In general, I don’t really recommend scaling into trades. I prefer to have a level that is important enough for me to play off of, or see a bounce off of. However, there are sometimes situations where there is value in scaling into a position, both psychologically and monetarily.
First, let’s get out of the way why I don’t like scaled entries - if only to highlight how important the plan is when creating a tiered approach. Oftentimes I associate scaling in as adding to a losing trade. Continuing to buy when the trade is going against you, and more often than not this involves some sort of hope strategy on the part of the trader that if they throw enough money at the trade eventually, they’ll get out breakeven. So as long as we plan the trade with a scaled approach, and the entire risk of the trade is taken into account during the planning, and we don’t go over our planned amount, then scale-ins can definitely have their place in a trade plan.
Buying the Higher Low. This actually kills two scenarios with one stone. The first is for a back burner setup, and the second is a version of that, but with the wedge pattern rather than the RSI.
BackBurner Setups - using shorter term extreme RSIs in order to make an entry that is in line with the longer trend (i.e. using 5 min oversold to buy an hourly higher low in an uptrend) can use the tiered approach. This helps because the momentum can be on our side, even if we can’t necessarily judge the exact low for the higher low. The key in this instance, is to only add while RSI is extreme and gets more so. Once any sort of bounce plays out, the conditions that were there for you to tier an entry no longer exist, and therefore no more additional scales make sense.
The second situation is one where we are looking to buy a higher low but are doing more the slow wedge-like approach, and there is often (whether a wedge or a flag) a quick dip to break support before the trade goes our way. This is the entry that can really do psychological damage, as many traders will enter on the consolidation, and then if we form an equilibrium, or a slightly higher tick, they will stick the stop below the low, only to get stopped out and then see the trade play out.
So, what can we do? Well let’s say you have this happen to you consistently. And let’s also assume your regular position size for stock XYZ is 100 shares, with a tight stop looking for a wedge like play into an hourly higher low. But you always get stopped out, only to FOMO back in and then your tight stop is no longer quite as tight, you’ve already taken your loss and now you’re doubling down on a trade.
Well, what if instead, you buy 50 shares of XYZ where you normally would. And then when we break support by a little bit (ticker depending) instead of stopping out, you add 25-30 extra shares, then give a little extra wiggle room on your stop. This would make it so that you have a similar overall risk on the trade, a slightly smaller reward, but you take out the part where you have to FOMO back in with a less than ideal setup. You are basically anticipating the quick break with not a lot of follow-through. (I will put out another blog as requested on how to identify follow-through).
The third time I like scale-ins, is right when it’s near your level. While I don’t love adding to a losing trade, I don’t mind taking a starter position, then adding to a winning trade. This will be highly individual depending on personal trade styles. But if you have an area where you are looking for an entry, and then you get your entry, your reaction, and take a starter at your level to see if you get the follow-through you want, then adding on a pullback into a higher low (or lower high if shorting) can increase your exposure to the trade once you already have some confirmation that a level is playable. It’s like dipping your toe in the water, feeling that it’s nice, then diving in.