Position Management – Order Placing
One of the major considerations in trading forex, is learning how to manage your position and learning when and where to place a trade. There are several concepts one can investigate, but today we are going to look specifically at the concept of position scaling.
Position scaling is where a trader places multiple orders around the area of interest to avoid missing a trade. It is very disappointing when you have a great trade idea leaving your order only to miss out on a fill by a few points. Position scaling looks at how we can avoid this issue. Lets have a look at the chart below to aid our discussion on the topic. The upper grey area is the level where we are interested in being a seller and the bottom grey area the level where we are interested in buying.
The concept of scaling is that throughout these buy/sell zones we would leave our orders at various different levels so we are not going to miss a fill. Lets assume we wish to scale into 5 units of short position risk by the time the currency moves to the upper extreme of our sell zone. If the up-move were to fail in the middle of this resistance zone position scaling would see us have 2/3 units of short risk on by this area. This way we will avoid the disappointment of a sell-off occurring and having our single sell order set somewhere in the resistance zone not being reached beforehand.
Another benefit of having scaled into part of our maximum short position is that we will feel more comfortable about being aggressive and adding to our short trade as the market sells off from the resistance area, increasing our short as the momentum increases and the currency moves in favour of our positioning. This type of trading called ‘momentum’ trading is practised heavily by the hedge fund industry to increase returns and can significantly bolster your account balance. I’ll discuss the idea in another later blog on ‘pyramiding’ to maximise returns, where we will look at the concept of adding risk as the favourable trend strength increases.
On a parting note on our discussion of scaling I would like to make one last point. Do NOT kid yourself into thinking you are scaling into a position when an objective person would know you are not. In the example just discussed if you are adding additional units of risk at levels well above your sell zone you have violated your trade plan, the extra shorts are not scaling but likely a result of your loss in discipline which will expose your trading capital to serious risk.