Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
Adding to an Open Winning Position
Now on to the fun stuff. If you catch a great trending move, scaling into it is a great trade adjustment to increase your max profit.
Again, just like Peter Parker, with greater reward, there is great risk, so there are rules to follow to safely add to open position. Let's go over those rules.
Rules to safely add to winning positions:
- Pre-determine levels entry for additional units.
- Calculate your risk with the additional units added.
- Trail stop loss to keep growing position within comfortable risk parameters.
To explain this strategy a little better, let's go through a simple trade example...shall we????
We have Tom the "trend trader" closely watching EUR/USD, and after a bit of consolidation he thinks traders will push the pair higher which leads him to plan to on buying some euros against the U.S. dollar at 1.2700.
First, he sees that recent consolidation never really traded below 1.2650, so he decides his stop will be below that level at 1.2600.
Tom also thinks that because it is a psychologically significant resistant level, 1.3000 would be a great level to take profits because a rally may stall there.
With a 100 pip stop and a 300 pip profit target, his risk-to-reward ratio is 1:3. Pretty awesome right?
He usually only risks 2% of his account per trade, but this time he's really confident with this trade and with the great risk-to-reward ratio, he decides he will add more if the market moves in his favor.
He decides that he will add more units every 100 pips and trail his stop 100 pips. Because he plans on adding more units, he decides to start with an initial risk of 1%.
With a starting account balance of $10,000, Tom's initial risk will be $100 ($10,000 x 0.01).
With a 100 pip stop and $100 risk, he has determined his initial position size to be 10,000 units (position sizes can be calculated with our position sizing calculator), he will add 10,000 units every 100 pips, and trail his stop every 100 pips.
Let's take a step-by-step look at the change in risk-to-reward with each addition.
This simplified example shows the basic technique of how to safely add to winning positions and how effective it can be to maximizing your profits.
Now before you go pressing up every winning position you have, you have to be aware that adding to winning positions may not be the best tool for every market environment or situation.
In general, scaling into winning positions is best suited for trending markets or strong intraday moves.
Because you are adding to a position as it goes your way, your average opening price moves in the direction of the move as well. What this means is that if the market pulls back against you after you have added, it doesn't have to move as far to get your trade into negative territory.
Also, you should know that scaling into winning positions in range bound markets or periods of low liquidity leaves you open to being stopped out often.
Lastly, by adding to your position, you are also using up any available margin. This eats up into margin that can be used for other trades! You have been warned!!
While you are logged into your account,
you can save your progress in the School of Pipsology!
- What is Scaling?
- Scaling Out
- Scaling Into Losing Positions
- Adding to an Open Winning Position
- Summary: Scaling In and Out