Taking a scaled entry approach to your trading provides benefits in the form of increased flexibility, price discovery and lowering risk. It involves entering your position on a trade in several parts and instead of buying or selling all in one go you take part of your intended position first and then add to your position only when everything is working in your favour. Normally traders will scale their entry in 2-3 parts.
Flexibility is a must when trading the stock market as you can never be right all the time however much you try! By scaling your position entries you do not need to be entirely right and will have time to seek price confirmation before committing yourself more fully. It should be used as a way from freeing yourself of the emotional need to be absolutely correct in picking the extreme high or low point of a move. Scaling your entry allows you to trade more aggressively when a position is going your way and cut your loss when it is not. Scaling does not mean you should be keeping funds for ‘averaging down’ when the trade isn’t going your way – you should NEVER add to a losing trade.
Once you have decided on a strategy, buying the share is the only cure for any fear or doubt. Now you have dipped your toes you will be able to make a proper assessment of your strategy. If the price is moving against you by your predetermined stop loss level, cut your loss. If the price is moving in your favour you now have more conviction in your position and also a positive P&L making it far easier to now add more to your position towards to your intended size.
Always add to the initial position in increments of half again and when the price has moved in your favour a safe buffer amount. This is because even if the price then turns against any loss would be less than your initial risk and the price can retrace whilst you are still maintaining a profit. The timing of any subsequent entry is also important. Most shares suffer a small pullback or flat period after rising, before rising again, so always wait for your buying opportunity until any downside motion stops and only enter when the pullback stops short of your initial entry point. Day traders in particular use this scaled entry technique to test particular shares before they enter with their normal position size.
The scaled entry technique is one of the key tools of every successful trader. It can never be repeated too many times: master the art of keeping your losses small and maximizing your gains. Scaling you entries and controlling your risk helps you do just that!
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