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Altos Trading Articles

How to Scale into Your Trades Using Good Money Management

Originally Posted: November 11, 2022

Leading by Example

November 11, 2022:

This is Jeff Tompkins, and today we're going to focus a little bit on Money Management.

More specifically, we’re going to talk about scaling in and out of trades and position management.

There are some cool little tricks that you can use with scaling, regardless of what strategy or system you deploy.

Scaling can really be applied universally, whether you’re trading stocks or futures or whatever.

And I think that this is going to be really valuable tool for your investing whether you’re a beginner or seasoned pro.

Gambling VS Trading

I was never like a big gambler, but whenever I’m in Las Vegas for a conference, I usually get a few chips. Do I make money? Well, not always, but I stick to the games where the casino has the loose edge.

So I play craps and blackjack, although I confess I played roulette the last time I was in Las Vegas. But Interestingly, as I started trading professionally, I've gambled less and less – because I'm not comfortable with somebody having an edge over me.

I want to be the one that has the edge.

So that's why I think I've kind of stopped gambling, and I’ve really be working on safely scaling into my trades. It goes to show how Money Management can impact any system, whether it's on the craps table or in the stock market.

The good news in the market, there are no limits. The only limit is our available capital.

But if you use the scaling techniques I’ll show you today, you’ll find it’s a great principle to understand and implement when you're trading.

Money Management and Scaling into trades
can give you a BIG EDGE over the rest of the market.

Most trading systems out there only focus on potentially calling the right entries and exits.

These trading “experts” only tell you when to get in and out of the trade.

But just imagine using an often-overlooked Money Management technique…

You could have more of an edge than if you just guessed at picking entries and exits.

So today, I’m going to show you why Money Management is really, in my opinion, a bigger key to success than technical analysis, entries and exits (or all three).

In fact, I've actually done studies on this…

You can take really terrible systems that are worse than flipping a coin or throwing darts at a dartboard… And you can turn that guesswork into positive expectancy with proper Money Management.

And it just goes to show how managing your money really could be THE crucial factor.

So we'll talk about Money Management tonight.

And we'll start out with kind of some basics tonight and we're going to look at scaling in and out and then we'll get in future sessions, get more in depth on some of these Money Management topics.

After the first quarter of 2022, I believe we’re in a ranging market.

In a moment, I'll explain why we're in a range and not a downtrend.

So let me do that real quick and then I'll draw that support line at the all-time high in January 2022.

If you look at these momentum shifts within the price action,
the highs and lows of the year are forming a defined trend.

In late March we posted a swing high – or a “supply point” where there was excess supply in the market. That exceeded the swing high or supply point from late January, early February.

That's why we're in a range, because that downtrend structure was broken and this is significant enough to say we’re in more of a range.

And right now we're at the bottom of it.

Take a look at this chart from May of last year, and there was a move off that 4100 level up to the over 700 point move on the S&P from that level.

Back in May of 2021, there was a major rejection of a century market, $4,100.

And then again, on May 2, 2022, we’re looking at the same exact support level.

On the chart below, you can see the highs and lows of the year circled.

So we're going to use that support level as a barometer for support and buyers coming in after the recent sell off.

Now, because of the overall shift in market structure and sentiment from secular Bull to secular Bear – I don't expect that we'll get back up to 4800.

But I do think this is a noteworthy support level at kind of the bottom of our range right now.

So unless something derails this rebound off the lower level of the zone, I think we'll continue to see upward price movement.

This is the perfect time to start “scaling-into” your trades.

Let's say you're using support levels to make decisions on entering a trade.

Most people would jump in all at once. But not anymore right?

But you don’t generally don't jump in all at once.

I prefer to scale into the trade – and scaling offers me a number of advantages.

Number one, sometimes I don’t get the timing exactly right…

For instance, let’s say I’m taking a buy signal off of this support level.

But there's always going to be lower levels of support anytime we’re trading at or near a support level.

I may have been looking for an anticipated up-move.

And while that may at the time be an ideal place to enter, I’ve learned I can't be right 100% of the time.

So there's always the chance that support breaks and then the security trades into lower levels of support.

That's where scaling-in can be advantageous – you don't necessarily have to be exactly right on your entry.

If you scale-in your trades, you can be wrong and still give yourself a chance to lower your cost basis, PLUS add to your position at lower price levels.

So that offers you a statistical edge as far as entry points.

But you can’t just blindly scale in with a hope and a prayer.

You want to obviously have a Risk Management plan, and every trader NEEDS to have a plan in place.

So if you exceed your risk threshold, you still want to have a stop loss at a point where you’re just not going to scale in anymore.

If you can manage risk like this, you'll end up much better off than if you jump all in at once.

Because you've lowered your cost basis by scaling in.

And overall, in my opinion, it's better to scale-in because it gives you an edge in both directions where you can be profitable.

If a trade moves in the anticipated direction, and experience less of a loss or even a better profit if it moves lower, even if you get stopped out.

So we'll be using the current market as a kind of a barometer for what that “scaling” looks like.

Take another look at this chart of the S&P at the strong support level of 4100.

As a smart trader, you would have done your homework and mapped this out from previous levels of support back to February of last year.

You can see that probably institutional buyers came in here at this 4100 level and drove prices up.

So let's say that your risk based on your entry and your stop and your account size warranted trading 100 shares.

Well, instead of entering those 100 shares at this support level, a simple way to scale would be to enter half of your position at a certain low price.

You could do like a 50-50, where you buy half the position at one level, and then if it moves lower, the other half at the next level.

Or you could even chop it up more and start with 50%... then 25% at the next lower level, and then if that goes lower you could “scale in” the other 25%.

So you can chop it up, slice it and dice it… Plus save yourself a ton of money in the long-run.

Let's say you scale into a trade that takes off in the very beginning and really makes a stronger move up.

But then it might move against you a little bit. You can scale into the trade.

For instance, take a look at this chart of the S&P back in late February 2022…

The first green bar was a buy signal. We got a little bit of the move up, and then a bit of a retracement with the down arrow.

But the support still held around 4100, and we never broke it.

Then there's another buy signal and we start moving up again. And then you see a follow-through of the momentum with yet another big buy signal as the arrow goes straight up.

If you’re bullish, a small pullback could serve as an opportunity to scale-in on an upward momentum move.

Now, let’s take a look at the same S&P chart a few weeks later. The arrow facing down.

That was a short trading opportunity right off of resistance on the spy worked out nicely, and this one actually hit the trading stop. It would have been a very profitable trade on this signal.

Let's say you had bought puts on this sell signal and it made a nice move down, but then another buy signal comes in. That could have been your scaling opportunity.

And here it would be easy to scale-in, just by adding more put contracts as the overall market goes down.

So in this case, the S&P did go down after the sell signal, and we got another opportunity to potentially scale-in at two lower levels of support.

Scaling into the trade can really makes sense whether you’re bullish or bearish.

When I’m trading in my personal account or in my hedge fund, I’m always using this scaling in-and-out methodology in terms of Money Management.

Once I figured it out, I was able to make money whether the market is going up, down, or sideways. And I think scaling-in could help give you this trading edge too.

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