the open and pushes to 1051.00.

I entered long at 1052.00 (late) on the bounce. For the sake of this exercise and so we do not get caught up in money and P&L’s, we should always think of our quantity traded in terms of UNITS. In other words, plan the trade in terms of getting in or out with a whole unit, 1/4, 1/2 or whatever rather than number of contracts. This will make it possible to trade whatever size you happen to grow into and manage it without regard or thought of the value of the trade in $$ amounts. This is very important for your development!

In order for this example to work, a unit must be at least 4 contracts. This trade was executed with a larger unit than 4 cars, but it is irrelevant to this exercise. The point here is to show how money management can change the way the trade plays out even if it is going against the trend.

Let’s dig into the math:

1) Entry: Long 1052.00 (1 unit)

2) Scaled out on retest of opening price at 1056.25 (1/2 unit)

Result: Given the scale-out taken, the average on the ENTIRE trade is at 1047.75

The market continues down and tests 1046.75. This area is the morning low on 10/7, so I see it as potential rotational area and possible launching point for 1050.50 again.

3) Entry: ADD 1/2 Unit @ 1047.50

Result: The average has been shifted down from 1047.75 to 1047.63, but the potential for a rotation is much higher now as the $ES_F has reached what is likely (based on my homework) an extreme on this rotation.

4) Scaled out 1/2 unit @ 1050.25 on retest of high volume price. I front-run the level to get a better chance of getting filled.

Result: The scale-out gives me a theoretical average of 1045.00 with the low now being 1046.75. I am anticipating a move to 1055.50 at this point. Do I get it? Heck no! LOL

5) Scaled out 1/4 unit more @ 1052.00. Market showing signs of inability to get through to the midpoint, VWAP and that morning’s VPOC at 1053.00, so I scaled here.

Result: With only 1/4 unit remaining, my theoretical average shifts drastically down to 1038.00. This means that if I take a stop at 1038.00 on the remaining unit, I will be scratching (or breaking even) on the entire trade including the profits already banked.

6) Close the remaining 1/4 unit @ 1047.75. No follow through on the upward rotation convinces me that there is just no capacity for the market participants to discover higher prices. The exit is taken when the prior low of 1046.75 is taken out to 1046.25 and it bounces back up to 1048.25.

The point here being that even though this trade was taken AGAINST the trend and it was a long position on a falling market, the overall result is a net +2.44 points on the entire unit. Again, with a minimum of 4 contracts per unit, the resulting outcome is +9.76 pts.

Here is the chart of how the day went:

I cannot overemphasize the fact that if you do this without pre-planing the trade, you will run a tremendous risk of wiping out your account.


  • Jedi
    Posted at 14:53h, 30 October Reply

    Very helpful comments. Thank you for your inspiration and information.

  • Losangelesmatt
    Posted at 18:33h, 30 October Reply

    Very awesome. Thanks for taking the time. It has been great education for me since I discovered your blog. I usually have alot of questions for you as allonblack on twitter.

  • ESV
    Posted at 00:12h, 31 October Reply

    Fantastic, really appreciate this. It is exactly what I meant in my comment here:

    Would love to see more of these.

    A couple of questions

    1. For this trade you were using the high volume cluster, do you also use LOW volume areas in any way? (In this chart one area is marked by the green line showing the open and there are other areas in 1072 and 1040).

    2. What activity and/or price level would have shown you you were in the wrong and needed to take the loss and get out?

    Thank you.


  • Majik
    Posted at 13:18h, 31 October Reply

    First thank you for taking the time to show and explain your methodologies and your perspectives on the market(s) at various points of the market journey.

    It's funny (ironic) how two people can look at the exact same piece of information at the exact same time and come to two totally different conclusions as to what each one currently sees and expects to see in the future.
    I could come to the conclusion that this is exactly a reason for the perception of market shifts and market movements (as far as we as retailers can see…)

    A couple of quick questions for you:

    1) Gauging by your information of price and date one can deduct that you are taking the positions at the US Equity open. Now… I see what you are looking at in terms of Volume, VPOC, Price action TPO, and not really sure if you're streaming the tape as well with order book…

    I realize "Simplicity In Trading" is the theme, but for depth of thinking and preparation purposes, I'm curious if the following underlying concepts play a role in the way you prepare and do you market prep.

    1a) When you plan to execute your positions are you treating the Open (US Equity Open) as the open of the Globex or do you perceive the Futures market as already up and running from the prior day's 4:30PM EST / 3:30PM CST open?

    2) Has the change in how the CME distributes data changed the way you look at the markets today or altered your strategies on how you address executing your positions?

    3) As mentioned in your fantastic presentation on October 15 2009 are you incorporating conscious and continuous template analysis in your current trading and going forward?

    Keep up the Great educational content!

    It's is very much appreciated.


  • tradercrm
    Posted at 22:04h, 02 November Reply

    Great post, just underlines the importance of entry timing and being able to book some profits after your initial entry and subsequent scale in.

  • Losangelesmatt
    Posted at 22:22h, 05 November Reply

    At the end of the trading day is it possible to get initiated entry points? I know there is context around these, but it would be nice to see where you went long or short, then look at the chart and really understand why.

    Thanks for all your help!

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