Everyone from the most successful trading gurus to your Mom has told you:
“Don’t trade cryptocurrency (or anything else) without using a stop loss”.
It’s a good bet the biggest problem in trading is the use of stop losses to control risk. Doubt many quit who are consistently making money….
We could simply pile on and say “You GOTTA use stops or don’t trade!” but how does that help?
We’d rather show those who struggle with using stop losses (it’s not just you–far from it) some alternatives they can use to trade SAFELY and, with practice, PROFITABLY for years
The concept is called “Scaling In” and it involves buying small “blocks” of your investment as price goes lower so you build a position slowly while improving your average investment price.
WARNING: Scaling in is not foolproof (neither are stop losses) and also takes practice, but it could be a better fit for your current trading mindset for those who feel they must “stay in the trade” while still managing risk.
HOW TO SCALE INTO TRADES
There are multiple methods but below is one step by step example and then you’ll find additional ideas in a link to another post that can help you build the skill needed to successfully scale in.
We need to add that sometimes a trade or investment set up makes more sense to enter all at once and use a stop loss. Traders can use “scaling in” to practice safe trading until the build a system for setting stops they can use confidently and effectively.
cryptopatterns can help. Our newsletter teaches our subscribers scaling in (and out), effective use of stop losses (we share possible specific stops or scale in strategies with our reasoning on many of our posts).
Whatever you do, spend time learning to define and manage your risk. You want as many tools as possible for safe trading if you want a real shot of getting out of the “90+% who lose, quit trading, or both”
SCALING IN STRATEGY – STEP BY STEP
- Determine the percentages you’ll use for investing — one we’ve seen used effectively is
- Block 1 10%
- Block 2 10%
- Block 3 20%
- Block 4 20%
- Block 5 FINAL BLOCK 40%
“BLOCK 6” RESERVE Some traders keep a reserve fund usually = 25% -50% additional for a 100+% investment if patterns and indicators justify the additional funds.
you can adjust these figures and with practice will determine the scaling in strategy that give you the most confidence.
2. Determine the price points you’ll use to enter the trade —
Your goal in this step is to have a legit reason to enter each block — you should review market conditions before adding as well –things change all the time.
Block 1 . You want “in” so start with a small investment on a dip on the 15 or 30 minute chart (bottom of indicator such as “bollinger bands”) — here’s the ETH example again
Block 2 This might be a target from a longer time frame chart — like the daily chart
Block 3 Again might be from the daily chart but add the use of bollinger bands or other indicators on the daily chart to increase the chance of getting in safely
Block 4 Use Daily and even weekly charts once price gets this low. Here’s where you also need to take a hard look at what “wave” your investment is likely in. As we get closer to fully invested we want to be convinced that our story for the investment is still valid.
Block 5 Same as Block 4 — careful consideration should be given to REDUCING your investment before adding block 5 or 6 — why will this investment go up from here? You need a better answer than “it just has to” or “I want to make back what I’m down”
Block 6 All above tools plus every other tool you use says BUY. We’re talking the strongest case possible — don’t kid yourself. Add when ALL indicators are at absolute bottom of indicator where there’s very low probability of anything lower except a spike that typically reverses quickly (you might want to wait for such a spike if price gets this far as it could be great buying opportunity). Block 6 adds should be VERY VERY RARE
Scale in “stop loss” = Some price well below you ever thought you’d see — you honestly determine you’re better off salvaging the money you’ve invested vs waiting and hoping it will come back. Might want to check cryptopatterns newsletter before selling –this might be where we’re looking to buy! This should almost never happen which is why you want to practice with SMALL investments or on paper before risking too much scaling in.
If you’ve scaled in properly price usually starts going up around blocks 2-4 so you have a lot of funds not invested. Do not rush to add those funds. You’ll be profitable on your trade which is more than most can say. Plus over time, you can learn to add when you have the momentum of the trend behind you.
Obviously, you need to adjust the above information to your personal preferences and risk tolerance.
SHOULD YOU USE “SCALING”?
Right now is a VERY risky time to trade cryptos – don’t rush to scale in, but if you’ve built a case and a plan and are confident and comfortable (minimal stress) you can handle the risk, then TRADE YOUR PLAN. Our final suggestion is to take whatever position size you are considering and
CUT IT IN HALF or even less— practice scaling and prove you can do it successfully–you’ll be doing it for years so no need to go huge $$ on this trade.
We hope you find this information helpful– STAY SAFE (=STAY SMALL for now) and STAY IN THE GAME.
For more strategies to use “scaling” see our prior post:
This site is for educational and entertainment purposes only and not in any way intended to be investment or trading advice. You are 100% responsible for your financial decisions at all times. It is highly recommended you DO NOT make any investment or trading decisions depending upon what you read on this blog/newsletter! All information presented (c) 2017 JBP cons, inc. All rights reserved.