Your position size is what determines if you reach your trading goals.
You can pull off a great entry, but if your position size is too small (or too big…) then you run the risk of not achieving what you set out to do.
At the start of the move (when you have your variant perception), you want to be prepared to take a small sized trade. This lets you confirm the move, while limiting the chance of a dramatic loss. The idea is to be scaling in, and approaching your maximum position size, by the time the move is going full-tilt. Then, as the move peters out, you should begin to decrease your size by taking profits at different points.
Think of the trade like a pendulum.
When the pendulum is to one side, you start to build your position. Then, as it gathers momentum and swings towards the centre, you are ramping up your position size. As it hits the central point of its arc, you are at your biggest. As it swings in the opposite direction and begins to slow down, you start cutting down and eventually exiting.
If you do this, you avoid having too big an initial trade. This is great, because it means if your perception is wrong or you’ve misjudged your stop, your risk is strictly limited. On the other hand, it means you can extract significant profit from your trade ideas when you’re right.
Nobody is right 100% of the time. The best traders know how to profit in the long run, even knowing they will sometimes be badly wrong. Scaling-in allows you to limit your downside risk, while increasing your potential gains remarkably.
Think of it this way – if you ride a small position all the way, you’ll either make or lose a bit of money. If you make it your goal to capture the meat in the middle, you will snare the occasional monster, just because you were in the right place at the right time.
This is not something new, it was a favoured tactic of Jesse Livermore as recounted in the classic book “Reminisces of a Stock Operator” published in 1923.
Over to you,
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About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter.
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