As of 12/20/2024
Indus: 42,840 +498.02 +1.2%
Trans: 15,892 +32.54 +0.2%
Utils: 986 +14.76 +1.5%
Nasdaq: 19,573 +199.83 +1.0%
S&P 500: 5,931 +63.77 +1.1%
|
YTD
+13.7%
0.0%
+11.9%
+30.4%
+24.3%
|
 44,200 or 41,750 by 01/01/2025 16,100 or 17,700 by 01/01/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 |
As of 12/20/2024
Indus: 42,840 +498.02 +1.2%
Trans: 15,892 +32.54 +0.2%
Utils: 986 +14.76 +1.5%
Nasdaq: 19,573 +199.83 +1.0%
S&P 500: 5,931 +63.77 +1.1%
|
YTD
+13.7%
0.0%
+11.9%
+30.4%
+24.3%
| |
|
44,200 or 41,750 by 01/01/202516,100 or 17,700 by 01/01/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 | ||
My book,
Trading Basics
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$ $ $
Scaling in costs you money! I was as shocked as anyone after reading that headline and hoped that wasn't the case. I scale into stocks to build my position all the time, but according to an article in the October 2009 issue of Active Trader magazine titled, "Scaling in as an entry technique," by Howard Bandy, the technique lowers profit.
Scaling in is important when buying thinly traded stocks. You buy a little each trade, hoping not to move price much. One rule of thumb to use about trading stocks is to create a position no larger than 1% of volume. If your trading size exceeds that, then look elsewhere for a more actively traded stock.
I threw out a trade in Bassett Furniture (BSET) because it's too thinly traded (3 month average volume from the Statistics page on Yahoo!finance shows 27,614 shares trade daily, on average). With the stock selling at about $4, it can take a month to accumulate several hundred thousand shares without moving price much.
Scaling in refers to taking a partial position in a stock at one price then adding more at a later time. Sometimes you are averaging down -- buying more of a stock as price falls. Your average purchase price drops. Averaging down is a favorite technique for those that buy-and-hold because they know (or hope) that price will recover if they hold the stock long enough. I do that, especially on my utility stocks. I want a large position to boost low tax rate income so why not buy at a lower price?
I almost never average down on my trading positions. All that does is make the loss grow when you throw in the towel and sell just days before price turns higher.
Others like to buy more stock as additional trading signals occur when price rises. I will do that too, when I see a buying opportunity. Perhaps a stock breaks out of a congestion region. I'll double my position. Maybe it breaks out upward from a symmetrical triangle. Again, I will add to my position and ride the stock higher. I do not buy half a position and then buy another half. I buy a full position and then decide to add more shares. If price is higher than the previous buy or the weighted average buy price, it's called averaging up.
Bandy identified 5 reasons for scaling into a position.
Bandy used 72 stocks and exchange traded funds of the highest average daily liquidity in 2008 and back tested them from December 31, 2003 to October 31, 2008. Based on the SPY (S&P tracking stock), the general market went nowhere during that period. He bought positions of $5,000 and $10,000 each month. His system buys a position at the close of the first trading day of each month and exits at the close on the last trading day. He did not adjust returns for commissions, fees, or interest applied to spare cash.
He performed seven tests and the results appear in the table.
| Technique | Avg Profit Per Trade | Discussion |
| 1. No scaling, no stops (buy-and-hold) | $1,810 | Risk is $10,000. 93.4% of trades close with a loss of less than 10% with 82.5% having draw down of 10% or less per trade. |
| 2. No scaling, 10% trailing stop | $-22 | Risk is $1,000. Stop set at 10% below entry and trails it 10% below highest high. |
| 3. No scaling, 10% trailing stop, half position | $-11 with stops, $905 without | Same as #2 but only $5k invested. Risk is $500. |
| 4. Scale in $5k at 5% profit, 10% trailing stop | $73 | Risk is $500 for first portion, $1000 after scale in. 65% didn't rise enough to scale in. |
| 5. Scale in $5k at 10% profit | $76 | Same as #4 but waits to scale in at 10% profit. 98% of trades had less than 10% draw down. 89% didn't rise enough to scale in. |
| 6. Scale in $5k at 5% profit, set stop to break even then trail it | $-105 | Risk is $500 until scale in then $0 afterwards. 98.4% of trades had less than 10% draw down. |
| 7. Scale in $5k at 5% loss, 10% trailing stop (averaging down) | $264 | Risk is $500 then $1,000 after scaling in. 98.5% of trades closed less than 10% lower. |
I take issue with his risk assessment. Sooner or later a stock will gap lower, sending the stock plunging well below a stop.
I would like to see this run using bullish and bearish markets, not just the neutral one he chose. Notice that #7, which is averaging down, results in the best performance besides buy-and-hold (#1).
-- Thomas Bulkowski
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