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The "Scale and Trail" Strategy

01/26/2016 7:00 am EST

Focus: STRATEGIES

By scaling into positions and effectively placing trailing stops—a strategy deemed the "scale and trail"—traders can take as much as 200% of the market's movement.

Ask yourself this: "How many times do I have a trade which has moved nicely onside, but failed to meet my target, then come back on me and either given me a scratch or a loss?"

Then ask yourself this: "If I had taken something on each of those trades, how would that affect my strategy?"

It would certainly allow you to bank something on more of your trades, but it would also diminish profits on those that do meet their targets. So, if you are going to scale, it has to be based on analysis of your method's results and potential results.

How frequently does the strategy meet its targets; how big are those targets; and are there certain objectives that are met much more frequently than the overall target? These are a few of the questions you'll need to answer when looking at whether scaling is worthwhile for you.

There are some who disagree with scaling as a premise, and I used to be one of them. Your stop is likely to be based on a whole trade unit. So, when you are underwater, you are probably going to exit fully, compared with not holding a full unit when the trade is on side. Crazy idea, right?

Well, I'd point out that in this case you should have your stop where most of the time if it gets through, the market is likely to go much further. So, exiting fully can protect you here.

In the case of not being fully loaded when it does go your way, how do you know it'll actually reach your target before it hits your stop? If you have a much-higher-probability, closer target, taking off a portion of your trade just makes sense.

Some of the benefits if the risk:reward has been properly taken into account are consistency, profit retention, lowering the risk of the whole trade due to better average of the position, and less mental/emotional stress.

Let me quickly define what I think of as a "scale and a trail" before taking a look at a few types. A scale is a minor profit target for a trade where a certain portion of the trade is exited. A trail is the moving of your stop to minimize adverse price moves relative to your position. I want to highlight various aspects of scaling trades and different methods of doing so.

So what methods are available to you to scale and trail (S'n'T)? Pretty much anything you like is the answer!

You can use technical levels such as pivot points or profile levels as scale targets; you can use a variety of moving averages as stops or even ATR-based trailers. You could even use RSI to define when a move may be ending then adjust your stop profile to be more aggressive in an attempt to retain more profit.

It's up to you really, but you need to robustly test your design and ensure that the average profit versus the average loss has the right ratio and you have a good percentage win rate.

The ultimate system, based on using scaling and trailing, allows for super-advanced trading where a trader can take 200% of a move if he scales and then re-enters on every minor pullback. No human could be that accurate, but it's a heck of a goal.

By the Staff at NetPicks.com

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