Trading Small Size & Scaling In: Part I

Ken Calhoun |

One of the fastest ways to lose money trading is to trade in large share sizes, and take large stops for losing trades. A more professional, potentially more successful approach is therefore to trade small size, with tight stops and scaling in, adding to winning trades for those that trend in the traders’ favor.

The key is trading multiple stocks/ETFs with small-size (20-50 share initial size) “pilot trades” and add to those that start moving in a profitable breakout trend. And keeping very small stops for losing trades.

Scaling In: Where to Add to Winning Swing Trades

Swing trading, defined as overnight holds up to several weeks in duration, depends on navigating uptrending breakout charts successfully. We’ll look at several top trading patterns, including where to set both initial entries as well as stops and scale-in (secondary) entries, for leverage.

For example in Figure 1, Polypore International, Inc. (PPO) , this long recovery pattern moves up sharply once it gets over the 50 simple moving average (MA) line near $46/share on February 2nd.

Fig1_PPO.gif

Initial pivot entries are often set by institutional traders once a key MA line has been broken; in this case the first entry trigger was just over $46/share.

A good rule of thumb for swing trading stocks in the $20 - $70/share range is to add to winning trades every 2 points or so. Why 2 points? Because a value lower than that, say every $1, is too close to the prior trading range and is too early to scale in. When in doubt, use larger, not smaller, increments to scale in to winning trades. Entering at $30 and again at $33 or $34 is fine; but entering at $30 and again at $31/share, for example, is not.

Keep in mind however that using much larger values, like $6 or $7 up from the initial entry, may never hit, or occur weeks later; too late to take action on. So adding every $2 is a good middle ground to consider using for a series of scaled-in entries.

In Figure 1, that would mean the second entry is at ($46 + 2) = $48, and the third entry up another $2, in this case $48/share. In all swing trades, a maximum 2-point initial and trailing stop should be used. While this may initially seem “too tight”, the purpose is to minimize the cost of initial stop losses for trades that don’t work out. For ones that do, scaling in every $2 or so makes sense.

Trading Volatile Charts: Same Strategy

Upon seeing volatile charts, traders may be tempted to ‘relax the rules’ for fear of whipsaw moves that would produce excessive stops. The key is instead to find exceptionally strong “outlier” trending charts which, while volatile, are trending in the traders’ favor for a directional entry.

The volatile chart seen in Figure 2, CyberArk Software Ltd. (CYBR) shows a highly volatile strong-trending breakout chart. It moved from $32/share to over double at a peak of $70/share in just a few short weeks. Seldom are swing traders fortunate enough to locate charts this good; however the same entry strategy is used. In this chart a cup breakout (new high above prior resistance) was at $38 following a minor gap up; scale-in entries would’ve been at $40 and $42, which when using a 2-point initial and trailing stop would have worked out nicely.

Fig2_CYBR.gif

One key to successfully scaling in to trades is to tighten in trailing stops often, at least one or two times a week, during an uptrend continuation pattern. It’s very frustrating to get into a winning breakout and, due to being overly optimistic, fail to exit if the price comes crashing back down. Usinga 2-point trailing stop is designed to lock in as much profit as is reasonably possible during winning swing trading breakout trades.

In our next article, we’ll look at additional example charts and tactics to start testing out. Hint: scanning for exceptionally clean, wide-range strongly trending charts is vital for success.

Recommended resource: For more on using this and other trading strategies, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at DaytradingUniversity.com/free.

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the and DaytradingUniversity.com and StockTradingSuccess.com (with Steve Nison), popular online educational sites that reach tens of thousands of active traders worldwide. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CYBR CyberArk Software Ltd. 49.00 -0.01 -0.02 228,016

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