Rules to safely add to winning positions:
- 1. Pre-determine levels entry for additional units.
- 2. Calculate your risk with the additional units added.
- 3. Trail stop loss to keep growing position within comfortable risk parameters.
Let’s have a look at a basic trade example to better understand this method.
We have Tom the “trend trader” watching EUR/USD attentively, and after a bit of consolidation, he believes traders will drive the pair higher, so he plans to purchase some euros against the US dollar at 1.2700.
First, he notices that the recent consolidation has never traded below 1.2650, so he sets his stop below that level at 1.2600.
Tom also believes that 1.3000 would be an excellent level to grab profits because it is a psychologically significant resistance level, as a rally may stop there.
His risk-to-reward ratio is 1:3 with a stop of 100 pip and a profit target of 300 pip. Isn’t it amazing?
He generally only risks 2% of his account per transaction, but this time he’s so confident in the trade that he decides to increase his risk if the market advances in his favor.
He decides to add more units every 100 pips and to trail his stop by 100 pips. Because he intends to add more units, he decides to start with a 1% risk.
Tom’s initial risk will be $100 ($10,000 x 0.01) with a $10,000 beginning account balance.
He has decided his initial position size to be 10,000 units (position sizes can be computed using our position size calculator), and he will add 10,000 units every 100 pips and trail his stop every 100 pips.
Let’s take a step-by-step look at how the risk-to-reward ratio changes with each addition.
This simplistic example demonstrates the fundamental method of securely adding to winning positions and how successful it can be in maximizing earnings.
Before you start pressing every winning position you have, you should be aware that adding to winning positions is not always the greatest tool for every market condition or situation.
Scaling into successful positions is often best suited for trending markets or big intraday swings.
Because you are adding to a position as it moves in your favor, your average opening price moves in the same manner.
This implies that if the market comes back against you after you’ve added, it doesn’t have to move as far to put your trade in the red.
You should also be aware that scaling into winning positions in range-bound markets or during periods of low liquidity puts you vulnerable to getting stopped out frequently.
Finally, by increasing your position, you are depleting any available margin.
This depletes free margin that may be utilized for further trades!