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Scaling

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The following is a synopsis of something sent in by brodtj:

ACCURACY

Why do we need to be 95-100% accurate with our trades? Why would anybody want to trade if they're loosing some of the time? When we go to work, we expect to get paid, every time we work. You put in your time, you do a good job, and you get paid. There is never a week that the boss comes up to you and says "Hey George, we can't pay you this week, maybe next week." Yet some people don't expect to be paid for their hard efforts, study, research, and the tons of time that they put into trading stocks.

We must attain 100% accuracy with our trading, or very close to 100%, say 95-100%. That only leaves a 5% margin for things that can not be avoided. What happens when you aren't experiencing accuracy? You end up stressed, worried, concerned, frustrated, and wondering what to do next. You spend more money getting advice from the experts, you spend more time researching, fiddling, changing, and reading to get your system to work better with this new expert advice. You go to seminars, buy videotapes, cassette tapes, work manuals, just to get told by the experts what to do. But after much money, time, research, study, reading, and practicing all this expert advice, you're still not being accurate with your trades to a point where it is worth while.

Lets look at how the lack of accuracy affects our money income power. Or compare your winners against your losers. Somebody's trading history might go something like exhibit A:

EXHIBIT A

WINNING TRADES LOSING TRADES DATE TRADED

$235.68 9/1/98
-$145.98 9/2/98
$1,110.44 9/4/98
-$555.30 9/8/98
-$468.90 9/11/98
$275.65 9/14/98
$789.53 9/16/98
$125.90 9/22/98
$65.78 9/23/98
________________ -$788.90 9/29/98 TOTAL $2,602.98 -$1958.97

$2602.98
-$1958.97
$644.01 = Profit

From first glance, exhibit (A) looks decent. In a short period of time $644.01 was made. 10 trades where completed, and in only one month. Plus there are more winners then losers. This system looks sort of promising. Lots of traders can live with this level of accuracy. I won't, but some will. On the flip side of this coin you have some loser's that really hurt your winners. It's never fun taking a loss and it can create fear in our trading. If you become too afraid because of loosing, you will not trade effectively.

This will eventually result in a month of trading loses. Believe me, Fear and Greed are the traders worst and biggest enemies. You don't need them. Exhibit (A) does show a net profit for the month. But when you really look at the history of these ten trades you can see that grief was experienced here as well. Grief in the losers, that is. Hence all the more reason to trade with 95-100% accuracy, so we can avoid the emotional roller coaster.

ACCURACY RULES!!! You have to have it. That's why SCALE trading is the best method to incorporate with the buying and selling of rolling stocks.

Thanks for all the input brodtj! That was a great contribution.

If you don't understand what scale trading is, you can find more info. on this topic by scanning through the discussion groups. You'll find that brodtj has posted information on this subject. In the mean time I'll take a shot at explaining.

Simply put, once you've decide on the specific stock (s) that you want to purchase you will buy and sell in increments as the price goes up and down. Example: I believe that XYZ is going to rhythmically rise and fall in price, within a determined price range. For this exercise I'll say that it's cyclic low is $8.00 a share, it's cyclic high or resistance point is $12.00. Now normally as you know, I would wait until the stock hits it's low (in this case $8.00) and then execute my buy. I'd then sit back and wait for the stock price to rise to its resistance point, and then I would sell.

Taking my one time profit from this stock, during its full cycle. Simple, huh? Well the only difference in scaling is that if I figure, that with the number of shares that I purchased, the price only has to, lets say rise $1.00 before I can sell it at a profit. And also, in this case I have realized that the stock is expected to rise more than that, up to $4.00 more. I then know that I can scale it. Okay great! Now I've concluded that it's advantageous for me to use this fluctuation in price to the max. Instead of just making one buy at one price and taking a one time profit during the cycle, I'll make multiple purchases, at $8.00, $9.00, $10.00, and $11.00.

I can place a limit order to buy, so that when each of my preset prices are reached automatic buys will take place. Once purchased, I set a limit order to sell at $1.00 higher than what I bought them for. Or whatever the sell price is, that I decided on for each. So theoretically I could have all of this going on simultaneously, within the dealings of just one stock during just one of its full range cycles:

Picture this:
I buy XYZ @ it's cyclic low of $8.00. At the same time I place a limit order to sell @ $9.00, and a limit order to buy more shares @ whatever higher price I've decided E.G.; $8.25, $8.50, $9.00 or whatever I want. For the sake of argument I choose $9.00. Just remember that the resistance point has to always be kept in mind, and that in this scenario it's $12.00. Okay, now you understand that you can place, as many limit orders to buy on this stock as you feel that you can afford to and in whatever price increments that you want. Just ensure that the highest price doesn't exceed $11.00.

As the price of the stock rises (and it will, provided that I have done my research thoroughly) it will of course, automatically be acquired at the various preset limit orders. What needs to be done now is, as the stocks orders are bought one by one, I must be on my toes and set limit orders to sell each @ $1.00 higher than what it was bought for. I'm pretty conservative so I'd probably be in question of the stock really going all the way to $12.00 and adjust accordingly.

Now I'm not so naive that, I really think the average Joe on the average income (you can fantasize on your own as to what an "average income" amounts to) is going to be able to take any given stock and purchase a bunch of shares, multiple times. So of course within my checkbook, the volume of zeros, or their lack of, will have allot to do with how much and how many times that I'll be able to do this within the cycle of one stock. It's of course just a matter of math. Higher price per share equates to a lower number of shares, that I'm financially capable of purchasing.

To go one step further, the lower the number of shares purchased, the greater the difference between the buy and sell price has to be for me to sell the stock at a profit. A half step further, stocks are probably best adhered to in the price range of $20.00 a share and under. However, when price gets down to the $7.00 and below range. The volatility of the stock generally increases greatly. Meaning that it can suddenly shoot up (yeh!) or suddenly plummet (boo!) taking your money with it (boo, hoo!) These simply constitute companies with less capital and therefor can be drastically effected by relatively smaller financial changes within.

Well, I'll stop now...I think I've pretty much beaten this subject to death.

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