Why scaling is an important part of my strategy

NFP data was initially perceived weak on Friday. As such we were looking at a good gap down.
My strategy on a day like this is to short any pullbacks unless I see otherwise, and so at the open that’s exactly what I was looking for.

Various lines on my chart were within striking range of the market and good areas to look for shorts. The first was yesterdays low, the next was the lower end of the last few days range with other areas of resistance leading up to the last swing high.

The market opened and pushed up relatively quickly to yesterdays low. I waited for a small push above and hit the market short. At the time it looked spot on, a small pop over yesterdays high and now it could break back down to new lows. I scaled out as usual at +10.
It wasn’t to be and the market popped back up over the last swing high and I took a stop.

In this sort of setup my stops are variable depending on a parameter of market volatility. So if the market goes blasting through my level I’ll take full stop. If however the market gives me my first scale I’ll pull the stop down accordingly, to reduce the risk yet still giving it some wiggle room.

Unless I take a full stop with no scales it’s not going to make much of an impact.

The next level I was looking to short was 10600 on the YM. Again the tape slowed and looked good so I took the short on the second pop over 10600 as the volume was dwindling.

I got my first scale and tightened my stop up, this time it was tighter as the volatility was reducing slightly. After a bit of flirting with 10600 the market broke higher again and stopped me on my remaining contracts. Another poor call.

3rd go……………I shorted at my last level before the gap fill. I scaled my first batch, but this time the market rolled over and the rest is history. I’d finally got my short runner that took out the lows that I was looking for.

So what happened? I completely misread the open. It happens, I was slow to realise the strength could last for a good thirty minutes. But with scaling and stops it didn’t matter so much, my money management saved me taking any serious losses.

Mark Douglas said it best – “Trading has a neutral short term expectancy but a positive long term expectancy”

Meaning you don’t know what the next trade will do, only that your edge will work out over time giving you that positive return.

There are weeks when I’ll hit trade after trade with a high win rate. But that’s irrelevant if you let the other losers wipe out those profits. Knowing how to eliminate losing trade damage is one the most important aspects of trading.

I could have kept adding short, at every level instead of taking a stop. This time if i could have stood the pain it would have worked. This time……….. But what happens next time when a full reversal takes place? Before you know it you have all your chips on the table for one trade……..one trade with so much at stake. Crazy. Stick to your plan, take your stops and focus on making the next trade.

Including my pre market NFP trade I only had a 50% success rate on the day. 2 out of 4 trades right. But the money management side of my trading plan made sure that I didn’t get hurt on the wrong calls and maximised my gains when I was right. Finishing a good week on a high.