Position Management: Various Methods of Increasing Positions
A'hai, after communicating with several investors and combining his many years of trading experience, has summarized methods and techniques of position management to share with everyone. This includes when and how to adjust the size of positions during trading, or when to increase the size of positions to maximize profits, since we can never predict when market movements will occur. If we did know, it would be best to invest all at once at the beginning to earn a substantial profit. However, due to the many uncertainties in the market, it might be safer to establish positions tentatively. Surviving long-term in the market is crucial, hence the fear of going bankrupt after a single failure. It's impossible to bet big on every occasion, so risk diversification and profit augmentation are achieved through the distribution of positions.
Different Methods of Increasing Positions
This refers to adding positions at different price points—commonly known as scaling in. There are various ways to scale in, usually after certain conditions are met. A simple example is to add once when a trade is profitable beyond a set number of points or a percentage, continuing in this manner. However, efficiency diminishes with too many additions.
Adding on pullbacks—when the price moves in the opposite direction after you enter a trade. For instance, if you buy and the index pulls back by 50 points, you would add one long position, and so on. This method of averaging down costs is close to doubling down on a position, which could lead to significant losses without proper exit strategy control.
Profits and losses curve method—simply put, adding positions when profits reach a set goal or when losses hit a predetermined target.
Indicator-based method—using specific technical or custom indicators to gauge market sentiment, such as adding to a position every time the ADX increases by 10. This is just one of many methods to scale in.
Adjusting the Number of Entries Dynamically
This involves modifying the number of entries based on certain conditions or circumstances, thus dynamically adjusting positions. A common method is adjusting the size of entries with market volatility, where the number of entries is equal to W/risk value. W could be a fixed value or an acceptable loss number, and the risk value is variable, often measuring recent volatility.
The Martingale (double-down bet) method—essentially a gambling strategy. After every loss, the size of the next bet is doubled until a win is secured, recovering all previous losses plus the original bet amount. In trading, this means doubling the size of the position after every loss.
This method requires significant capital to endure major losses. The reverse-Martingale strategy, on the other hand, involves doubling up after wins, which could wipe out all profits with a single loss. The choice between these methods depends largely on the market condition, with the Martingale method suited for range-bound markets and the reverse-Martingale for trending markets.
Special conditions method—scaling in when specific conditions signal a high probability of success for your trading strategy. For example, if the price opens above the 20-day moving average after trading below it and seems likely to rise, one might increase their position size accordingly.
Variability in Trade Volume
Changes in trade volume can also relate to capital management, with methods such as the pyramid or reverse pyramid scaling methods. Position size adjustments don’t have to follow a fixed pattern like 1, 2, 4, 8, etc.; other methods like using the Fibonacci sequence are also viable, making this another knowledge area in itself. However, adjustments should always consider the size of your capital to avoid the risk of a margin call.
Moreover, every scaling method greatly affects exit strategies. Increasing position sizes naturally raises the risk, making it crucial to decide when to exit. A well-timed exit can secure profits, while a poor one may exacerbate losses. Thus, different scaling methods should have corresponding exit strategies, especially when programming them, as complexity can lead to bugs and issues.
Therefore, when capital is limited, it's not advisable to allocate all funds to a single scaling strategy due to its minimal risk diversification effect. Most scaling strategies assume a market trend, which can be damaging in a consolidating market.
Diversification Beyond Scaling
A'hai believes a good investment portfolio should diversify across multiple markets and strategies, spreading the risk of trading a single market or commodity. Using multiple strategies can also spread entry points, similar to the effect of scaling. Moreover, deploying different strategies for entry gives more confidence in trading. Although scaling to test for market movements is an option, utilizing multiple strategies for diversification is recommended.
For more related trading knowledge, you can add A'hai on WeChat: ahaidanshenkeliao
