The thing about ‘live’ trading is that we only see the bars (candlesticks) to the left. If I show a chart with the whole trade, the start and the finish, it’s easy to say…”yeh, I would have seen that, no problem.” But without the bars on the right, that is, the future movement already in place, it is, as we all know, so much more difficult. Let me show you an example:
Here is a chart from a trade I took a couple of days ago based on 5 minute bars EUR USD:
We took a successful trade, with a buy shown by the blue arrow and a sell shown by the green arrow. So confidence was high. We considered that the context, that is the stream of bars, is following a tight downwards (bear) channel. What do we do next?
We consider that if the bars come up to the top of the channel we’ll go short as we have a 60% chance of the trade following the trading range. Here’s what happened:
The trade came up to the top of the channel so, as planned, we shorted. We bet that the price would go down at (1). However, the price went up represented between (1) and (2). This, we considered, was an exhaustion spike so we ‘scaled in’ (added to our short) at (2). When the price zoomed up again it was clear price was going for the red line, a higher but different channel. So we shorted again at (3). We had three shorts in place at this stage. (1) was very much out of money, (2) was somewhat out of money and (3) never went out of money. We took profits at the blue arrow with break even for (1) and the others nicely in profit.
To Scale in requires a large stop (and therefore a large risk) and if we get it wrong, if we don’t read the context correctly, we can take a very hard knock. However, if done correctly, scaling in can be beneficial.