Trading Small Size & Scaling In: Part II

Ken Calhoun |

Combining strong entry patterns with scaling in (adding to winning trades) is a favorite professional traders’ approach for managing risk. Entry patterns such as bullish cups, ascending triangles and minor gap continuations can be integrated with careful entry management to potentially make for even more profitable trading entries.

Scaling In After Bullish Cup Breakouts: Swing Trade Entry Cups

Many traders look for a favorite entry pattern, then enter a single trade (often 200-500 shares or so in size), and then follow up with their initial and trailing stop. It’s usually better to instead enter a swing trade on small “pilot trade” sizes of just 20-50 shares or so, then add to this pilot trade every 2 points for those that continue their trend.

One of the best entry patterns is a simple cup breakout pattern, which looks like the letter “U”. For example in Figure 1 – Qunar Cayman Islands Ltd. ADS (QUNR) , the bulllish cup occurs from $27.5 to $29; in this case the first entry trigger is at $31/share, for a small-size 50-share ‘pilot trade’. We then add to the initial position every 2 points.

Fig1_QUNR.gif

In Figure 1, that would mean the second entry is at ($31 + 2) = $33, and the third entry up another $2, in this case $35/share. Using an initial and trailing stop of $2 keeps the position open during a favorable in-the-money trend continuation, and keeps risk to a minimum. The key is finding strong-trending charts like Figure 1, and avoiding choppy up-and-down charts, or those with major pullbacks and churn, which are not as successful for swing trading.

Day Trading Strategy with Small Size Add-On Trades

When day trading volatile charts, the single best chart pattern is minor gap continuations. Minor gaps are defined as up to 10% of the share price, so for example a $30 stock that gaps no more than 3 points up would qualify.

When using a day trading strategy, typical share size of 100-500 shares is used for the initial entry, and the same size for the 2nd “add-on” scale-in entry. Shares are added for a $50-$70/share price instrument a single time at $0.60 (sixty cents) above the initial entry.

For example, the intraday trading chart seen in Figure 2 – United Continental Holdings Inc. (UAL) illustrates this minor gap continuation pattern. Initial entry is set slightly above the open, in this case at $65.8, and the add-on scaled in shares are bought $0.60 above this, at ($65.80 + .60) = $66.40/share. 

Fig2_UAL.gif

Experimenting with different scale-in price increments, targets and stops is a valuable professional swing and day trading skill to master. The fundamental concept of keeping initial stops as inexpensive as possible, while adding to winning trades, is essential for profitable trading.

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 founder of 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
UAL United Continental Holdings 74.82 2.08 2.86 3,621,119
QUNR Qunar Cayman Islands Limited 29.99 -0.01 -0.03 41,683

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