You can scale in and out of trades in a different way that actually increases profit potential and reduces risk. What you can do is divide a 1% risk trade into two 0.5% risk trades in separate accounts that each enter and exit at different points. You can even divide a 1% risk trade into three 0.333% risk trades in three separate accounts. This is called system diversification.
Suppose your trading capital is $10,000. $100 is one percent. You put a small amount sufficient to meet margin requirements in three different accounts and trade AUD/NZD with a ten, twenty, and thirty day price channel system in each account respectively risking $33.33 per trade (one third of one percent). From mid March to late September 2013 you have the following results:
You have two short trades in the ten day system. Each time you enter a trade you set your stop at the top of the price range and put on a position size that sets your risk from entry to stop at $33.33. The first trade wins 385 pips on a trade with an initial stop distance of 227 pips. Because your position size set that 227 pip risk at $33.33, your profit was $56.53.
The second trade on the ten day wins 376 pips on an initial stop distance of 259 pips and your profit is $48.39. So the ten day system never risks any more than 0.33% of your account (plus slippage) and wins a total of $104.92 (1.04% on your $10,000).
The twenty day system gave just one trade. It initially risked 319 pips and won 799 pips. The position size on this trade was smaller than those on the ten day system because the stop distance was wider. Although the initial stop distance was 319 pips, you still risked $33.33 and won $83.48 (0.83% on your $10,000).
The thirty day system also gave just one trade that initially risked 410 pips and won 628 pips. Again, this one had an even smaller position size and risked $33.33 and won $51.05 (0.51% on your $10,000).
Your total risk in all of this never exceeded 1% of your $10,000 (albeit slippage could have handed you more). Your position sizes from April 9 to June 3 would have been around 2329 units on the ten day, 1657 units on the twenty, and 1289 units on the thirty thus totaling 5275 units. Slippage in an event of illiquidity would cost you roughly 33.26 cents per pip collectively in all three systems. So for every ten percent move in AUD/NZD against you, slippage would hand you a loss of around $414.09 (4.14%). Because of that, your account is very likely to survive even a nasty black swan event. While a 20% slip would cause some bankruptcies and a lot of blowups around the globe, your account would take an 8.28% hit and move on.
So during this period your three systems won $104.92, $83.48, and $51.05 respectively for a total of $239.05 (a 2.39% gain on your $10,000).
You will notice that you scaled into the full three pieces over a couple of weeks and then scaled out of one piece during the bumpy June only to scale back in for more. If you examine these three systems over time you will find that there are times when one is getting whipsawed while others are staying in trades for a win. By trading all three you increase your chances of success and reduce your chances of choosing the one system that will lose for the year. There may be times that you will go in on one system but suffer a quick loss and be glad you took just a 0.33% risk while staying out of the others that were not triggered.
Scaling in and out is for putting on small pieces at a time, not for pushing up leverage in hopes of a major windfall while taking major risks if stops can’t get good execution.
-Adrian
