Live Trades Series: Scaling in to avoid loss

 

Video duration 13min 21sec. English subtitles to follow.

Scaling in to avoid loss

Video transcript

Introduction

Hi Everyone. This is Al Brooks, and this is part of my Live Trades Series. I took a trade today in one of my actual trading accounts, not just a simulated account to illustrate how to manage scaling in to a losing trade.

Globex Chart

This is TradeStation. Here’s today. This is the Globex market. The day opened right here, the day session. This Moving Average is based on the Globex chart. If you look at the day session chart, which I’ll show later in the presentation, the Moving Average is actually down here. So we opened above the Moving Average and we sold off, but we never went below the Moving Average. I’m going to speed this up so that we don’t waste time on prices that really don’t add anything.

We have a very climactic open. A series of Buy Climaxes – one, two, three, four. Typically you’d expect at least a couple legs sideways to down. It’s possible it’s one, pullback, two. It’s more likely it’s one, pullback, two. So it’s more likely that we’re going to form a Lower High and test this low. Less likely that we’ll just keep going up.

Reasonable to Sell

So it’s reasonable to sell. Possible Wedge, three legs up – one, two, and three. We have a bear bar closing below its midpoint, so I sold at the market on the close of that bar, betting that we’ll get a second leg down to this low. It’s possible that this breakout is strong enough to get three legs up starting the count over again. So instead of one, this becomes one, two, and three. The bears need to get a reversal here for a test down to that low or this low. So it’s reasonable to sell again, sell more, so now I’m short two contracts. I could exit on a stop above this sell signal bar, or I could exit if we get a pair of consecutive bull bars, or I could just hold short and look to sell more higher up.

It’s reasonable to take this short, but if we’re breaking above a Wedge, we might go up for a Measured Move up based upon the height of this Wedge. Now we have a big bull bar and a bull follow-through bar. Most traders, as soon as they see that, they should buy back their shorts on the close of the bar. However, it’s reasonable to hold short and to sell more, and I’m going to do that in this particular case to illustrate a couple things.

Could Have Gone Long

Now, if you wanted to, you could have exited short and gone long, and normally if you have a trade that is doing a low probability thing, something you think is unlikely, you’re going to get some kind of a Measured Move. Maybe a Measured Move up based upon the height of this Wedge. So if you were able to get out of your short and get long here, you’re probably going to rally for about a Measured Move based upon the height of this Wedge or based upon the height of this.

Scaling In to Avoid Loss

Instead, I’m short two contracts, and we have a very good bear bar. If it goes below that bear bar, it probably will come down low enough so that I can get back to breakeven. Now, I really need to sell double my position, so I just sold a fourth contract right now. I sold one, I sold two, I sat through the breakout, and now I’m trying to get out breakeven, which I just did. It hit the average entry price between this short, this short, and then the two shorts here, and I was able to get out breakeven.

Now, normally you should not be shorting in a strong bull trend like this, but this had a special situation, and I’ll talk about it in a moment.

Most Traders: Should Only Buy When Strong Bull Trend

In a strong bull trend like this, most traders should only be buying, and they’ll lose money if they short. You can simply buy above any bull bar closing at or near its high. Remember, this is the day session, and I said that the Moving Average was below the low of the day. So we opened here, above the 20-bar Exponential Moving Average, and we did not touch it. Now, there’s a special thing going on here. I’ve been trading now for, I don’t know, 35 years. I’ve never seen a day that opened above the Moving Average and went all day without touching the Moving Average. So 35 years, that’s a long time, and the statistic I use is 99.99% chance we’re going to touch the Moving Average. And in fact, 99.95% chance we’ll have at least 3 bars with lows below the Moving Average.

Selling below Bear Bar

So knowing that, it’s reasonable to sell below that bear bar, especially if you sold earlier and you’re scaling in. As I said, 80% chance if you sold here or here, and then you sold more here, you’ll get a pullback at least to your average price. This selloff went almost down to your original entry price, and had you held short, you would have come close to getting out breakeven on the original two sells and with a profit on the higher sell.

One other thing. I said 99.99% chance we’re going to get to the Moving Average. When it does, usually if you get a bull bar, you’re going to get a test of the high. So this was a bear trap. The bears hoped that the breakout, the close below that low, the close below the Moving Average, was going to lead to a bear trend. But as soon as you get a bull bar, you know the odds are 80% you’re going to go back and test the high. So I would look to buy again above a bull bar closing near its high here or here.

Experienced traders will buy all day, but a few will take shorts based upon the knowledge that the market is going to pull back to the Moving Average, and if they scale in, they can make money, or at least avoid a loss on their shorts.

Special Situation: Market Will Touch Moving Average

Again, special situation. The market goes 50 or more bars without touching the Moving Average. You know it’s going to touch the Moving Average. Well, you know anyway it’s going to touch the Moving Average. It does every day. I don’t remember a single day in 35 years when the market did not pull back to the Moving Average. So the odds are very high that we’ll get there. We can get there by going sideways or by going down. An experienced trader, if they see a bear bar closing near its low, like that or that, they’ll short, looking for at least a scalp.

The bears are not expecting a bear trend. They’re looking for a scalp, just a small profit down to the Moving Average. If they’re smart, they’ll look for a bull bar closing near its high for a test of the high of the day.

If Sell, 2 Choices: 1. Exit When Wrong

It’s reasonable to take this short. As I said, after a climactic rally like this, the market usually enters a Trading Range. And it did, but the Trading Range was up here, so it did not enter the Trading Range here. However, it probably was going to. As I said, probably we’re going to get a couple legs down – one, bounce, two. It’s possible that this was one, bounce, two. So it’s reasonable to short here. Most traders, if you get a bull breakout bar, a close above the prior minor Lower High here, and then a bull follow-through bar, you know we’re going higher.

So most bears should exit above this second bull bar and take their loss. But experienced traders can hold, knowing that if we get a bear bar closing near its low, at a minimum we should come back to the midpoint between the entry price below that bear bar and this bear bar. That took place over here, but since I scaled in, I sold here, I sold more here – my average entry price was a little bit higher and not down here.

Thinking About Getting Out

Most traders, if they’re short in a strong bull trend and you get a big bull bar closing above the high of the prior bar and closing above a minor Lower High – here, closing above the high of the past 15 bars – they should be thinking about getting out, and if the follow-through bar, the next bar is a bull bar, they definitely should get out. And the reason for that is if they’re looking to scale in, they’ll mess up. They won’t do what they need to do.

In fact, if they’re able to reverse the long, they’ll probably be able to make up for their loss. So if they sold here, sold more here, and bought two here, it’ll probably go up high enough to erase the loss that they got on those shorts.

But the reality is, most traders are not going to be able to reverse. Most traders do not reverse. I don’t like to reverse.

If Sell, 2 Choices: 2. User Wide Stops or No Stop and Scale In

Alternatively, if you don’t get out, the second choice is to hold short. Wait for a bear bar closing near its low and sell again. But not just sell one contract; you should be doubling your position. So if you short one here and one here, you’re now short two, and you should therefore sell two up here. You should double your position. It sounds easy, it looks easy, but it’s not easy.

The market came down a little bit below the average entry price, so if you had a limit order to get out breakeven at your average entry price, you could’ve gotten out there. Never scale in against a strong trend unless you’re trading small enough so that you can do the right thing if the market goes against you. Most beginners trade too big and they get scared, and they exit at the exact time when they should be doubling their position, and that’s the problem.

Doubling Size of Position

The beginner thinks, “Oh, I’ll sell one contract. That’s not too big. I’ll sell two contracts. That’s still not too big. I’m a little bit uncomfortable.” But can they sell two more here? If they’re already uncomfortable here, they’re not going to double their position here. If you’re selling and you did not get out above this second bull bar here, the correct thing to do is to double the size of your short here.

Scaling into Shorts in Bull Trend: Most Should Never Do It

Again, never sell in a strong bull trend unless you have a good reason to expect a profitable scalp, and if you’re experienced enough so that you don’t panic when the market continues to go against you. In this particular case, we’ve been above the Moving Average all day. We know there’s a 99.99% chance that the market will pull back to the Moving Average, and there’s a 99.95% chance we will have at least 3 bars with lows below the Moving Average.

This low is a little bit below, this low is below, that’s below. So now we’ve met the minimum objective. And then once you get a bull bar, after those 3 bars, 80% chance you’re going to go to a high. You could’ve bought above here, you could’ve bought more here. You know 80% chance we’re going to test the high of the day.

Often Better to Exit Breakeven

Most traders, when they’re wrong, it’s often better just to exit breakeven than hold for a profit. So selling here, better just to get out breakeven. This is a surprisingly strong breakout, and we may go higher, and therefore it’s better just to try to get out breakeven. Sold, sold, and then sold two more here. Here’s your average price. Get out there breakeven. You have a loss on here, you have wins on these two contracts. The net is a breakeven trade.

Never Be Greedy

Never be greedy when you’re wrong. Never hope that the market will go far your way when you’re betting against the trend. So if the market does something surprisingly strongly against your position, it’s better just to try to avoid a loss and not worry about making a profit.

Again, most beginners cannot do this. Most experienced traders do not do this. But a trader who understands what’s going on and they know the odds of the market pulling back to the Moving Average can do this. You have to trade small enough, and you cannot get scared when the market goes against you, and that means most traders should not do that.

Example of Selling in Bull Trend

This is an example of how, if you do sell in a bull trend and you understand that there’s a good reason for the market to go down, you can scale in against the bull trend and avoid a loss. If it went down initially here, you would’ve made a profit. If it went down here for a Wedge, you would’ve made a profit. Instead, it did that. Once it’s done that, it did something other than what you thought was likely. It’s better just to get out breakeven.

Close

I’m Al Brooks. Thank you for watching this video, and I hope that you found it helpful. This is a video on scaling in to avoid a loss.

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